I have previously posed a question to both the FSA and the industry – which model is bust?
I therefore wonder, is it only me that can see that it is the non-IFA sector which creates the most distrust? The publication last week of the Financial Ombudsman Service’s annual report sheds further light on the relative customer service ethics of IFAs and the non-wholeof-market distribution channels.
Headlines have focused on the reduction in overall complaints against IFAs falling from 12 per cent in 2006/07 to 4 per cent during 2007/08.
This is certainly telling but it masks an even greater truth. The FOS report comments that this percentage reduction is due to a similar fall in mortgage endowment complaints and goes on to highlight some interesting statistics.
Out of 123,089 complaints made, 13,778 related to mortgage endowments and if these are factored out, the figures are thus – 109,311 complaints, of which only 1.4 per cent related to IFAs.
One might reasonably question why a disproportionate 24 per cent of mortgage endowment complaints relate to independent advisers and there are two answers to this.
First, advisers generally keep better records than banks and insurance companies.
This lack of recordkeeping means that many banks and insurers uphold complaints as there is little documentary evidence allowing otherwise.
Second, these organisations also reach commercial decisions whereby they choose to settle complaints, up to a certain monetary level rather than meet the expense of investigation, a possible FOS referral fee and another tick in the unsettled complaints’ column of their regulatory return.
Those new to the industry and those few remaining naive readers may shake their heads and utter “Surely that sort of thing doesn’t go on?” But of course it does.
Last year, while taking a sunshine break by the Red Sea, I relaxed over an obligatory pint with another tourist and, somewhat bizarrely, it turned out that he worked for a major insurance company running their endowment review team.
He confided that the strangest aspect, from his point of view, was being told to pay out all claims which involved compensation of £3,000 or less. Is it only me…but are you then surprised that many clients clamoured for their share of this bounty?
Last week, David Severn’s report on behalf of the Financial Ombudsman Service was published. It focused on how the FOS dealt with the deluge of endowment complaints over the previous seven years and also offered an interesting chronological history of the drama.
Severn confirmed that the report is not a comprehensive history and in this regard he is correct as it is concentrated on documentary evidence such as FSA consultation and discussion papers and failed to comment on the surreal nature of the debacle.
Most endowments were set up to achieve their targets using growth rates of between 7.5 per cent and 8.75 per cent, which were the middle growth rates used during the 1988-99 period.
When these growth projections were lowered to 4 per cent, 6 per cent and 8 per cent in 1999, one natural consequence was for most reprojection letters to imply that plans were behind target – even if they were growing at the rate anticipated.
Surprisingly, Severn does not once mention the Lautro 12 affair, the companies identified by the FSA as guilty of “pre-contractual misrepresentation” and in some cases a “breach of contractual warranty” by incorrectly calculating premiums, often significantly below the level needed to achieve the mortgage target.
Maybe David Severn’s remit did not enable him to comment on how the entire endowment reprojection exercise has been a farrago of factual inaccuracy and designer confusion.
Far worse than the Northern Rock shambles and far more troubling because it was not due to the FSA being asleep on the job but due to it consistently failing to grasp the problem and failing to ensure that a systemic common-sense approach was followed.
Alan Lakey is partner at Highclere Financial Services