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Wed 8th September, 2010
News
Endowment Shortfalls – What mortgage introducers still need to know? |
14th March 2006 |
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Endowment claims continue to remain at high volumes. A number of claims management companies have aggressively created a market in making claims against providers and advisers. It has been forecast that 26,000 new endowment claims will be received during 2006/07. In June 2005, the Financial Ombudsman Service (FOS) revealed it was receiving 1,300 endowment mis-selling claims a week. Of the cases examined by the FOS, approximately 40% ruled in the Claimant's favour and compensation was awarded.
A client could have grounds to complain if:
· The product was unsuitable at the time it was sold.
· The client did not understand what he was buying or the risks involved at the time he bought the policy.
· The sale was inappropriate given the client’s financial and personal circumstances at the time, for example, if the client was told that his endowment would pay off his mortgage when he retired.
For any claim to be successful, the FOS must determine that the client lost out financially as a result of the mis-selling.
I have received an endowment claim, what should I do?
On receipt of a complaint from a client or a claims management company, the adviser must review the file of papers at the time the advice relating to the endowment policy was given and deal with issues relating to the complaint either directly, via a solicitor or through PI insurers. The adviser must ascertain whether a full explanation of the potential risk of a shortfall of the policy was provided to the client and whether the client understood the potential risk of shortfall.
It is worthwhile considering whether the complaint is time barred. If so, the adviser must raise this with the client and with the FOS. If the adviser’s record keeping is good and the advice was sound then there are reasonable prospects of defending a complaint.
What are the time limits for a client to bring a claim?
A claim must be lodged to the FOS within 3 years of receiving a letter notifying a projected shortfall. Section 2 of the Limitation Act 1980 provides that the time limit for a claim based on negligence is 6 years from the date the cause of action accrued. Section 14A provides an alternative time limit, namely 3 years from the date of discovery.
The FSA has introduced new rules which are exceptions to the general rules and provide the FOS with jurisdiction outside the normal time periods provided by the Limitation Act 1980. However, the FOS can only do this with complaints lodged with them prior to 31 May 2004.
Whether a complaint is time barred or not depends upon when the client received a final expiry date deadline. A complaint must be lodged within 3 years of the first red letter that notifies the policy is running a high risk of an endowment shortfall. However, if a client did not receive a final deadline date more than 6 months before the end of the 3-year period, then he can complain until such a letter is issued.
A client can only make a complaint to the adviser or the company who sold the endowment policy. If a client bought a policy before 29 August 1988 (when the financial services legislation took effect) and the adviser/company are no longer trading, the client will be unable to make a complaint. However, if he bought the policy after 29th August 1988, in such circumstances, a client can make a claim for compensation to the Financial Services Compensation Scheme (FSCS).
Can I settle out of court?
If the adviser considers that inadequate advice was provided to a client then they may consider it prudent (perhaps after seeking advice from a solicitor or PI insurers) to make an offer on a without prejudice basis to settle the complaint. The client then has an option either to accept the offer or to lodge a formal complaint to the FOS.
It was not my fault, how can I defend the allegations?
After reviewing records, if the adviser is of the opinion that they are not at fault then they can explain their position in writing to the client. The client then has options either to lodge a formal complaint to the FSO or to issue proceedings via the County Court. The adviser can then deal with his or her defence in person, through solicitors or through PI insurers.
I keep seeing adverts from claims companies, when will all of these claims end?
The FSCS has announced that they intend to process approximately 63% more endowment claims in 2006/07 (24,500 in total) than in 2005/06 (15,000). This is an increase of over 500% compared to the total number of investment claims completed in 2004/05 (4,900).
It is clear that the endowment problem will take time, possibly a few years to resolve. In the interim, it is advisable for advisers to retain all papers and to ensure complaints can be properly analysed and defended.
For further information, please contact Mr Russell Mozumder, Dispute Resolution Partner, Tel: 023 8038 4456 Email: russell.mozumder@lawcomm.co.uk
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