The Personal Investment Authority knew about L&G's "procedural errors" which suggested advisers were mis-selling mortgage endowment policies, but did nothing to ensure improvements were made until 1999, the Financial Services and Markets Tribunal has said.
That is part of the conclusion reached after hearing evidence in the case involving FSA allegations the insurer widely mis-sold policies, but which was challenged in the Tribunal by L&G.
What may upset consumers is the implication not only that L&G's procedures were known to be wrong over a long period of time, but perhaps worse still the regulator of the day - the PIA - did not feel they were serious enough to warrant significant action as L&G had agreed to put certain matters right in 1999.
"We have concluded that L&G’s procedures failed to ensure that advisers had done enough to satisfy the requirement that customers understood and were prepared to take the risk that their low cost with-profit endowment policies might not produce sufficient investment returns to pay off their mortgages when they fell due for repayment," the FSMT writes in its conclusion.
"In particular the use of part of the Personal Financial Review form may well have inadvertently misled customers about the degree of risk of a low cost with-profits policy. The sample wording supplied to advisers for making recommendations was inappropriate and its use was too widespread and indiscriminate."
"These rule breaches need to be seen in context. The text of the PFR form had been reviewed by L&G's regulator, PIA, without any adverse comment. The inappropriate use of sample wording had been identified and criticised by PIA in 1999, which had imposed remedial measures on L&G without classifying the matter as particularly serious."
Expanding on the contexualisation of the procedural flaws, the Tribunal says forms, which it finds are flawed, were looked over by the PIA in 1996, "without any comment or criticism being made to L&G".
Subsequent defects in procedures were then identified by the PIA in 1999 "not warranting disciplinary action".
"L&G had agreed a programme to put them right over an 18-month period and reasonably assumed that no further action would be taken."
It seems L&G did not count on the FSA later shifting the goal posts in 2000 as the endowments issue began to shift up the agenda of financial services issues which needed sorting.
"FSA probably changed its position following a gradual realisation over the Relevant Period that a major and developing problem with low cost with-profits endowments required a different approach," the Tribunal writes.
The decision to shift the goal posts seems to have been crucial in this case, as the Tribunal points out on page 53 of its ruling document.
"We have referred to the contact between FSA and L&G up to January 2000. L&G were justifiably surprised when on 14th July 2000 FSA informed them that, despite earlier indications, the matter had been referred to PIA's Enforcement Department because of concerns raised by the themed visit. The investigation was to last three years. These matters proceeded to enforcement not as a result of the usual supervision process but as part of FSA's wider endowment mortgage initiative."
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