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Verity’s view

With both sides claiming victory over Legal & General’s ground-breaking challenge to the FSA concerning its 1.1m fine for endowment misselling, which side has really won?L&G’s victory dance convinced more members of the press than did the FSA’s equivalent.

The Financial Services and Markets Tribunal found that the FSA’s powerful regulatory decisions committee had drawn unjustified conclusions from the evidence before it. The fine was to be reduced. So the FSA was wrong, right?Well, not quite. The tribunal found that L&G’s sales procedure had nevertheless been flawed. So the FSA was able to claim vindication for its central contention that misselling had occurred on a significant scale. L&G was still to pay a fine, albeit a lesser one.

So what exactly did the regulatory decisions committee get wrong? To arrive at its conclusion that widespread misselling had taken place, the committee referred to a sample survey of 250 L&G mortgage endowment holders conducted by PricewaterhouseCoopers. Of those policyholders, 152 returned their questionnaires. L&G believed that those who thought they had suffered misselling would be far more likely to return their forms, meaning the sample was not representative in the first place.

Among those who returned their forms, PWC found evidence in 60 cases that misselling might have taken place. The FSA used that proportion – 60 out of 152 – to suggest that 39 per cent of L&G’s 41,000 mortgage endowments sold in that period were unsuitable.

Now, the difference between “might have been missold” and “were missold” is more than a fine point of grammar. The tribunal took a sample of 13 of those 60 endowments which might have been missold and found that only eight actually were. What do you conclude from that?L&G chief executive David Prosser was widely quoted saying that only “eight out of 250” endowments were found to have been missold. He added that this was not “a high percentage”. My calculator makes it 3.2 per cent.

Compare that rate of misselling with the success rate of complaints about endowment misselling. With many other companies, this comes in at about 40 per cent.

How could L&G’s percentage be so low? A misselling rate of 3.2 per cent would be staggering. Not only would L&G be a clean company with excellent sales practices, it would be an ultra-hygienic, saintly one with no human foibles – the life insurance equivalent of a Tibetan monk.

But is that percentage accurate? The FSA’s reading of the tribunal’s outcome was almost diametrically opposed. According to the FSA, far from being eight out of 250, the real number was eight out of 13. Its press release – an attempt, apparently, to play down its sense of jubilation at the tribunal’s outcome – pointed to the tribunal’s confirmation that its own result – eight out of 13 – turned into a percentage of 62 per cent. The FSA further noted that the tribunal had said common sense allowed one to assume this percentage applied across this particular group of policies. Which group? The ones PWC thought might be missales? Or just the ones the committee sampled? It was not entirely clear.

A 15-year-old studying statistics at GCSE level might well frown at the conclusions of every party involved, including the tribunal. On the one hand, the tribunal was saying the committee should not have concluded widespread misselling among 41,000 cases by extrapolating from such a small sample. But on the other hand, it was drawing its own conclusions about the FSA’s sample from a tiny sample of its own – just 13 cases.

As the first challenge to an FSA fine by a major company, L&G’s case gave expression to a wider frustration on the part of the industry that all this talk of endowments, personal pensions and compensation reflects a cynical view of the industry and the people who work in it, that they only care about commission and do not give a hoot for customers. Many in the industry genuinely feel hurt by this – they believe that they are genuinely trying to do the right thing by selling policies.

The trouble with that view is that you can believe both things. Advisers were indeed trying to do some good but misselling nevertheless took place. If misselling happened, there is no need to suppose a deliberate, abusive intent on the part of the adviser, neither does it have to reflect a flawed wording in the life insurer’s guidelines for endowment sales. All it requires is that the beliefs and expectations of both customer and salesperson at the time were wrong.

In the late 1990s, many of those who sold endowment policies knew they had never in decades failed to pay off customers’ mortgages and the small print warning of the possibility seemed to refer to an outside chance. It was regarded as a fussy bureaucratic necessity.

Both adviser and customer simply did not consider the real possibility of the sort of stockmarket downturn we have had. That was the truth about misselling. Both adviser and customer believed that shares meant quick, easy gains.

To err is human. The Financial Services Act 1986 required the adviser not to err but to be perfect – to give best advice. Against that requirement, being human is no defence.

Andrew Verity is a financial reporter at the BBC

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