Aifa, the ABI and the Consumers' Association have all just published their responses to the FSA consultation paper on mortgage endowment complaints. While none of them dispute the need to redress missold endowments, there are significant differences.
The FSA's proposals are guidelines and the flexibility that this allows is welcomed by Aifa. The responses deal with the practicalities of redressing missold policies, often many years ago.
The extent of the problem is still difficult to gauge. The percentage of complaints that relate to IFAs are relatively low at 12.4 per cent. Figures from the Financial Ombudsman Service for April 2000 to January 2001 show 7,067 complaints were received and 873 related to endowments sold through IFAs.
The ombudsman is unable to supply figures for the amount of complaints upheld but says historically it has averaged around 50 per cent. As the FOS briefing note puts it: “Even though people may be disappointed or upset by the performance of their endowment, they may not have good grounds for complaint.”
The regulatory position is that a “firm must offer redress to the consumer that puts him, so far as practicable, in the position that he would have been in had the breach not occurred”.
The FSA proposals acknowledge that, in many cases, rectifying the breach will involve conversion to a repayment mortgage.
Where a client should have taken out a repayment mortgage, Aifa wants any redress to be conditional on that conversion. Its response focuses on the greater difficulties that IFAs will have in calculating redress for clients who have been missold endowment mortgages.
Aifa's report starts with the statement: “It is important that the procedures for assessing a complaint should not incur costs which are disproportionate to the resultant outcome.”
It is supported by the ABI, which asks for clarification as to whether the guidance applies equally to IFAs as well as to providers. The ABI report says: “There are additional complexities for IFA cases, for example, when comparing endowment and repayment mortgage costs, it cannot reasonably be assumed for comparison purposes that the same provider would have been used under both endowment and repayment options.”
Aifa points out the greater difficulties that IFAs would have in getting data from providers and that this might take more time. It wants clarification on whether generic or client-specific data would be needed to calculate redress.
London & Country mortgage specialist David Hollingworth asks whether the lenders are willingly going to help IFAs.
One could argue that what providers lose with the one hand through compensation they partially recoup on the other through early redemption penalties.
But IFAs have no buffer. FOS media relations manager Iris Baker says: “That is the cost of bad advice. A suitable remedy has to be found, irrespective of who gave the advice.”
Aifa asks if the difference in value can be taken into account in calculating the redress if an endowment is sold on the market rather than surrendered. “Where a firm can evidence that the market value is materially higher than the surrender value and realisable, we believe firms should be permitted to take account of the higher value in the comparison calculation,” says the Aifa report.
This would, says Hollingworth, go some way to redressing the comparative disadvantage of IFAs and remove dependency on provider's surrender value.
CA senior policy adviser Mick McAteer says shareholders rather than policyholders should foot the comp-ensation bill. But this raises another point. The FSA is also looking into the increasingly high-profile issue of the poor value available to consumers who terminate their policies early.
Additionally, Aifa asks that redress calculations take into account demutualisation benefits while the ABI merely asks for clarification on this issue, including the distribution of inherited estates.
The CA is emphatically against this. McAteer says: “We are very unhappy about the inclusion of demutualisation benefits in calculating compensation.It seems very underhand and would be very bad for the image of the industry.”
Hollingworth asks if windfalls are to be taken into account, how is the value to be calculated – on the basis of the initial value of shares if they were sold, or their current value if they were kept?
FOS head of communications David Cresswell points to the general legal rule of thumb that one should not benefit from a breach. But he says all cases are evaluated on merit. He also refers to the test case about to get under way on the question of whether windfall benefits can be taken into account in pension transfers. While very specifically in relation to pensions, any ruling could have a bearing on this question. Cresswell says: “We have been taking windfall benefits into account in similar situations.”
On savings, there is again disagreement. The ABI argues that savings (accrued through lower monthly payments) should be taken into account.
Aifa says it would be unreasonable to avoid factoring such savings into the analysis.
The CA disputes this, claiming it an inadvertent gain, in line with the FSA proposals and it is concerned that some providers will attempt to minimise redress in this way.
On the plus side for IFAs, the CA is calling for providers to pay for advice from an IFA. “Providers should be required to include the cost of independent financial advice as part of the calculation of redressable loss, and pay the cost of that independent advice as part of the compensation package,” it says.