Both sides claimed victory after the financial services and markets tribunal recently handed out its decision on the controversial endowment misselling case between Legal & General and the FSA so what does this decision mean for other firms?The FSA had imposed a 1.1m fine for endowment misselling which L&G contested at the tribunal. The regulator sought to prove that Legal & General’s compliance procedures were deficient, that endowments were missold and that the proportion of misselling was unacceptably high. The tribunal concluded L&G’s procedures were deficient but the breaches had to be seen in proportion. The FSA’s regulatory predecessor the Personal Investment Authority had previously considered the defective documen- tation but had not criticised it and while it had identified other defects in procedures back in 1999, these were considered not sufficient to warrant disciplinary action. The tribunal concluded that only eight missales had been correctly identified and while defects in procedures would probably have caused further missales beyond those established, the misselling case failed, other than to this limited extent. Procedural riskDuring the hearing, the tribunal emphasised its difference from a traditional court. As part of this, it said it preferred the evidence of real customers rather than expert conclusions about what the reaction of a customer might or might not have been to a particular piece of evidence. At first sight, this sounds entirely reasonable but there is a danger for firms that the customers who are selected to appear before the tribunal may be drawn from a pool of customers who have suffered losses. Such customers may be keenly aware that the likelihood of getting swift compensation will depend on the outcome of the hearing. If the events in question took place several years previously, customers’ memories could be vague or coloured by recent reportage. Firms must therefore take care to ensure that customers who give evidence are representative of the firm’s general clientele, not just a disgruntled section. Increased costThe tribunal was critical of the FSA’s regulatory decisions committee for drawing conclusions based on evidence which was “strongly indicative” and felt that these conclusions “were not justified by the material before the RDC”. The tribunal stated that if more evidence was needed the FSA should have obtained it because it was for the FSA to prove its case and produce the evidence it relied on. The FSA has since said that in the future its investigations may need to be more intrusive as it will need to look at a bigger sample of files or possibly even all relevant files to get a more accurate view of the evidence. There is, no doubt, a degree of bravado in this statement, as, in many enforcements, the FSA will not have sufficient resources to carry out this threat but the likely effect of the ruling is that FSA investigations will be more in-depth and more costly for firms if the FSA has to consider more documents to support (or reject) its case. Sample wordingGeneral lessons may be drawn from the tribunal’s criticism of L&G’s use of sample wordings in reason-why letters. The tribunal ultimately found that the sample wordings used in the relevant period (1997-99) did not make sufficient direct reference to the risk of capital shortfall and that this was unacceptable for low-risk investors. It concluded that although sample wording is useful in helping advisers to be consistent and accurate in expressing their recommendations, wordings should be tailored, as appropriate, to fit the individual concerned, otherwise, reason-why letters could be rendered useless as transactional records, explanations of recommendations or as evidence that customers understand the risks that they are taking. This finding relates to the rules in place during 199799 but it meshes neatly with the current rules which state that, ideally, each suitability letter should be different, to reflect “the approach of the representative, the customer’s profile, subjects discussed and the considerations on which the advice was based”. They also say that although firms may standardise letters to a degree to aid quality control, they should bear in mind that: a: standard paragraphs are best limited to the description of the most common needs and the products which will satisfy those needs; b: the firm should clearly link the customer’s own needs,priorities and attitude to risk to the product recommended rather than just setting out stock motives that may apply to all customers; c: Tick-box, pre-printed forms should only rarely be used and, when they are, it should only be in the simplest and most straightforward advice situations. The moral of the story is that, in every case, careful consideration should be given as to how far standard wordings are adequate for the case in hand. This will be a vital weapon in the defence of any misselling claims or enforcement action or preventing them in the first place. In conclusion, whoever “won” the Legal & General case, it is likely to affect the practice of firms, the FSA and the RDC in the short and longer term.