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complaints about guaranteed investment performance

Some complaints involve claims that the financial adviser guaranteed the investment would perform in a certain way - although no contractual guarantee was included in the policy.

For example, a complaint about a mortgage endowment can involve consumers claiming they were told the policy was guaranteed to repay the mortgage - and additionally to produce a surplus of, say, £10,000 - when in fact there was no such contractual guarantee in the written terms and conditions of the contract.

This note considers the legal issues arising in such disputes. It is based on advice given to the Personal Investment Authority (PIA) Ombudsman Bureau by leading counsel. However, it is not intended as an authoritative statement of the law or as a substitute for legal advice on individual cases.

If consumers are told something inaccurate about an investment policy before they enter into the contract, they may view the matter in a number of ways when they discover the true position:

  • (a) that they never really believed what they were told - accepting it was just sales talk;
  • (b) that the product provider should honour whatever it was the adviser had said;
  • (c) that while what was said was too uncertain to amount to a promise, it was nevertheless misleading; and that if they had known the true position, they would not have entered into the contract.

In general terms, if the consumer's response is that described at (a) above, this is unlikely to lead to a complaint. Even if it does, no redress would be appropriate for an inaccurate statement which the customer had not, in any case, believed. The adviser's statement was not relevant to the consumer's decision to take out the investment. (However, this does not mean that the policy was either suitable or unsuitable - this is a separate issue.)

If the consumer's response is that described at (b) above, the complaint would generally lead to a contractual claim; while the response described at (c) above would broadly lead to a misrepresentation claim.

contractual claim

With this type of complaint, consumers are, in effect, claiming they were given a guarantee about investment performance. When consumers are told something inaccurate about an investment policy which they are considering taking out, two questions arise in deciding whether they have been given a guarantee.

  • (a) Did what they were told comprise a promise on which they could expect to be able to sue?
  • (b) If it did, was the person who made the promise authorised to make such a promise on behalf of the product provider?

Has there been a binding promise?
Each case must be considered on its own facts. The test is whether a reasonable person - reading (or hearing) the words in question in their context at the time, and in the circumstances they were written down (or spoken) - would have taken them to constitute a binding promise on which they could rely or act. The promise must therefore have been clear and certain in its terms.

A binding promise does not have to be made in writing on headed notepaper. Such promises might be written on illustrations, fact finds, or anything else. Similarly, there is no absolute requirement that the document should be signed or dated.

Does the person making the promise have authority to do so?
Traditionally the courts took the view that an insurance company's employees - however senior - were not entitled to vary or add to the terms of a policy they were selling, unless there was very clear evidence that the company had given the employee the authority to do this. However, this was generally in the context of policies which, by modern standards, were quite straightforward in their operation.

The type of policies that exist today can be highly complex insurance products. Most consumers depend almost entirely on the employees or agents of product providers to explain them. It might be argued that no one could reasonably suppose an adviser would be entitled to alter the terms of such carefully drafted written contracts. In any event, many policies usually state that agents cannot vary the terms.

However, more recently - in relation to the sale of other types of products - sales representatives have been held to have at least apparent authority to make promises on behalf of the companies whose products they sell. We have received senior legal opinion that it is therefore difficult to see why someone employed to sell an insurance policy would not have at least apparent authority to make promises on behalf of the insurance company.

So we take the view that, while each case must be considered on its own facts, financial advisers employed or appointed to give investment advice on behalf of product providers will generally be considered to have authority to make promises which bind the company. (This does not apply to independent financial advisers, as they are not employed or appointed by product providers.)

This means that if a sales representative made a clear promise about the performance of an investment policy (which can be proven on the balance of probabilities), we may require the product provider to honour that promise on the basis of a collateral contract.

In some circumstances, we - like the courts - are prepared to treat a statement intended to have contractual effect as a separate contract, collateral to the main transaction. In particular, we may do this where one party has refused to enter into the contract unless the other has given an assurance on a certain point. In a case in 1976, Lord Denning said: "When a person gives a promise or an assurance to another, intending that he should act on it by entering into a contract, and he does act on it by entering into the contract, we hold that it is binding." (J Evans & Son (Portsmouth) Ltd - v - Andrea Merzaria [1976] 1 WLR 1078)

Contractual claim - case study 1
Mr and Mrs S were sold a unit-linked endowment policy. As part of the sales process before the policy was issued, the sales representative wrote to Mr S as follows:

I enclose our brochure on [the policy]. If you contributed £50.00 per month for a period of 10 years this would give you a tax free lump sum of £19,500. I would welcome the opportunity of expressing the value this investment can be to you. I would like to call on you and discuss this with you.

