On June 1, the FSA again changed the rules governing the time limits applying to customers wanting to complain to firms and the Financial Ombudsman Service about their mortgage endowment policies.
The new rules were made by the FSA using its powers under section 155(7) of the Financial Services and Markets Act 2000.
This means that the FSA did not consult with the industry or the public on the proposed rules as it believed that the delay in doing so could have been prejudicial to the interests of consumers. Any prejudice to the interests of the firms which the FSA regulates does not appear to have been considered.
Unsurprisingly, the new rules give the vast majority of policyholders more time to complain. This is the latest in a series of manoeuvres and rule changes by the FSA and the FOS designed to erode the rights of authorised firms to reject complaints on the basis that they are time-barred under normal limitation rules.
Time bars in law
Under the Limitation Act 1980, claims in the courts are time-barred if they are brought more than six years from the date of the action complained of or, if later, three years from the date that the potential claimant had knowledge of the facts giving rise to the claim.
The three-year period is subject to a “long stop” of 15 years from the date of the action complained of. If you are outside that 15-year per-iod, you cannot bring a claim unless the facts giving rise to the claim have been deliberately concealed from you by the perpetrator.
What is clear, following a decision of the House of Lords in April 2002 in the case of Cave versus Robinson Jarvis & Rolfe, is that the 15-year long-stop time limit will only be waived in favour of the claimant where the adviser manifestly knew at the time the advice was being given that it was in breach of his duty to his client. This is a high hurdle for any potential claimant to overcome in seeking to argue that the 15-year rule should be disapplied to allow a claim to be brought outside that time limit.
PIA Ombudsman rules
The terms of reference of the FOS's predecessor the PIA Ombudsman contained a clear statement that it would abide by the rules of the Limitation Act 1980. Paragraph 6.3(d) of the PIAO rules state that the PIAO was not empowered to consider any complaint if it would be “time-barred by reason of any applicable rule of law or enactment”.
Although the above did not apply to pension review complaints, it is only in recent years, and in particular since the inception of the FOS, that the application of the Limitation Act 1980 principles has been watered down to make it significantly easier for complainants to bring complaints against authorised firms outside the normal time limit that would apply in law.
The FOS rules, which came into force on December 1, 2001, did not contain an explicit statement, as in the PIAO rules, that the FOS would broadly comply with the principles set out in the Limitation Act 1980.
Instead, the FOS rules in chapter 2.3.1 of the dispute resolution complaints manual contained a rule broadly reflecting the three-year and sixyear rules under the Limitation Act 1980. Crucially, however, there was no reference to the 15-year long-stop. The FOS also retained a right to consider complaints outside the three-year and six-year time limits set out in its own rules in “exceptional circumstances”.
Endowment complaints and the three-year rule – February 2003 to June 2004 In February 2003, after a short consultation per-iod of one month, including Christmas and New Year, the FSA amended the rules applying to the FOS and relating to the three-year time limit for endowment claims. Policy statement 158 (published in January 2003) which introduced these new rules makes interesting reading.
In PS158 (at para 3.3), the FSA sets out its stall by stating that it is “not changing or trying to change the time limits that would apply under ordinary law”.
However, the opening paragraphs of PS158 (paras 1.1 and 1.3) state that the proposed rule changes are designed “to allow the FOS to consider some complaints that might otherwise have been time barred” and that “the normal three-year time period specified in the rules will be extended”.
The FSA also states in PS158 (later in para 3.3) that it “does not consider it is in the interest of consumers to rule out the possibility of complaints being dealt with outside the 15-year period that would apply to court cases. Nor do we consider this necessary to prevent hardship to firms.”
Firms dealing with complaints that would otherwise have been time-barred may disagree with the latter statement, particularly as they have to pay a case fee even when a complaint is rejected. But leaving that point aside, the FSA's statement that it is not seeking to change the ordinary legal time limits appears entirely inconsistent with the subsequent statements.
The original three-year time period set out in the FOS rules on December 1, 2001 broadly reflected the provisions of the Limitation Act 1980. That being the case, how can extending the three-year limit and allowing claims outside the 15-year period be anything other than changing the law?
Furthermore, in para 3.6 PS158, the FSA goes on to say that it “considers that the then existing time limit provisions that bind the FOS may, in the context of complaints about misselling of mortgage endowment policies, unfairly disadvantage a significant number of consumers. So CP158 proposed changes to the rules to remedy this unintended effect.” In other words, if the existing laws on limitation do not suit the FSA, let's see what we can do about changing them to make it easier for consumers to bring complaints.
As all firms will be aware, PS158 then went on to state that only a red letter would start the three-year clock running and that the clock would not run out until six months after the second red letter, even if this took the consumer past the usual three-year period. The provision adding six months after the second red letter clearly does change the law and the stipulation that only a red letter starts the clock ticking, if not changing the law, certainly placed a very strict interpretation on the existing rules, inevitably resulting in the majority of consumers having longer to bring a complaint.
The FOS has since made it abundantly clear it does not consider that the 15-year rule applies at all in relation to complaints made to it. It is difficult to reconcile any of the above with the FSA's statement in PS158 that it is not seeking to change the law.
Endowment complaints and the three-year rule – June 2004 onwards The high-water mark of the FSA's erosion of the time-bar rules came with the announcement from the FSA on June 1 that the rules on the three-year time bar for endowment complaints was changing again with immediate effect. The new rules effectively extend the time limits for the majority of potential complainants by saying that the three-year period for complaining triggered by receipt of a first red letter cannot expire until the policyholder has been told at least six months in advance that their right to complain will expire.
Policyholders who received a reprojection shortly before June 1 which did not contain such a warning may not be due another reprojection for two years. This means that such policyholders, who are likely to have received their first letter around three years ago, will now have a further two years (at least) to complain unless the product provider or intermediary who sold the policy chooses to specifically mail the policyholder again giving the six-month warning.
For IFAs, undertaking such a mailing could raise serious PI issues as insurers could deem it to be encouraging a claim.
At the same time as the rule change, the ABI has amended its mortgage endowment code and ABI members in future reprojection letters must either state the final date for complaint or, if they choose not to do so, agree with any intermediaries who sold their products that a time limit will not be imposed or make “reasonable efforts” to provide intermediaries, who do want to impose time limits regardless of the provider's stance, with the information needed to contact policyholders themselves. Aside from the PI issues for IFAs, the details of what “reasonable efforts” will entail have not yet been thrashed out. How much effort will providers have to make to contact IFAs and give them this information? IFAs have been left at the mercy of providers.
The position for departed IFAs is even worse. The FOS still has jurisdiction over claims against most departed IFAs and FOS awards can be enforced in the County Court under the FSMA. This places departed firms which traded as sole traders or partnerships in a very difficult position.
It is even less likely that providers will have the obligation or inclination to contact departed firms, the former principals of whom may be very difficult to trace. In the event that a provider does not impose a time limit, it is also extremely unlikely that departed firms will have the information or resources available to contact their former clients themselves. This means that retired IFAs, many of whom in today's market are unable to get or afford run-off cover, will be potentially exposed to claims until they die.
This all paints a very grim picture for the IFA, who must be wondering where the next hammer blow is coming from. Certainly, the FSA's protestations that it has not sought to change existing law does not appear to stand up to any kind of closer scrutiny.