Select Committee on Treasury Written Evidence

Memorandum submitted by TRS Independent Financial Advisers


  1.1  This submission concerns "The responsiveness of the FSA to the needs of the retail financial services consumer."

  1.2  The FSA is failing to address an ongoing issue that arises partly from the actions of a number of life assurance companies and partly from the previous regulator. It is causing unnecessary financial loss to those retail financial consumers who purchased Unit Linked low cost endowment policies between April 1988 and December 1994.

  1.3  From April 1988 until December 1994 insurance providers had to use standardised charges (LAUTRO) specified by the then regulator when producing policy illustrations and quotes. These standard charges were considerably lower than the provider's actual charges. Thus retail consumers were often being misled by the illustrations provided by the Life Insurance Companies. From January 1995 following the intervention of the Office of Fair Trading they were able to use to use their own charges again.

  1.4  Since that time a number of insurance companies have voluntarily compensated those consumers who suffered as a result of this policy. However a number of providers have not.

  1.5  Those companies that are compensating are using different methods. Some compensate monthly by enhancing the premium others intend to make an adjustment at maturity.

  1.6  Even those who are compensating are not advising their clients regularly of the positive effect of the enhancement on their plans. As a result many financial retail consumers unaware of the "hidden" benefits of their plans have been cash surrendering their Unit Linked Low cost endowment policies to their considerable detriment.

  1.7  The FSA is aware of the problem and has taken no action to regularise the situation.

  1.8  The FSA should not wash its hands of legacy issues by claiming that it was before they were instituted. This is an ongoing problem and is causing financial loss to consumers today. Many of the FSA executives were employed by the previous regulator and have a duty to resolve this issue.



  In April 1988 the Regulatory predecessor of the FSA introduced standardised charges (LAUTRO assumed charges) for all illustrations and quotations for life assurance and pension policies, including low cost endowment policies. The use of these charges in producing illustrations and quotes was mandatory. Many in the industry believed this to be a result of muddled thinking because it meant that all policy illustrations and quotations produced were misleading. This was because the actual charges on policies were higher than the standardised charges assumed in the illustrations. Thus even if the rate of investment returns over the term of the policy had been consistent with those shown on the illustration, the actual returns to the policyholder would have been less than illustrated due to the much higher charges actually deducted from the policy over its term. The then regulators were warned consistently of the problem during this period.

2.2  Unit linked low cost endowment policies

  Some Life Assurance companies used the LAUTRO assumed charges to calculate premiums for their unit linked low cost endowments and thus compounded the problem identified in para 2.1 above. This meant that any policy affected could not possibly attain the illustrated maturity benefits as the companies used their own actual charges and these were much higher than the LAUTRO assumed charges. This was especially unfortunate for low cost endowment policyholders who would be relying on the proceeds of their policies to repay mortgage loans.

2.3  Abandonment

  In December 1994 the Lautro projections were abandoned. This action followed an unfavourable regulatory report.

    "The requirement to use standard charges prevented life offices from producing illustrations which demonstrated the relative merits of their products thus restricting their ability to compete with others in the market... the requirement to use standard charges in illustrations was likely to restrict and distort competition among life offices"

  The regulatory body that came to this conclusion was the Office of Fair Trading and regrettably not the predecessor of the FSA.

2.4  Post December 1994

  Since January 1995 companies have been able to present their illustrations using their own charges. Since 1997-98 a number of life offices have compensated their unit linked low cost endowment policy holders who were adversely affected by the misrepresentation and breech of contractual warranty identified in 2.2 above. The compensation has been provided by a variety of means. However, there are still companies who are not compensating.

2.5  Problem Awareness

  As previously stated not all companies are compensating their clients and those that are, are using different methodologies. For example some companies increase the premium invested monthly by adding substantial amounts to the premiums that the policyholder pays. The value of the redress can be as high as 60% of the premium being paid by the policyholder. This means the benefit of the policy cannot be equalled by any other investment or financial arrangement. Other Life Assurance companies however intend to make the redress adjustment to policies at maturity. Few of the companies advise their clients on a regular basis of the nature and value of the redress. Finance professionals and, to our certain knowledge, some retail consumers have made the FSA aware of the potential for clients to suffer financially through lack of such relevant and appropriate information from the insurance companies. Failure to keep the client informed is clearly in breach of the Principle 7 in "The Principles of Business" in the FSA Handbook as well as a Breach of the COB requirements. Thus many unit linked low cost endowment policyholders have been and are cash surrendering their policies unaware of the valuable additional benefit that they are losing. The FSA have remarked that a relatively high proportion of endowment policyholders cash surrender their policies. Given the publicity that mortgage endowment policies (low cost endowment policies) have attracted in recent years it is likely that the tendency to cash surrender has been high. In the case of unit linked low cost endowment policies which are subject to compensatory payment every month, it can easily be seen that the Life Assurance companies gain handsomely but illicitly when such plans are surrendered by their clients through ignorance of the compensatory benefit. Keeping this issue as low profile as possible could be construed as a deliberate ploy on their part to reduce future compensation payments every month to the detriment of the consumer.


The FSA should:

    —  List all the Life Assurance Companies who are providing compensation.

    —  Encourage (using moral suasion if necessary) all those Life Assurers who are not compensating to do so as soon as possible.

    —  Insist that Insurance providers remind their clients of the redress at each and every plan update.

    —  Instruct providers to revisit all surrendered unit linked low cost endowment policies to determine if the client was given adequate warning of the redress being lost.

    —  Devise a standard method for calculating recompense that all providers should use.




  5.1  The subject and associated issues of this submission demonstrate that the FSA is consistently failing to provide many consumers with the appropriate protection from misrepresentation that they should reasonably expect. In addition this submission illustrates that:

  5.2  The FSA is consistently failing to acknowledge and give proper consideration to valuable information, issues and intelligence provided from industry sources, especially when these sources are small businesses and that when pressed.

  5.3  The FSA consistently fails to recognise issues and actions that are extremely likely to cause consumers loss even though it might reasonably be expected to do so.

  5.4  The FSA fails to take timely and appropriate action to protect consumers thereby creating both unnecessary losses and potential losses for consumers.

  5.5  As a consequence, confidence in the UK Financial system has been destroyed for many consumers and investors who no longer trust the abundant and compliant documentation produced by authorised financial companies choose not to save or invest.

September 2006

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