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ombudsman news

issue 54

July 2006

pre-"A Day" mortgage endowment complaints

This is an extract from the briefing note on pre-"A Day" mortgage endowment complaints published earlier this year on our website - together with some relevant case studies.

There is nothing new in the approach set out in the briefing note - the principles became well-established many years ago. However, we hope the note will prove useful in drawing together the available information on our approach to handling these complaints.

A pre-"A Day" sale is one that took place before 29 April 1988 ('A Day') - the day the provision of investment advice became regulated under the Financial Services Act 1986. When considering pre-"A Day" complaints, we ignore the post-"A Day" regulatory requirements and instead take into account the general legal principles that applied at the time.

Until "A Day" there was no regulatory requirement for firms to give advice - nor were they required to volunteer advice. After "A Day", advice about investments had a specific regulatory meaning. Before "A Day", it had a more general meaning - effectively, giving an opinion about what the customer should do.

Many firms say they did not give advice at all before "A Day". They say they merely provided relevant information about endowment and repayment mortgages, allowing the customer to make an informed choice about which type of mortgage to take. Or they say they acted as an "introducer" - referring people who asked about an endowment mortgage to a product provider. Many consumers, on the other hand, say they went to their bank or building society for a mortgage, and the branch manager or mortgage adviser told them an endowment mortgage would be the best thing for them to have. Often they say they were told that the policy would not only repay the mortgage, but also provide a tax-free lump sum - perhaps enough to buy a car, pay for a holiday or help with retirement planning.

did the firm give advice-

We therefore have to decide, in each case, whether the firm limited its dealings to providing facts and figures about the mortgage and how it operated - or whether it went further and gave a recommendation about the appropriate course of action to take.

We reach our decisions on the balance of probabilities. We do not assume that advice was given. We look at the circumstances at the time and decide what is most likely to have happened.

Factors we consider include:

  • the consumer's recollection of events and what led them to take out the policy
  • the firm's account of events
  • the consumer's financial awareness
  • any pre-existing advisory relationship
  • whether a mailshot (postal promotion) from a firm recommended existing customers to change from a repayment to an endowment mortgage
  • promotional material advertising the provision of advice
  • whether the firm received commission and/or submitted the application form.

We believe these are useful indicators in helping us determine whether advice was given. But we consider each case individually. For example, we may think it unlikely that a particular customer went to their lender and requested a policy - or that a financially naive borrower would enter into an investment contract without receiving advice to do so.

On the other hand, we do not assume that if a firm received commission or submitted the application form, it necessarily gave advice - or that if it advertised that it could give advice, it did so in every case.

if the firm gave advice...

If a firm gave advice, it had a duty to exercise reasonable care and skill, according to the standards of the time. If it recommended a policy that was clearly inappropriate for the customer's circumstances, we would almost certainly conclude that it had failed to exercise reasonable care and skill.

Sometimes a policy might be inappropriate because it should have been clear from the customer's circumstances that they were unlikely to be able to afford the premiums over the full term. Or it may be inappropriate because it was clear that the customer needed a mortgage only as a short-term expediency and had no need for a long-term savings commitment.

But in most of the complaints we receive, the main issue is whether the policy represents a degree of risk that the customer was unaware of, and would have been unwilling to take.

if the firm did not give advice...

Of course, if we find that the firm did not give advice, we will not uphold a complaint that it failed to advise with reasonable skill and care. But we may still uphold a complaint if the firm misrepresented the position to the customer.

An active misrepresentation would be where the firm made an untrue and misleading statement about the features of an endowment contract, which induced the consumer to take out a contract when they would not otherwise have done so.

However, it is also possible to misrepresent something by silence, or by only partially disclosing the material facts - for instance, by telling only the good news and hiding the bad (such as when a firm sends out a mailshot about endowments, extolling the benefits but omitting to mention that there is a potential downside).

