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ombudsman news

issue 73

October/November 2008

investment case studies involving endowment savings plans

issue 73 index of case studies

  • 73/1 - whether consumer was wrongly advised to take out a with-profits savings endowment policy
  • 73/2 - consumer complains about misleading product literature for with-profits savings endowment policy
  • 73/3 - consumer complains of poor return from his with-profits savings endowment policy
  • 73/4 - business that sold consumer an endowment savings plan tells her the Financial Ombudsman Service cannot consider her complaint about it
  • 73/5 - consumer complains he was wrongly advised to take a with-profits savings endowment policy

whether consumer was wrongly advised to take out a with-profits savings endowment policy

Mrs G complained to the business that had advised her to take out a with-profits savings endowment policy. She said she had been wrongly advised, as the policy had not given her a reasonable return on her money. When the policy came to the end of its term she received just £2,470, having paid in a total of £2,600.

The business told her the amount she received from the policy depended entirely on market forces, which were outside its control. Mrs G then brought her complaint to us.

complaint upheld
Mrs G had been aged 60 when the business advised her to take the policy. She and her husband had both retired, were living on a state pension and benefits, and had some modest savings in a deposit account. They had no debts other than a repayment mortgage, which they were still paying off and which was protected by a decreasing term insurance policy.

Our rules let us dismiss complaints about the performance of an investment. But often, although the consumer expresses the complaint in terms of performance, the underlying issue is whether the policy was suitable for them. So when we receive a complaint such as this one - about an endowment policy providing little or no return - we will examine the evidence to see why the policy was sold, and whether it was a suitable recommendation.

Mrs G's savings endowment policy provided life cover and was designed to produce a lump sum when it matured. When recommending the policy, the business had recorded that Mrs G wished to start putting aside a modest amount of money each month in a regular savings plan. There was nothing to suggest that she asked for - or needed - any additional life cover. And her age at the start of the plan meant that the life cover was significantly more expensive than it would have been for a younger person.

We upheld the complaint, as we did not consider the policy to have been appropriate for Mrs G's particular circumstances.

During the course of our investigation, Mrs G told us she had been looking to invest her money cautiously, with perhaps just a limited amount of exposure to shares.

We therefore said the business should calculate the amount Mrs G would have received if she had invested the same amount of money - over the same period - at Bank of England base rate + 1%. We considered this would best reflect the level of return she could reasonably have expected from a suitable alternative investment. We said the business should compare this figure with the amount Mrs G actually received. It should then pay her the difference - adding simple interest on this sum at 8%, from the date Mrs G's policy matured until the compensation was paid.

consumer complains about misleading product literature for with-profits savings endowment policy

Mrs D was very disappointed with the amount she received when her with-profits savings endowment policy matured.

She complained to the business that had provided the policy, saying its marketing material had been misleading. When the business rejected her complaint, Mrs D referred it to us.

complaint not upheld
Mrs D had taken out this policy in 1992, after receiving a mail shot containing a brochure for the policy. The business had not given her any individual investment advice, so it was not responsible for ensuring the policy was suitable for her needs. We therefore looked at whether the product literature that had led Mrs D to invest had set out all the details of the investment clearly, and had not been misleading.

Mrs D told us she had decided to invest because of what she described as "impressive promises" in the brochure about the level of return she could expect when the policy matured. However, she said the amount she actually received bore no relation to the amount she had been led to expect.

We examined the brochure and found it made no promises other than stating the guaranteed "sum assured" - the amount payable if Mrs D died during the period covered by the policy.

The brochure explained that the policy's value would grow by means of bonuses, which were dependent on the performance of the underlying investments and could not be guaranteed. The brochure did include some figures about possible returns from the investment. However, the text made it very clear that these figures were given only as an example, describing an investment made by a man who was considerably younger than Mrs D and paying a much larger monthly premium.

The other point Mrs D made to us was that the firm had not been prepared to tell her how it calculates policy maturity values and bonuses.

We explained that the calculation of maturity or surrender values and bonuses is a matter for the firm's actuaries. We do not normally consider complaints about such matters because they involve the legitimate exercise of a firm's commercial judgement. However, we will often refer such issues to the Financial Services Authority under our wider implications procedure, for their confirmation that they have no objection to the way the fund is managed.

We concluded that the product literature that had led Mrs D to invest had not been misleading. We did not uphold the complaint.

consumer complains of poor return from his with-profits savings endowment policy

Mr B complained to the business that had advised him to take a with-profits savings endowment policy. He said he had been led to expect a reasonable return when the policy matured. However, after paying into the policy for 10 years he received £185 less than the total amount he had paid in.

The business rejected Mr B's complaint. It said the product literature made it clear that the policy contained an element of risk. The business also pointed out that Mr B had benefited from the life cover provided by the policy.

complaint upheld
The "fact find" that the adviser completed at the time he recommended the policy recorded that Mr B's primary aim was to find a suitable means of saving. At the time he asked the business for advice, Mr B had been 45 years old. He was single with no dependants and was living at home with his parents. He was a member of his company pension scheme which provided a death-in-service benefit.

