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Is it too soon to cheer?

The sound of Champagne corks could be heard across the country as the

sign-up date for the pension review passed but is the sign-up date really

as
simple as it sounds and a cause
for celebration or merely an

early April fool?

On August 3, 1999, the FSA announced that investors who wanted their

personal pension reviewed had to request a review no later than March 31,

2000 – the sign-up date.

At the same time, the FSA said firms should complete all their phase two

reviews by June 30, 2002. Phase one cases should have been completed by

December 31, 1998.

It may, however, not be possible to rely on the sign-up date.

FSA Bulletin No 5 says: “Firms will only be able to apply the sign-up date

if they have complied with the regulatory guidance, particularly in

res^_pect of the specification and timetable for issuance of direct

invitation and other investor materials under the phase
two guidance.”

Therefore, any failure to comply with the mailing req^_uirements of phase

two invalidates the sign-up date. The unanswered question, how^_ever, is

how any particular procedural failure will affect the review. Examples of

uncertainties include:

If the direct invitations
were issued one month late, does this mean

that the sign-up date is to be extended for one month – or is there no

applicable sign-up date and the time period infinite?

Similarly, if a group of inv^_estors was mistakenly omitted from the

starting population and only later issued with the investor materials, does

this invalidate the sign-up date for those cases or all cases?

Does it matter that materials were sent in a non-compliant envelope?

In due course, these questions will have to be addressed by the FSA. But,

even if a firm can rely on the sign-up date, complaints about advice still

have to be considered.

The FSA says: “After the sign-up date, investors will
be able to

exercise such rights
as remain open to them – through making a formal

complaint (including, if necessary, taking the matter to the omb^_udsman)

or, if they wish, by taking legal action.”

As far as compliance matters are concerned, a complaint to the ombudsman

is unlikely to be radically changed by the non-application of the pension

review system since the omb^_udsman is likely to apply the principles of

the review, if not the review itself.

The changed burden of proof under the review is irrelevant to

inquisitorial investigations by the ombudsman. There is, however, a

fund-
amental difference in terms
of limitation.

Where a cause of action arises for breach of contract or negligence, the

primary limitation period is six years from the date of the transaction.

This is the date when the investor suffers damage, as confirmed by the

court case Ryles v Chaudrey 1999.

In negligence claims, there is a further period of three years from: “The

earliest date on which the plaintiff … first had both the knowledge

req^_uired for bringing an action for damages in respect of the relevant

damage and a right to bring such an action.”

Limitation issues have so far played very little role in cases which fall

within the review because the PIA Omb^_udsman has jurisdiction to consider

any complaint of negligence, where it would other^_- wise be time-barred,

if the complaint “concerns a contract or policy which is or may be the

subject of a review under the terms of the statement of pol^_icy on pension

transfers and opt-outs issued by the Securities and Investments Board on 25

October 1994 [as modified by PIA or other SRO]where in the opinion of the

ombudsman it would be inequitable for such a time bar to apply”.

If, however, an investor has failed to request a review before the sign-up

date, that case is excluded from the review and the ombudsman does not,

therefore, have jurisdiction to consider or comment on the case if it is

time-barred.

In the context of the a mis-advised pension transfer, opt-out or

non-joiner, the “knowledge” required to start the three-year period running

is knowledge of the material facts about the loss and the fact that the

loss is attributable to the negligent advice.

Arguably, the investor might not acquire such know^_ledge until he retires

because only then can he compare his pension with the deferred benefit

statement to discover that his personal pension is worse than his

guaranteed deferred benefits at retirement.

However, there exists ample ammunition to suggest that any investor has

already had more than three years&#39 knowledge to bring a claim, given the

extensive publicity.

FSA Bulletin No 7 suspended loss assessments for two categories of

investor within phase two because research carried out by

PricewaterhouseCoopers suggested that the FSA assessment guidance may

result in a “material mis-statement of loss” in up to 35 per cent of phase

two cases.

New guidance is still awai^_ted. Some phase two cases have already been

closed, assessments having been carried out on the old FSA-prescribed

basis. When new guidance is issued, will the FSA require firms to re-open

cases previously closed as showing no loss?

More significantly, will the FSA direct firms to re-open cases where loss

was assessed and redress paid to an investor “in full and final settlement”

of their claim but it is now established that such redress was

insufficient?

As a matter of law, these claims cannot be re-opened, the matter having

already been resolved. Any attempt by the FSA to require firms to re-open

such cases would, therefore, be susceptible to an application for judicial

review of the
FSA guidance.

Issues remain as to whether it is correct as a matter of law that

investors should not be required to give credit for windfall shares they

received on demutualisation of life offices such as Norwich Union, NPI and

Scottish Widows.

The PIA directed firms to ignore windfall shares in assessing loss and

redress because: “The actual value [of the shares] in the hands of the

investor is entirely collateral to the value of whatever investment

cont-
ract he or she may have. It follows therefore that the

finan-
cial impact of demutual^_isation should be ignored.”

It is strongly arguable that the shares are not collateral (unrelated) to

the contract.

The shares are integral to the pension/contract. If the investor had not

taken out the per^_sonal pension/S32 cont-
ract, he would never have

rec^_eived the shares.

Damages for negligence are compensatory, that is, claim^_ants are to be

put in the financial position they would have been in had they received

best or suitable advice.

The investor&#39s loss is the difference between the value of the

occupational pension and the value of benefits received/ expected under the

personal pension/S32 contract, including the shares which the inv^_estor

would not otherwise
have received.

The PIA Ombudsman&#39s newsletter last December illustrates the arguments.

Although the ombuds-
man repeated that demutualisation shares are

collateral
to the investment contract, in a non-pension review case he

dec^_ided that the investor should give credit for the shares because the

particular investment contract had been rescinded.

How is this different from cases where investors have been reinstated in

their occupational schemes and the personal pension surrendered?

Will the PIA Ombudsman apply regulatory update 33 to cases which are

excluded from the review because the complainant failed to meet the

sign-up date?

It is probably too late to seek judicial review of update 33 (which the

PIA Ombudsman is applying to cases before him). However, the PIA

Omb^_udsman&#39s terms of reference allow for a test case, where the issues

involved “may have important consequences for the business of firms

gener^_ally” or are “an important or novel point of law”.

With Collegiate Management Services, we are actively considering invoking

the test-case procedure following a preliminary assessment from the PIA

Ombudsman Bureau that the value of demutualisation shares is to be ignored.

The sign-up date has been hailed by some as the beginning of the end of

the rev-
iew. It should certainly rem-
ove some of the difficulties

experienced in obtaining pro^_fess^_ional indemnity insurance because a

firm&#39s review cases are now quantified.

However, the sign-up date does not dispose of existing contentious matters

and creates a few more issues of its own. Therefore, we say, watch this

space.

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