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ombudsman news

issue 61

April/May 2007

mortgage endowment complaints - capping where the policy remains linked to a mortgage

In November 2005 we published a technical note on mortgage endowment redress in more complicated cases. Among other things, that note sets out our general approach to mortgage endowment complaints - where the business believes the calculation of loss should be restricted (or "capped") to a date in the past when, in its view, the consumer was aware of a problem with their policy, so could have done something about it.

The note explains that our approach is likely to depend on whether or not the policy remains linked to the consumer's mortgage. This article sets out in more detail the thinking behind our approach to cases where the policy does remain linked to the mortgage.

our normal approach

In "standard" mortgage endowment mis-selling complaints, where the policy remains linked to a mortgage, we will usually tell the business to pay compensation to put the consumer in the position they would have been in, if they had taken a repayment mortgage at the outset.

We ask the business to pay compensation calculated up to the date the complaint is resolved (or the date of our final decision), in accordance with the approach set out in the FSA's guidance, Handling Mortgage Endowment Complaints.

We are normally unlikely to accept the argument, put forward by some businesses, that the loss calculation should be restricted (or "capped") to a date in the past. The date proposed is usually that of the "red" or "amber" re-projection letter (letters warning of a high risk - or a risk - that the policy will fail to reach the target amount).

The FSA provided some guidance on this issue in its December 2004 letter to Chief Executives of some regulated firms. Among other things, it said that reducing a complainant's recoverable loss is only likely to be fair where:

  • "The options available to address the shortfall are clearly communicated and are a fair representation of all the options available to that complainant.
  • The consequences of not taking action are clearly communicated, ie that any future compensation may be reduced due to the complainant's inaction.
  • The business can demonstrate that it is in all the circumstances reasonable to expect the complainant to have taken action which would prevent further losses accruing."

when might we accept capping arguments-

Occasionally, in cases where the policy remains linked to the mortgage, we will agree that the business should calculate the consumer's recoverable losses to an earlier date (often six months after the consumer received a "red" letter, by which time they ought reasonably to have realised they had cause for complaint).

This might happen in cases where:

  • the consumer is particularly financially sophisticated (for example, because they work in a relevant part of the industry) or
  • the consumer sought and received professional advice about the options and action they might take to prevent further losses from arising, but then failed to take reasonable steps.

However, as we illustrate in the second of our case studies (61/08), we do not always accept capping arguments simply because the consumer has discussed matters with an adviser.

case studies

mortgage endowment complaints - capping where the policy remains linked to a mortgage

issue 61 index of case studies

  • 61/7 - a fairly typical mortgage endowment case where the business has sought to cap the consumer's loss
  • 61/8 - a mortgage endowment case illustrating that we do not always accept arguments for "capping" simply because the customers had discussed their situation with an adviser

61/07
a fairly typical mortgage endowment case where the business has sought to cap the consumer's loss

In February 2004, shortly after they received a second "red" re-projection letter, Mr and Mrs G complained about the sale of their unit-linked endowment policy. The business upheld their complaint but restricted the loss calculation to 12 March 2001, six months after the date when it had sent Mr and Mrs G their first "red" letter.

The business said:

  • When Mr and Mrs G received the "red" letter in September 2000, they ought reasonably to have realised that they had cause for complaint about the advice they received at the time of the sale.
  • It could not be held responsible for any losses Mr and Mrs G incurred after they had become aware of the position, because there had been a "break in the chain of causation" when the couple received the letter.
  • Once Mr and Mrs G became aware that the policy had been mis-sold - and they had chosen to retain it when they were free to dispose of it - they could not expect to receive any further compensation.
  • Even if it remained responsible for the losses Mr and Mrs G incurred after they had become aware of the position, Mr and Mrs G had a duty to "mitigate" their loss by, for example, increasing their premiums within a reasonable period of time (six months).
  • However, Mr and Mrs G had not taken any action, so it did not consider it was responsible for any losses incurred because of the couple's failure to do anything.

