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ombudsman news

issue 16

May 2002

a selection of recent cases - illustrating the wide range of complaints dealt with by the investment division

mortgage endowment policies

16/11

Mr E took out a £40,000 mortgage endowment policy over a 25-year term, extending two years into his retirement. He believed the policy would provide a surplus of £10,000 to £15,000, on top of the amount he needed to repay his mortgage. He had been planning to use some of this surplus to cover the cost of his mortgage payments after he retired.

When he realised that the policy would not produce the amount he expected, Mr E complained - first to the firm and then to us. He had no evidence that the firm had guaranteed the amount the policy would produce. However, the firm was unable to provide any records from the time of the sale to show that it had established Mr E's attitude to risk, or discussed with him how he would pay the policy premiums after he retired.

We concluded from Mr E's circumstances at the time of the sale that he could have afforded a 23-year term. This would have allowed him to repay his mortgage before he retired. We also concluded that it was unlikely that he would have accepted the degree of risk associated with an endowment policy, had it been explained to him.

We therefore awarded redress, calculated in accordance with Regulatory Update 89 (RU89), on the assumption that Mr E should instead have been sold a repayment mortgage over 23 years. We told the firm that, in accordance with Regulatory Update 94 (RU94), it should not deduct the value of the windfall shares that Mr E received when the product provider ceased to be a mutual company.

16/12

Mr and Mrs C complained about the firm that had sold them a mortgage endowment policy. The policy continued beyond both their retirement dates and they claimed they were not warned that it might not produce enough to repay their mortgage.

The firm maintained that the sale had been appropriate, given the couple's situation and requirements at the time. However, it conceded that the policy should not have extended over so many years, so it made an offer of redress.

But before Mr and Mrs C had accepted this offer, the firm withdrew it, saying it had found new evidence. This evidence proved that it had discussed with the couple how they would afford the payments after they retired. At this point the couple referred the complaint to us.

It was clear from our review of the evidence that the firm had indeed discussed the length of the policy term - and its implications - with the couple. We also found that the sale of the mortgage endowment policy was appropriate for the couple's needs and circumstances, and that the firm had explained the risks to them. We therefore rejected the complaint.

16/13

Mr and Mrs V had been sold a mortgage endowment policy that extended beyond their retirement. They said they had not realised this at the time of the sale and they were worried about how they would be able to pay the premiums once they had given up work. They claimed that they had only taken out a mortgage endowment policy because the adviser told them it would produce enough to let them to repay their mortgage early.

The firm investigated the complaint but concluded that Mr and Mrs V's current financial circumstances meant that they should now be able to afford the premiums after they had retired. It therefore did not offer them any compensation.

We found no evidence from the time of the sale that the adviser had discussed the length of the policy term with the couple. The subsequent improvement in the couple's financial circumstances did not alter the fact that the original sale had been unsuitable.

We recommended that the firm should pay redress in line with RU89, using a term to coincide with Mr V's retirement age.

16/14

After investigating Mrs M's complaint about her mortgage endowment policy, the firm made an offer in line with RU89. However, Mrs M was not at all certain if this was an appropriate remedy so she came to us. We confirmed that the firm should pay redress in accordance with RU89 and we asked it to update the sum offered. This was because of the length of time that had elapsed since it made its original offer.

The firm was reluctant to do this. We explained that Mrs M had been entitled to wait for the outcome of our investigation before accepting the offer, and she had been continuing to pay in to her existing scheme in the meantime.

The firm then asked if it could at least take into account the notional "savings" Mrs M had made since the original calculation was made. We had seen no evidence that Mrs M had been informed of any such savings, so we did not agree that this was reasonable in the circumstances.

16/15

Ms E complained to the firm about her mortgage endowment policy. She said the firm had not made her aware of any risk associated with this type of policy but had led her to believe the policy was guaranteed to pay off her mortgage.

Ms E was an employee of the firm and had taken out the policy in conjunction with the firm's staff mortgage scheme. The firm could find no evidence that it had explained the risks, so it carried out a loss assessment in line with RU89. This showed that Ms E had not suffered a loss, so it told her that no compensation was payable. Unhappy with this conclusion, Ms E came to us.

