The Financial Ombudsman Service is industry and industry and consumer bodies to comment on proposals...
April's Ombudsman newsletter - which this month focuses on banking and mortgages - explains that the Ombudsman's primary duty is calculating whether each complaint involves a loss for which it can award compensation.
Public criticism of the mortgage sector - particularly in relation to endownment mortgages - has led to calls for compensation where homeowners may have been misled about endownment payments.
According to rules explained in the newsletter, calculating whether redress should be paid usually involves comparing the borrowers' actual position with what it would have been had they not taken out an equivalent repayment mortgage. Borrowers' mortgage outgoings are considered, and the service compares the payments made until now on the endowment mortgage with the payments that would have made until now if a repayment mortgage had been taken instead.
In doing this, says the Ombudsman, monthly payments are totalled, without applying any notional interest or discount. When calculating the outgoings on a repayment mortgage, it's assumed the borrowers would have taken decreasing term life cover - unless satisfactions are met that they did not need life cover (eg where they had no dependants or already had plenty of life cover).
The service looks at the present surrender value of the borrowers' mortgage endowment policy. This is compared with the amount of capital they would have paid off by now if they had taken a comparable repayment mortgage instead.
If the borrowers are worse off as far as capital is concerned, but better off on outgoings, the group considers whether to take into account the notional past saving in outgoings. Ordinarily, notional past savings are not taken into account, the borrowers will probably have spent them unknowingly on normal expenditure. Exceptionally, the borrowers will be of sufficient means that it is reasonable to assume the notional past savings actually increased their means. In such cases, the borrowers should have to account for past savings to that extent.
Where a borrower has incurred a loss and the firm was at fault, compensation comprises the total of the amount of the loss, the cost of swapping to a repayment mortgage (assumed to be £250 unless some other figure is demonstrated) and any appropriate amount for inconvenience.
Responses from the industry are welcome until May 1, and both the Council of Mortgage Lenders and the Financial Services Consumer Panel have agreed to help speed and coordinate responses from their respective constituencies.
Cases currently being dealt with by lenders or by the current ombudsman schemes will have to be put on hold temporarily, until the outcome of the consultation is known, says the Ombudsman.
For detailed information about the consultation, go to www.financial-ombudsman.org.uk
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