The following case studies illustrate some of the wide range of complaints we deal with involving pre-"A Day" mortgage endowment complaints.

case studies

pre-"A Day" mortgage endowment complaints

pre-"A Day" mortgage endowment policy - whether firm provided advice

Mr and Mrs T complained to firm B after they received a letter telling them their endowment policy was likely to produce less, when it matured, than they needed to pay off their mortgage.

When firm B rejected the complaint, saying it had not advised the couple to have an endowment mortgage, Mr and Mrs T referred their complaint to us.

complaint upheld
Mr and Mrs T had taken out their £19,000 mortgage with firm A in 1986. To cover the mortgage they took an endowment policy with firm B. Firm B told us it had not advised the couple to take an endowment mortgage. However, it said that the commission on the sale had been split evenly between firm A and an estate agent, so it thought that one or both of them must have been responsible for the advice given to Mr and Mrs T.

When we contacted firm A, it denied giving the couple any advice but said it believed the estate agent had advised them. We discovered that the firm of estate agents is no longer trading, so it couldn't comment.

Mr and Mrs T told us that when they took out the policy they had no savings or investments, only a current account into which Mr T's wages were paid. He had been aged 40 at the time of the sale and had been working temporarily in a warehouse, earning about £11,000 per year.

Mrs T was six years younger and - at the time of the sale - had not been in paid employment but was at home looking after their three young children.

The couple told us they bought their first home through their local estate agent. They had decided to arrange the mortgage with firm A because one of its representatives was based in the estate agent's office. The couple told us that firm A's representative had subsequently introduced them to Mr Y, a representative of firm B. Mr Y had later visited them at home to discuss their mortgage.

Mr and Mrs T said they had never heard of endowment mortgages before meeting Mr Y. He had told them it was the best option because it would not only repay the mortgage but also give them a tax-free lump sum. The couple said he had never told them of any risk that the policy might not produce enough, when it matured, to repay their mortgage.

Mr and Mrs T had a very clear recollection of his visit to their home. They were certain they had never heard of a mortgage endowment before their meeting with him, and that he had said this was their best option.

Mr and Mrs T were financially unsophisticated. We thought they were unlikely to have taken out an investment contract unless they had been advised to do so - they had no experience of such matters.

We thought the estate agent had probably received commission from firm B because it referred the couple to firm A. And we thought firm A had probably received commission because it - in turn - had referred the couple to firm B's representative, Mr Y.

It was possible that firm A, or the estate agent, had advised Mr and Mrs T to take out an endowment mortgage before Mr Y became involved, but we did not think this was likely in this case. Mr and Mrs T were sure they had not been advised to buy an endowment mortgage before they met Mr Y.

At the time of the sale there had been no regulatory requirement for firm B to give advice. But if it did so, it had a legal duty to act with reasonable care and skill. In this case, we were satisfied that it was more likely than not that Mr Y, acting on behalf of firm B, had given advice.

Taking into account Mr and Mrs T's financial circumstances and testimony, we thought it unlikely that they knowingly accepted a risk with the repayment of their mortgage. We found that in failing to make Mr and Mrs T aware of the risk associated with an endowment policy, firm B had failed to advise with due care and skill. We therefore upheld the complaint.

pre-"A Day" mortgage endowment policy - whether firm's mailshot constituted advice

Mr and Mrs G complained to the firm after receiving a letter telling them that their endowment policy might not produce enough, when it matured, to repay their mortgage.

Until 1987 the couple had a repayment mortgage but they converted it to an endowment mortgage. They said they had done this after receiving the firm's mailshot encouraging them to change. The mailshot had stated that an endowment policy would give them a cash lump sum, as well as paying off the mortgage. The couple said the firm had not told them of any risk of a shortfall when the policy matured. The firm rejected the complaint. It said there was no evidence that the couple had been given inappropriate advice.

Its mailshot had simply provided information and invited Mr and Mrs G to seek advice - there had been no meeting or interview with an adviser.

