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ombudsman news

issue 11

November 2001

mortgage endowment complaints alleging guaranteed investment performance

The mortgage endowment complaints assessment guide, illustrates our current approach to complaints where it is alleged that a firm guaranteed an investment would perform in a certain way - even though the policy did not include any contractual guarantee.

The legal issues that can arise in such disputes were given careful consideration when we drew up this guide, which we hope will prove a helpful indication of our general approach. We would stress, however, that it is not intended as an authoritative statement of the law, or as a substitute for legal advice on individual cases.

In our experience, when customers have been told something inaccurate about an investment policy before they enter into the contract, they generally react in one of the following ways when they discover the true position. They may:

  • take the view that they never really believed what they were told, accepting it was just sales talk;
  • consider that the product provider should honour whatever the adviser said; or
  • consider 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.

Our guide deals with the circumstances of two potentially successful forms of claim involving alleged guarantees. These are:

  • where customers are, in effect, claiming they were given a guarantee about investment performance; and
  • where customers claim that, while what the financial adviser 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.

If this first type of complaint is successful, this may well mean that the appropriate redress is for the firm to be required to pay the amount "guaranteed" when the policy matures, providing all payments are kept up to date.

If the second type of complaint is successful, the outcome is achieved on the basis that the advisor's statement constitutes a misrepresentation in the legal sense. The legal remedy for misrepresentation is either the voiding of the contract (leading to the return of premiums paid with interest) or damages.

As our mortgage endowment complaints assessment guide sets out, although voiding the contract is a possible remedy, in many cases we may consider it more appropriate to award damages. In any event, voiding the contract is not an 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 customers to the position they would have been in if the misrepresentation had not been made, not the position they would be in if the false statement had been true.

case studies - mortgage endowment complaints alleging guaranteed investment performance

These cases illustrate the response of firms to windfalls, the Taber case and the publication of Regulatory Update 94.

11/04

Mr S and Miss K complained that the endowment mortgage policy sold to them in October 1989 was inappropriate for their circumstances and that the adviser had not discussed any other options with them. They also alleged that the adviser had told them the policy would provide a lump sum over and above the amount they needed to repay their mortgage.

We rejected the complaint. The firm had provided sufficient documentation from the point of sale to make it clear that it had not guaranteed the amount the policy would produce. In addition, the endowment mortgage questionnaire that we asked the couple to complete confirmed that their attitude to risk at the time of the sale was compatible with the degree of risk the policy presented.

11/05

When Mr and Mrs G were sold a mortgage endowment policy in 1986, the adviser gave them a handwritten "quotation", setting out the amount they would receive when the policy matured.

They were therefore very surprised when they recently received a letter from the firm saying the policy might not enable them to pay off their mortgage in full. The couple said they expected the firm to honour the amount on the "quotation". The "quotation" was on company headed paper and said

Further to your request for policy maturity figures, here are the terminal and reversionary bonuses, together with the basic endowment figure.

  £
Endowment 7,875
Reversionary  
Bonus 12,624
Terminal Bonus 17,625
Total 38,124
Less balance of mortgage 17,500
Cash back at maturity 20,624

The figures were based on the value of similar policies maturing in 1986 and there was no evidence that the adviser had provided any disclaimers to suggest there was any doubt about the figures quoted.

The firm did not consider that it had provided a guarantee. There was little documentation available from the time of the sale. There was also no evidence to suggest Mr and Mrs G could reasonably have been expected to question the validity of the information they were given, or to know that the firm did not give guarantees for endowments.

The "quotation" was clearly expressed and there was no evidence that it was not part of the contract terms. We ordered the firm to guarantee that, provided the couple continued paying the premiums to the end of the policy term, they would receive £38,124.

Walter Merricks, chief ombudsman

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.