Select Committee on Treasury Fifth Report

6 Complaints and compensation

The complaint and compensation process

61. To have a valid complaint about a mortgage endowment policy policyholders need to show that they were both given unsuitable advice when purchasing the policy and that they have lost out financially as a result. In calculating any compensation due, the aim is normally to return the policyholder to the position they would have been in had they taken out a repayment mortgage. The calculation of any compensation thus involves comparing the mortgage interest and premiums actually paid on the endowment mortgage, and the current surrender value of the mortgage endowment policy, with the mortgage interest and capital repayments paid on an equivalent repayment mortgage, and how much capital would have been paid off the mortgage.[134]

62. In the first instance policyholders must complain to the seller of the policy. Insurance companies are thus only responsible for policies sold directly to the customer, not those sold by intermediaries. If a policyholder feels they have not been treated fairly by the company, they can then appeal to the Financial Ombudsman Service (FOS), although the FOS has no power in cases involving sales via IFAs pre-1988.[135] In addition to the normal complaint process for individuals, however, the FSA has intervened and agreed a proactive review programme with some companies.

Level of complaints and compensation

63. The FSA told us that so far its interventions had produced "£5.2 million in fines and involves approximately £227 million in compensation to around 183,000 consumers. In addition, through our intervention on a non-disciplinary basis, 19 other firms have delivered approximately £446.5 million in compensation for a further 253,500 consumers."[136] In addition, the FSA told us that a "further £200 million has been paid by firms as a result of individual complaints made by consumers. We expect this figure to rise significantly in the forthcoming period."[137] The FSA added that in the past year 216,000 complaints were made to companies about endowment mortgages. In total the FSA's figures suggest that the number of complaints relative to the number of policies remains well below 10%. This conclusion was reinforced when we asked the five major insurance companies that gave us evidence what percentage of the endowment policies on their books had so far lodged complaints. The figures ranged from 10% in the case of Standard Life to 2.0% in the case of Scottish Amicable,[138] but across the five companies 5.7% of the 4.68 million policies had prompted complaints. This figure needs to be compared with the evidence we noted earlier (Section 3) that between 50% and 60% of endowment policies were mis-sold. Mr Harvey, Chief Executive of Aviva, told us that he did "not agree with the view that [the percentage of complaints] is a tiny proportion of those who have a potential claim."[139] While not all mis-sold policies will give rise to a compensatable loss, with around 80% of endowment policies showing a shortfall it nevertheless seems fair to expect many more policyholders to be complaining if they were fully aware of their rights and the complaints process. The available evidence suggests that 80% of endowment mortgage policies are now showing a shortfall and that 50%-60% of holders of such policies believe they were probably mis-sold. However, we note that in many cases there is a lack of any contemporaneous record of what the sales person said to the client and vice versa; this will make it difficult to determine reliably what a client's attitude to risk was at the time the contract was entered into. Against this background, under 6% of policyholders have so far complained. Urgent action is needed to ensure that the complaints process is better understood and more accessible to policyholders.

64. Consumer groups told us that they had made requests to the FSA to improve the information available to policyholders about making a complaint. Ms Foster of the Financial Services Consumer Panel told us that "our main concern about the communications with consumers was the fact that FSA did not require the firms to send out with the reprojection letters the leaflet about endowment mortgage complaints. They did send out the fact sheet about endowment mortgages and we agree that was helpful, but actually consumers really needed help to understand whether they might have a claim for compensation arising from mis-selling, and it is not easy to work that out and they needed this leaflet to enable them to do that. We asked the FSA if they could ask the industry to send this leaflet out with every reprojection letter, and that has not been done."[140] The Consumers' Association told us that they had made a similar request to the FSA because, while the FSA had produced a fact sheet on how to make a complaint, Consumers' Association research showed that "only 13% of people who had endowments knew that this fact sheet existed."[141] The FSA has told us that its research showed that "that 85% of consumers knew how to make a complaint if they needed to".[142] However, the FSA should include a fact sheet explaining in what circumstances policyholders have a valid complaint, and how to make a complaint, with all reprojection letters.