The letter was undated but was written on the product provider's notepaper.

When the policy matured, it was worth £8,214 not £19,500. As a result, Mr and Mrs S complained to the ombudsman service.

Having taken legal advice, we took the view that the language of the letter was the language of a promise - leading counsel's opinion was that this was how a reasonable person would regard it. We therefore directed the product provider to pay the difference between the actual maturity value and the maturity value promised in the letter, together with interest from the maturity date.

Contractual claim - case study 2
Before taking out a particular endowment policy, Mrs M asked what return she could expect on the investment if she paid £25 a month for 10 years. An employee of the product provider replied to this question in writing on company notepaper:

For a monthly premium of £25 you will receive a tax free lump sum of £10,500.

After receiving this letter, Mrs M applied for the policy.

The policy contained the following provision:

This Policy, the Application, any Statements of medical information and any other written statement by the Applicant or the Life Assured, taken together, and any document or endorsement attached to this Policy when issued and any subsequent endorsement or amendment or variation shall constitute the entire contract. Any endorsement or amendment or variation to this Policy must be made in writing and signed by a duly authorised officer of the Company. No agent of the Company is authorised to vary the terms of this policy in any way.

However, such provisions do not have any bearing on a collateral contract. An entire contract clause does not exclude a collateral contract, because such a contract does not vary or amend the policy - it is collateral to it.

In this case, we made an award in favour of Mrs M, requiring the product provider to honour the promise it had made.

misrepresentation claim

(see Brinkom Investments - v - Carr [1979] QB 467)

With this type of complaint, the consumer may claim that, while what was said by the financial adviser was too uncertain to amount to a promise, it was nevertheless misleading; and that if they had known the true position, they would not have entered into the contract.

In circumstances where the language used by the adviser was not definite enough to be taken as a promise, this does not necessarily mean the complaint should not be upheld. The adviser's statement may still constitute a misrepresentation in the legal sense. This area of law can be complex and this note is only an indication of some of the issues involved.

There is little controversy about sales representatives' authority to make "representations" on behalf of their company. It is also possible for an independent financial adviser to "misrepresent" the features of a product provider's contracts (although the product provider may not be at fault here - unless it was their own misleading statements which led the adviser, in turn, to misinform the consumer). These representations may be in writing or oral.

It was traditionally considered that a representation must be a statement of fact, past or present - and not a statement of opinion or intention of law. However, in certain circumstances a statement of opinion or intention may be regarded as a statement of fact, and therefore as a reason for voiding a contract if the statement is false. Accordingly, if it can be proved that someone who expressed the opinion did not hold it - or could not, as a reasonable person with knowledge of the facts, honestly have held the opinion - the statement could be regarded as a misrepresentation.

If an untrue and misleading statement is made about the features of a firm's standard contract, and that statement is "a material inducement" to the consumer entering into the contract, then it may be a misrepresentation. In this context, "a material inducement" means that the statement is one of the factors which convinced the consumer to take out the investment. It does not have to be the only, or even the primary, factor that convinced the consumer. However, if the consumer would have gone ahead irrespective of this particular statement, then it would not be a "material inducement" and in turn cannot be a misrepresentation.

The legal remedy for a misrepresentation is either the voiding of the contract (leading to the return of premiums paid with interest) or damages. Voiding the contract is a discretional remedy. However, in many cases we may consider the alternative remedy of damages more appropriate. (In any event, voiding the contract is not an available option where the misrepresentation was made by an IFA, since the IFA is not party to the investment contract.) Damages for misrepresentation are calculated to return consumers to the position they would have been in, had the representation not been made. They are not calculated to put the consumer into the position they would be in, had the false statement been true. In mortgage endowment cases this may well mean that the appropriate redress is compensation by reference to the alternative of a repayment mortgage, where this is the route the consumer would have taken had it not been for the misrepresentation.