Discovering that consumers may have been missold financial products always places financial services...
Discovering that consumers may have been missold financial products always places financial services firms in a turbulent position. But as far as the past scandals are concerned, there has been nothing as complicated as the dilemmas faced with today's claims of mortgage endowment mis-selling.
Investigations conducted by IFAonline suggest the issue is far from clear cut. It seems all parties - consumers, product providers and regulators - may be right when suggesting products may and may not have been missold between 1998 and 1994.
The regulatory regime set up by FIMBRA was seen to be flawed at the time it was adopted so the industry and MPs sought to change it in 1995. But if the regulatory regime was seen to be flawed then, why has it taken so long for FIMBRA and the industry to start addressing the problems of using Lautro charges?
Obviously there is no FIMBRA anymore, it was replaced by PIA before becoming the FSA. The real problem here may not be whether the charging structures of the day mislead consumers, but whether the industry should rectify endowment shortfalls when the retrospective regulatory regime is now so different.
It is true some consumers may not have been fully aware of the true charges their endowment policies would carry, because in many cases they saw projections based on assumed growth rates and charges which providers had to use under Lautro rules.
Yet it is also true that life office and endowment providers did adhere to the regulations of the day: they prepared projections and illustrations based on the assumed Lautro rates, rather than illustrating how the company's own charges would affect investment returns. Even if they wanted to give additional information to consumers, many companies may have been inclined to stay quiet for fear of breaking Lautro rules.
Industry figures and IFAs have congratulated Clerical Medical and Scottish Widows for stepping up and correcting what they see as 'a lack of clarity' in literature used before 1995. But it is also recognized that one of the problems other providers may face is whether or not they have the assets to put things right, even if they want to.
Advisers should perhaps be most concerned about the impact an endowment mis-selling review would have not on the providers but on the IFA. The adviser is going to have to work much harder to prove they did everything FIMBRA required of them.
At the time, FIMBRA was the regulator of the intermediary. In that sense, advisers did not have to adhere to Lautro rules, except in relation to the marketing of financial products. But they did have to produce examples to show they had researched the market for the most suitable endowment product. If IFAs have done their jobs properly, they too were well aware that the real charges applied to endowments were often different to those on illustrations. To do a good job, the adviser would need to have researched charges and yield reductions to find the best product for a client. To do that, IFAs would need to tell consumers there was a difference. If that is the case, life offices might be able to place the blame squarely on the shoulders of IFAs.
Claims of endowment misselling may be genuine, they may be based on very different factors other than charges. And IFAs need to be prepared for questioning about their sales process if that is the case.
Whatever the FSA does decide and negotiate with endowment providers, the key considerations need to be whether or not companies should be penalized for meeting the regulatory requirements of the day, and what compensating policyholders could eventually do to the solvency of struggling life offices.
A year has gone by since the first endowment provider began to put its mistakes right, yet the industry and consumers still wait for publicly-acknowledgement on what to do about endowment shortfalls. The longer the FSA stays quiet on this issue, the weaker the financial services sector becomes in the eyes of the consumer.
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