Mr and Mrs G referred their complaint to us. They told us that in 1987 they had a £25,000 repayment mortgage with the firm. They had both been self-employed - working as cleaners - and had a small child. The couple had no savings and were paying premiums of 50 pence and £1 per week into two small insurance policies.

They had not kept a copy of the mailshot but we were able to obtain a copy from the firm. This stated:

"Although your current repayment mortgage was originally the most cost-effective way of paying for your home, now you can have the following extra benefits for approximately the same monthly outlay:

  • The probability of a handsome tax-free lump sum on maturity, in addition to having your mortgage completely repaid.
  • Greater security for your family, as your mortgage will be repaid in the event of your death.

Changing to an endowment mortgage is easy..."

The mailshot enclosed some further information about endowment mortgages and invited Mr and Mrs G to request a personal quotation. It finished with the statement:

"After all, you have nothing to lose - but you could gain a great deal."

After contacting the firm to ask about converting their repayment mortgage to an endowment mortgage, they received a second letter from the firm which said:

"...the majority of our recent mortgage customers have opted for this method and frankly the reasons aren't hard to find.

A personal quotation is enclosed which... shows you the advantages of the scheme.

I do urge you to think seriously about this new method."

complaint upheld
The first letter had been addressed to Mr and Mrs G personally from their existing mortgage lender, and was signed by a senior member of staff. We thought it reasonable of the couple to have considered the letter to be a recommendation.

We thought it perfectly possible that this first letter had left Mr and Mrs G quite unaware of any disadvantages in converting their mortgage to an endowment basis. The second letter reinforced the firm's recommendation of an endowment mortgage, again without any mention of the downside.

The documents enclosed with the second letter contained some warnings about bonuses. However, we didn't think these warnings were sufficient to have alerted the couple to the possibility of the policy failing to meet its target amount.

We concluded that the letters the firm sent Mr and Mrs G amounted to advice, so we went on to consider whether the firm had advised with due care and skill. We upheld the complaint.

pre-"A Day" mortgage endowment policy - whether it was likely that the consumers had understood the risks

Mr and Mrs J complained to the firm after they received a letter telling them that - when it matured - their endowment policy might leave them with less than they needed to pay off their mortgage. The couple said they would never have taken out the endowment policy if they had known of this risk.

After the firm rejected the complaint, Mr and Mrs J came to us. The couple had taken out a £40,000 endowment mortgage with the firm in 1987. At the time, Mr J was 32 years old and worked as an insolvency practitioner. His annual income was £22,000. Mrs J was the same age and was employed as a school teacher, earning £7,000 a year. The couple already had an endowment mortgage and were looking to move house and increase their mortgage.

Mr and Mrs J told us that the firm had advised them to have an endowment mortgage because the policy would repay their mortgage in full and leave them with a cash surplus. They said the firm had never mentioned any risk that the policy might not produce enough, when it matured, to repay their mortgage.

The firm did not dispute that it had given the couple advice. However it insisted that it made the risks clear.

complaint rejected
Mr and Mrs J had a reasonable joint income, some previous experience of mortgage endowments and relatively stable jobs with reasonable prospects. It seemed to us that, in exchange for the possibility of receiving an additional lump sum when the policy matured, they might have decided they were in a position to take a risk with the repayment of their mortgage.

We also thought it possible that Mr J's occupation and training might have given him a greater understanding of the effect of investment returns than the average person would have had.

And we thought that if the couple had read the firm's literature (and the detail of their testimony suggested they had done so), they were likely to have understood the warnings it contained. These warnings included the following:

"If current rates of bonus were reduced during the term of the policy to such an extent that the total maturity value would be insufficient to repay the outstanding loan, you would be required to pay the balance from your own resources."

We felt it was more likely than not that Mr and Mrs J had understood the risk that the policy might not produce enough to repay their mortgage. We rejected their complaint

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ombudsman news issue 54 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.