Time limits

65. It may well be that many policyholders do know of the complaints process but have opted not to act because "something might turn up". What policyholders might well not realise is that there are time limits on making a valid complaint. If the policyholder ultimately has to appeal to the Financial Ombudsman Service, complaints will only be considered if made within three years of receiving the first red letter warning of a likely shortfall or six months of receiving a second red letter.[143] While the latest FSA leaflet "Your endowment mortgage—have you acted yet?" does mention that a time limit for complaints exists, it is not explained in detail and Mr Harvey of Aviva told us that this will not be sent out until its phase three mailing, planned for July 2004.[144] This could well be too late for anyone who received a red letter in the first wave of mailings in 2000 and 2001. Mr Tiner of the FSA told us that information on the time limits is currently "not set out in the red letter, it is set out in the document that people can request as a consequence of the red letter that deals with 'How do you make a complaint?'"[145] The issue of time limits is likely to become increasingly pressing given that the first wave of projection letters went out in 2000, although Mr Prosser of Legal & General assured the Committee "We would not be looking to timeliness as a reason for not dealing with a complaint."[146] The Committee welcomes Legal & General's statement that it would not use time limits to rule out complaints, but across the industry urgent action is required to ensure that substantial numbers of policyholders do not lose their rights to compensation. It would be unfair to apply time limit rules which early mailings made little or no mention of. These rules, which have still not been spelt out explicitly to most policyholders, should be reviewed and the time limits extended.

Companies' complaints handling processes

66. The way companies have been handling complaints received from policyholders has been the subject of intense regulatory activity. As the flow of complaints began to grow it soon became evident that many companies were incapable of dealing effectively with the problem. Sir Howard Davis, then head of the FSA, said that "some firms complaints systems are currently snowed under by indiscriminate claims for compensation by endowment mortgage policyholders. Many have little prospect of success, and merely delay the resolution of other, worthy claims." [147]

67. The industry has had difficulties in simply handling the number of complaints received. Several companies told us that the number of staff handing complaints had risen dramatically over the past year or so. The FSA had originally imposed an eight week deadline for companies to respond to complaints, but then found it necessary to extend this deadline for several companies as they have struggled to cope with the surging number of complaints. The regulator has nevertheless informed the Committee that "all firms are expected to be back on track with complaints by the end of April 2004. Enforcement action will be pursued against any firms that continue to fail to deal with complaints fairly, consistently and promptly or fail to identify and remedy any recurring or systemic problems."[148]

68. As well as failing to process complaints in a timely fashion, the industry also seems to have initially adopted an unduly restrictive view of what constitutes reasonable grounds for a complaint. The FSA told us "we issued guidance, agreed with the Financial Ombudsman Service, in May 2001 on how firms, found to be responsible for mis-selling, should deal with complaints and calculate redress due"[149] and that "to further emphasise the importance of this, in April 2002 John Tiner wrote to the chief executives of the largest firms. He set out best practice for the way in which firms should handle complaints and asked CEOs to review their firms' procedures and experience in the light of the letter."[150] The practical effect of what the industry now terms the "Tiner letter" has been a significant increase in the number of complaints that companies are upholding, from 52% in Q3 2002 to 63% in Q3 2003,[151] although the improvement also reflects a series of targeted reviews following "an analysis of mortgage endowment complaints procedures for a sample of twelve large retail groups between 2001 and 2003."[152] The FSA has also told us that it intends to conduct "an analysis in early 2004 of standards of complaints handling in a sample of smaller IFAs, to assess whether there is action we should take to improve complaints handling in that sector."[153] The FSA has been persistent in its attempts to ensure that the companies handle complaints fairly and seems to have insisted on a general strategy of the customer being given the benefit of the doubt in cases where there is no clear evidence of whether the endowment policy was mis-sold or not due to inadequate documentation. It is very disappointing that it has required sustained pressure from the FSA to ensure that companies handle complaints satisfactorily. As with mis-selling, the need for repeated action to ensure fair treatment for customers seems to confirm that the insurance industry is locked into an unacceptable culture that focuses upon short term sales rather than long term customer care.

69. The Financial Services Consumer Panel has argued that one lesson to draw from recent events is that "the FSA must approach its dealings with firms with a healthy dose of cynicism. It is disturbing, but unsurprising, that it was not until the FSA put pressure on firms to raise the standards in firms' complaint handling that they did so." The Committee agrees with this assessment. The industry's track record, both in terms of mis-selling and in terms of handling complaints, has not been conducive to an atmosphere of trust either between the industry and its customers or between the industry and its regulator. Events have demonstrated that in the future the FSA needs to be much more rigorous in ensuring that its policies and strategies are being effectively implemented by the financial services industry.