We found no evidence that the policy had been guaranteed to pay off her mortgage. We noted that the firm had offered this mortgage arrangement as a concession to staff, and that, as a condition of the scheme, Ms E was required to take a mortgage endowment policy. However, participation in the staff mortgage scheme was not compulsory. Even if the risks of the scheme had been adequately explained to Ms E, it seemed likely that she would still have proceeded with the mortgage endowment policy in order to secure the benefits of the staff mortgage.

Ms E had not suffered financial loss and we did not uphold her complaint.

16/16

Mr and Mrs D had a 24-year deferred-interest mortgage, where the mortgage loan would increase to £54,270 after the deferred interest was added. They decided to remortgage their property to raise extra capital of £41,000 for home improvements and repairs. They would repay this with the proceeds of a second mortgage endowment policy.

When they subsequently discovered that their policies might not produce enough to repay the combined mortgage, they complained to the firm. They claimed that the adviser had told them there would definitely be a surplus after the mortgage was paid off and he had never mentioned any risk.

The firm accepted liability but disputed the basis of redress. It did not consider it should have to take the deferred interest into account when calculating redress.

However, it accepted our view that the couple could have afforded a repayment mortgage rather than the mortgage endowment policy that the firm sold them. We awarded redress in line with RU89 to compensate the couple for their loss and cover the deferred interest repayments.

cases involving other types of investment

16/17

Mrs F complained about negligence on the part of her stockbroker. In December 1998, she had given the firm discretionary management of her investment portfolio and in the period to 5 April 2000, it had carried out 30 sales and 48 purchases.

Mrs F's complaint focused on one of these transactions in particular - the purchase of 3,900 shares at a cost of £29,994. The share price declined sharply after the purchase and six months later the holding was worth only £21,879. When the holding was eventually sold, the shares produced a loss of £15,890.

Mrs F claimed that the firm had behaved irresponsibly and was in breach of its obligations because it had watched the price of these shares fall progressively without taking any action.

A stockbroker does owe his clients a duty of care. However, there was no evidence of any negligence in this case. We did not uphold Mrs F's complaint as it was based solely on the fact that the shares declined in value and she incurred a loss when they were sold.

16/18

Mr L wrote to his Individual Savings Account (ISA) provider, asking for details about what he should do if he wanted to close his and his wife's ISAs. The firm misread the letter, closed the ISAs and sent Mr and Mrs L cheques for the proceeds.

The couple were somewhat annoyed by this, but they decided to bank the cheques and use the proceeds to pay off part of their mortgage.

They subsequently complained to the firm about its mistake. The firm said it would reinstate the ISAs if Mr L and his wife sent cheques for the amounts it had sent them when it closed the accounts. The couple refused to do this and asked the firm to pay compensation for its error. When the firm refused, Mr L brought the complaint to us.

We told the firm that Mr L's request was reasonable and it eventually offered a total of £250 compensation, which Mr L and his wife accepted.

16/19

In February 2000, Mr T gave discretionary management of his investment portfolio to an investment management firm. His portfolio came under the direct control of a Mr M, who had previously managed Mr T's investments at a different firm.

During the nine months from 31 March to 29 December 2000, the portfolio's value fell from £394,000 to £290,000. Mr T complained that Mr M had failed to respect instructions. He felt that the portfolio was holding high-risk stocks that he had not explicitly agreed to in his instructions.

Mr T had switched to the new firm specifically so that Mr M would continue to manage his portfolio, so we considered his previous investment arrangements were of some relevance. Mr T had held high-risk stocks when Mr M managed his portfolio at the previous firm.

However, we considered that, in the absence of any specific new authority from Mr T, Mr M had placed too much emphasis on Mr T's agreement with the previous firm. He had retained too large a proportion of the portfolio in smaller company shares, given the agreed risk profile of the new arrangement. We believed that Mr M should either have reduced that portion of the investment or sought specific authority from Mr T to retain it.

We obtained a calculation of what the portfolio's performance would have been since March 2000, if Mr M had kept a more appropriate amount in smaller company shares. We compared the result with the performance of the remaining portfolio, excluding these shares, for the same period. Although the firm had reservations about the calculation, it offered Mr T the amount of difference calculated - £11,600 - and Mr T accepted the offer.

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.