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Mass appeal

As Legal & General squares up to the FSA over the alleged misselling of mortgage endowment policies, the industry waits to see if the regulator can be forced to back down.

L&G is disputing £1.1m fine for misselling, It is the biggest company to challenge the FSA openly over a decision.

Other companies to be hit with fines over endowments have included Prudential (£750,000), Royal & Sun Alliance (£950,000) and Royal Scottish Assurance (£2m).

If L&G wins its appeal, the industry expects it will unleash further challenges to the regulator&#39s authority.

LIA head of public affairs John Ellis says: “If the FSA loses, it will be a severe embarrassment and I am sure that other providers will take note of Legal & General&#39s success and change their stance. The industry is always complaining about the FSA forcing it to do things. If Legal & General wins, it will show that the regulator is not as watertight as we thought.”

Economist John Wriglesworth says: “Until now, the attitude has been that if the FSA sneezes, the industry has to jump. This challenge by Legal & General might change the tide and help people to realise that the FSA is not infallible. If L&G wins, there will undoubtedly be further challenges to the FSA&#39s authority.”

Reynolds Porter Chamberlain senior solicitor Harriet Quiney says the case will give a valuable insight into the workings of the tribunal, currently something of an unknown quantity. So even if L&G is unsuccessful, more firms could be prompted into taking cases to this level.

She says: “Prior to L&G, the tribunal really only considered procedural matters and so firms are uncertain of procedures and shy of publicity. If L&G does well, this will encourage more firms to go to the tribunal but, whichever way things go, we will be provided with a valuable insight into how the tribunal views the FSA.”

Legal & General is appealing over a £1.1m fine imposed by the FSA, which alleges that between 1997 and 1999 L&G missold endowment policies because of deficiencies in its sales and compliance procedures.

The tribunal began on September 13 and is expected to last for six weeks. It is hearing evidence from customers who bought endowments over the relevant period, as well as current and former FSA and PIA staff, L&G staff and consultants to L&G.

Last week saw Hodge Malek, QC, for the FSA, claiming that L&G would not co-operate with business consultants from PricewaterhouseCoopers called in to assess its sales process in 1999.

The tribunal heard that the FSA told L&G that it would reduce its original £1.3m penalty initially suggested by the FSA if it co-operated with enforcement but no reduction would be made if L&G contested the decision.

L&G&#39s lawyer, Charles Flint QC, said it was quite unlawful for the regulator to seek to obtain an agreement to the effect that the applicant should agree not to refer the matter to the tribunal.

The firm claims the FSA&#39s enforcement process used a broad-brush method when it should have dealt with each case on its own merits.

Solicitor and financial services regulation consultant Ruth Finch believes that while there is already guidance in the FSA handbook about regulatory decisions, the outcome of the tribunal hearing should furnish the industry with further clues as to what might lead the FSA&#39s scales to tip one way or the other. She says: “L&G is arguing that, on the facts of its case, there should have been a different decision. It will be interesting to see what it is that contributes to the FSA ultimately making a decision and this tribunal should give us more guidance as to why a decision falls one way or the other.”

If more information becomes available on how regulatory decisions are made, then firms will be able to bear this in mind when looking at their internal processes and controls. Finch says: “This could even stop firms getting in the position where there are problems or help them identify where problems are and do something about them.”

The drawn-out process of the L&G case calls to mind the trouble the FSA has faced over the split-cap debacle, which has dragged on for months as the regulator struggles to get all 21 firms involved to sign up to its compensation package.

Much like L&G, some companies implicated in the splits debacle believe the evidence against them is thin and in July just five firms had entered into settlement discussions.

Two weeks into the L&G tribunal, the industry is undecided as to which way the decision will go.

Finch says: “L&G must believe it has a very strong case or it would not be taking action.”

But Ellis believes the regulator will win. “The FSA must have crawled all over the case with its lawyers. I would have thought the regulator has it sewn up,” he says.

Ellis also raises the question of what Legal & General policyholders will think about the case. He says: “If I were a policyholder there, I would be asking a few questions about the money that is being spent on a legal action that might fail.”


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