Memorandum submitted by TRS Independent
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
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.
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.
3. ACTION REQUIRED
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
Devise a standard method for calculating
recompense that all providers should use.
4. ACTION TAKEN
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