We agreed with the business that Mr and Mrs G ought reasonably to have realised they had cause for complaint when they received the first "red" letter. But we did not think it fair to conclude that the business could not be held responsible for any losses Mr and Mrs G incurred after becoming aware that they had cause for complaint. This was because:

  • the policy remained linked to their mortgage (and Mr and Mrs G intended to use the policy to repay their mortgage) and
  • the letter Mr and Mrs G had received was not about surrendering the policy, but about addressing the likelihood of it resulting in a shortfall when it matured and
  • the business had not warned Mr and Mrs G that compensation might be reduced if they did not surrender the policy.

We did not think it was reasonable in those circumstances:

  • to expect Mr and Mrs G to have surrendered their policy after they received the first "red" letter or
  • for the business to treat the couple as if they should have done this.

If Mr and Mrs G had stopped using the policy in connection with their mortgage before they received the "red" letter, it is likely that we would have taken a different view. In those circumstances, the couple would have had a more straightforward choice - whether (knowing the risks) they should keep the policy as a means of saving, or whether they should dispose of it.

We also considered the comments made by the business about "mitigation" of loss. At the time Mr and Mrs G received the first 'red' letter, their loss was the difference in monetary terms between their position with their endowment mortgage and the position they would have been in, if they had taken out a repayment mortgage at the outset. Their loss was not the projected shortfall, although it was that shortfall, highlighted in the "red" letters, that had prompted their complaint.

By capping the loss calculation to 12 March 2001, the business was effectively saying that at that date:

  • there was a course of action Mr and Mrs G could have taken that would have prevented their position (compared with the repayment position) from deteriorating further and
  • the couple ought reasonably to have identified and taken that course of action to avoid further losses.

We agreed that Mr and Mrs G could, in theory, have avoided (most) further losses from arising by surrendering the policy, using the surrender proceeds to reduce their mortgage, and then converting the balance to a repayment basis. However, we did not think it unreasonable that Mr and Mrs G had not identified and taken that action.

Although the "red" letter had urged the couple to take action to address the shortfall, the options highlighted in the letter were not designed to avoid the loss for which they were now seeking compensation. If Mr and Mrs G had increased their premiums they might have made matters worse - they could have lost some of that money as well, while increasing their costs.

Mr and Mrs G were not financially sophisticated and we were not persuaded that, as a result of reading the "red" letter, they ought to have realised what steps would prevent their position from getting worse (as compared with the position they would have been in if they had a repayment mortgage).

Nor did we think it unreasonable that they had not taken any action until they complained, after receiving the second letter. The "red" letter had not explained the consequences of not taking action (that is, that any future compensation might be reduced). And even if Mr and Mrs G had taken the action suggested in the "red" letter, their loss might still have increased while the policy remained in force.

We told the business to carry out a full loss calculation to the date of our decision.

61/08
a mortgage endowment case illustrating that we do not always accept arguments for "capping" simply because the customers had discussed their situation with an adviser

In June 2000, after receiving an "amber" re-projection letter about their endowment policy, Mr and Mrs T contacted the business and arranged to meet one of its advisers, to discuss their options. However, they took no action after this meeting - either to address the shortfall or to complain about the sale of the policy.

Nearly three years later, in April 2003, Mr and Mrs T received a "red" re-projection letter. They then complained to the business. Although the business accepted their complaint about the sale of the policy, it said it was not responsible for the losses the couple had incurred after 1 August 2000. This was the date of their meeting with the adviser.

The business told us that during that meeting the adviser had explained the risks relating to the mortgage. And to back up its case, the business provided a copy of the "fact find" and report that the adviser had prepared at the August 2000 meeting. These documents indicated that the adviser had discussed with the couple the options for addressing the shortfall, set out in the "amber" letter. This included the option to " wait and see".

There was no evidence to suggest the adviser had discussed the steps the couple might take to prevent their position from getting any worse. The adviser had not, for example, discussed surrendering their policy and converting their mortgage to a repayment basis - a step which would have prevented the losses that arose later.

The adviser had recorded that Mr and Mrs T could not afford either to put any money aside or to make a lump sum reduction or other arrangement to address the shortfall. As they had a second policy, they had decided to wait and see for the time being, and to review their position when that second policy matured in 2003.

We concluded that although they had met an adviser, Mr and Mrs T were not aware of the type of action they could take to help avoid future losses. The adviser had not explained this to them.

In the circumstances, we did not think it was reasonable for the business to cap the compensation calculation and we told it to carry out a full loss calculation to the date of decision.

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ombudsman news issue 61 [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.