Mr B had not asked for life cover and there was nothing to suggest he needed it. The cover was expensive and, together with the policy charges, had a significant impact on the policy's potential for producing a reasonable rate of return. We noted that the illustration for a possible "mid-growth" rate of return, quoted in the product literature, showed that the policy would produce hardly any more than the premiums paid in. Overall, we concluded that the financial advice given to Mr B had been inappropriate.

During our investigation, Mr B told us he was not sure what he would have done with the money if he had not been advised to invest in the endowment policy. We thought it likely that he would have kept his money in a deposit-based savings account, as he had only ever used deposit accounts in the past and had no experience of investment-based products.

We told the business to compare the amount Mr B had received from the endowment policy with the amount he would have received, if he had put the same amount of money in a bank deposit account, over the same period of time. We said the business should pay him the difference between the two amounts, if any, and add interest at 8% on that sum.

business that sold consumer an endowment savings plan tells her the Financial Ombudsman Service cannot consider her complaint about it

Mrs A complained that she had been wrongly advised when she had taken out a savings endowment plan some ten years earlier.

She said she had understood she was paying into a savings plan that had no risks attached to it and that would produce a lump sum for her retirement. However, she had been very disappointed with the plan. She said that little or nothing in the way of bonuses had been added to her policy in the past few years. She was also concerned that the premiums she paid included the cost of life cover, which she had not asked for and did not need.

The business that had advised Mrs A turned down her complaint. It told her she had left it too late to complain about the life cover and that this part of her complaint was now "time-barred". The business said that the rest of her complaint was essentially about investment performance. This was outside its control and not something that the Financial Ombudsman Service could look into.

Initially, Mrs A accepted what the business had told her. However, she then decided it would be worthwhile contacting us, just to check that what she had been told was correct.

complaint upheld
The business objected to our involvement when we told it that Mrs A had referred her complaint to us. It repeated what it had told Mrs A about her complaint not being one we would be able to consider.

Our rules set down time-limits for consumers bringing complaints to us. Generally the consumer needs to bring their complaint to us within:

  • six months of a business sending them its final response to a complaint; and
  • six years from the event the consumer is complaining about or (if later) three years from when the consumer could reasonably have known that they had cause for complaint.

The business said the policy had been sold more than six years before Mrs A had made her complaint and - in its view - it was more than three years since she should have known the policy included life cover (because this would have been clear from the product literature given to her at the time of the sale). The business added that Mrs A could not complain to us about the performance of the policy as that was a matter that was outside its control.

We said that if we agreed that the complaint fell outside our remit, we would explain that to Mrs A. However, it was for us - not the business - to determine whether or not we could deal with the complaint.

We reached the conclusion that Mrs A's complaint was one that we could investigate. We told the business that simply giving Mrs A information that her policy contained an element of life cover did not enable her to know whether this made the policy particularly suitable or otherwise. It was the responsibility of the business to ensure it gave her appropriate advice. And the evidence we saw made it clear that Mrs A had complained about the policy very shortly after she had become aware that it might not have been appropriate for her needs. So we did not agree that the complaint was "time-barred".

We also considered Mrs A's complaint to be not only about the performance of the policy, but also about the way in which it was sold and about whether the business had made a suitable recommendation, given her individual circumstances.

We concluded that the business had not provided Mrs A with suitable advice. She had asked for advice about a form of savings that would produce a lump sum after ten years, to coincide with her retirement. She had not required any additional life cover. The combined effect of the policy charges and the cost of the life cover made the policy inappropriate for Mrs A, given her particular circumstances and objectives.

We told the business to put Mrs A back into the position she would have been in, had she not been given the inappropriate advice. We said it should also pay Mrs A an additional £100 for the distress and inconvenience its poor handling of the complaint had caused.

consumer complains he was wrongly advised to take a with-profits savings endowment policy

Mr J complained that he had been wrongly advised to take out a with-profits savings endowment policy. He had started paying £50 a month into this policy in 1997, following a consultation with a local financial adviser about a suitable form of longer-term savings.

After 10 years, Mr J had made a "profit" of only £140 - which he thought was very poor and less than he would have got if he had put the money in a bank deposit account.

The adviser rejected Mr J's complaint. He said that despite the disappointing level of growth, this recommendation had not been inappropriate. The policy offered the prospect of higher returns than those available from a deposit account, over the longer term. The adviser also noted that Mr J had benefited from the life cover that the policy provided. Mr J referred his complaint to us, saying he had only ever wanted a form of savings and had not required life cover.

complaint not upheld
The adviser was able to provide evidence from the time of the sale that he had discussed the issue of life insurance with Mr J, and had made him aware that the policy contained life cover. He had recorded that Mr J had said one of his objectives was "family protection". He had also recorded that he had pointed out to Mr J that, given his age, the life cover element of the policy was not particularly expensive.

At the time he consulted the adviser, Mr J was in his early 30s and married, with two young children. In the circumstances, it did not seem inappropriate for the adviser to have recommended a savings policy containing life cover.

Mr J accepted that he might have expressed a preference for a form of savings that offered this cover, and he admitted that he might well have forgotten his discussion with the adviser about this.

We understood Mr J's disappointment about the policy's poor level of growth but we concluded that the advice he had been given was not inappropriate. We did not uphold his complaint.

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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.