Complaints to the Financial Ombudsman Service

70. If a company rejects a policyholder's complaint the policyholder has a right of appeal to the Financial Ombudsman Service (FOS). As the endowment mortgage problem has grown, the number of mortgage endowment complaints going to the Financial Ombudsman has soared from under 3,000 in 1998-99 to almost 14,000 in 2002-03 and an anticipated 50,000 in 2003-04.[154] In 2003-04 mortgage endowment complaints are likely to comprise around half of the Ombudsman's total work load. In spite of this explosive growth, the Committee was pleased to hear from the FOS that "our published timeliness targets are to resolve 45% of complaints within three months, 80% of complaints within six months and 90% within nine months. Our current closure rate for mortgage endowment complaints is in line with these targets."[155]

71. The FOS stated that "of the 13,570 complaints the Financial Ombudsman Service resolved in 2002-03, 39% were upheld, either substantially, or in part, in the favour of the consumer."[156] Consumer groups have highlighted the view that the percentage of appeals the Ombudsman is upholding reflects poorly on the ability of companies to adjudicate complaints fairly.[157] The FOS has further noted, however, that "in the case of some firms we are upholding 60% of complaints while in others we are upholding only 15%."[158] It is unacceptable that some companies' complaints handling processes are so flawed that the Ombudsman is upholding over 50% of consumer appeals against the companies' decisions. The FSA should take swift action to ensure that these companies begin treating their customers more fairly.

72. Consumer groups have highlighted two outstanding problem areas in the Ombudsman process. One is the issue of unnecessary delays in the paying of compensation by the company after the Ombudsman has found in favour of the policyholder[159]. The other area of concern relates to policyholders who received advice from IFAs. Many IFAs have now gone out of business and claims against them must be made via the Financial Services Compensation Scheme. Neither the Financial Services Compensation Scheme nor the FOS have a remit to look at cases relating to IFAs prior to 1988.[160] Broadly, however, consumer groups have expressed satisfaction at the way the Ombudsman is coping in difficult circumstances. The Consumers' Association told us that "we are very satisfied with the way the Ombudsman is taking forward what must be a huge increase in the complaints that are coming [through]",[161] a view broadly endorsed by the Financial Services Consumer Panel.[162] There remain concerns in the industry about the statutory framework within which the FOS works (for example in respect of the lack of symmetry between companies and complainants over rights of appeal from its decisions) and concerns about some of its decisions. In other respects, the Financial Ombudsman Service process appears to be working acceptably as an appeals body for the consumer on endowment mortgages and providing an efficient and accessible service.

73. The full complaints process can be lengthy and complex and there are some consumers who are not covered by the complaints process at all. We have heard from people who, when faced with a prospective shortfall, have complained to the endowment provider. The provider has, quite properly, indicated that in the particular case the complaint lies with the IFA who sold the policy. On making a complaint to the Ombudsman about the adviser, the policyholder has been informed that where the policy was taken out before 1988 the Ombudsman has no role. Additionally, if the adviser has gone out of business, and the policyholder has quite properly tried to claim from the Financial Services Compensation Scheme, the policyholder will again have been informed that where the policy was taken out before 1988 it is not covered by the Scheme. Consumers may need more help in establishing fair redress in some cases, with the main problem areas relating to policies sold via IFAs prior to 1988.

134 Back

135   Q 225 Back

136   Ev 97 paragraphs 16 & 17 (HC 275) Back

137   ibid paragraph 18 (HC 275) Back

138   Qq 417, 418 Back

139   Q 419  Back

140   Q 139 Back

141   Q 135 Back

142   Ev 96 paragraph 13 (HC 275) Back

143   Q 227 Back

144   Q 457 Back

145   Q 232 Back

146   Q 459 Back

147   FSA annual meeting, 17 July 2003 Back

148   Ev 97 paragraph 24 (HC 275) Back

149   ibid paragraph 21 Back

150   ibid paragraph 22 Back

151   Ev 110 paragraph 21 Back

152   Ev 97 paragraph 24  Back

153   ibid Back

154   Ev 94 paragraph 12 (HC 275) Back

155   Ev 94 paragraph 20 (HC 275) Back

156   ibid paragraph 13 Back

157   Q 155 Back

158   Walter Merricks, Chief Ombudsman, speech to the Council of Mortgage Lenders, 2 December 2003  Back

159   Q 156 Back

160   Q 225 Back

161   Q 156 Back

162   ibid Back

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