The crux of whether or not Legal & General had a widespread mis-selling case to answer, in respect of sale of its Flexible Mortgage Policy to consumers, seems in part to relate to the quality of the FSA-commissioned Endowment Sales Review.
Specific details of the 102-page report following the Financial Services and Markets Tribunal between L&G and the FSA reveals the FSA argued there had been “general mis-selling” at Legal & General following a study of 250 cases by PricewaterhouseCoopers, of which 60 were said to be mis-sold.
The FSA asked L&G to carry out a sample review of low risk customers in July 2001, following an FSA change in policy in relation to L&G's handling of the illustration issued at the time of sale along with other documents and to a wider FSA endowment mortgage initiative.
Findings of this review were compiled and collated by PwC by sending out a survey to 250 customers – known as the Endowment Sales Review - to assess whether the customer properly understood the risk of a shortfall at the time the policy was taken out, and whether the customer had been prepared to accept the risk of a shortfall.
Of the 152 responses received, 60 cases fell into a redress payable category, according to PwC, as there was “persuasive evidence to indicate the policyholders were risk averse and/or did not understand the capital shortfall risk...”
Based largely on the recollection of those questioned, says the tribunal report, PwC then recommended:
"We believe that for those cases we have categorised as redress payable, there exists persuasive evidence for a judgment to be formed on whether the customer was risk-averse and/or did not understand the capital shortfall risk and may therefore have been sold a policy that was not suitable for them."
The PwC report continued to point out, however, there could be some distortions in the results of the review, as they felt it was dificult to design a review methodology and L&G would not therefore be able to fully challenge customers' assertions.
The firm stated written or oral representations by customers "may be clouded by the passage of time and by subsequent events".
A second report was then produced by KPMG to assess the ESR work conducted by PwC - on the instruction of L&G - which basically said the survey and methods used were simply not good enough to assess whether consumers had been mis-sold.
The KPMG concluded:
- ”in no case was there clear and uncontradictory evidence that the customer was risk-averse at the time of sale;
- the questionnaire was poorly designed and unfit for the purpose, and
- customer answers were affected by poor memory, hindsight and media effects.”
The tribunal report obviously points out the FSA labelled KPMG conclusions as "flawed" and L&G did not subsequently agree with the PwC report.
As a result of expert evidence presented by both the FSA and L&G on the market surveys of methodology of the ESR and on the reliability of memory and recall, the tribunal committee said:
"We are concerned not just with the 60 cases produced by the ESR but with FSA's submission that the level of mis-sales amongst the cases, which formed the ESR, is properly representative of the level of mis-sales in the wider population of customers to whom L&G recommended [Flexible Mortgage Policies] and that this level is unacceptably high.
Both PwC and KPMG then went on to say - in oral evidence to the tribunal - the sample size of 250 cases was too small to reliably say whether there was systematic mis-selling and could therefore only be considered as a 'dip test', so one of the considerations would be to extend the testing sample to 2,00-3,000 cases.
One of the experts called later in the case was Professor Bob Worcester, chairman and founder of MORI, who again raised concerns about:
Professor's Worcester's own recommendation was at least 1800 policyholder cases should have been assessed to allow conclusions about potential mis-selling to be drawn.
As a result, the FSMT stated:
"[The] FSA has not convinced us that the sample size is statistically valid to extrapolate the result into the wider population of FMPs, for the purposes of a disciplinary case...As recently as February 2004 [the] FSA itself expressed reservations about the reliability of survey evidence in a letter to a House of Commons Select Committee."
Click the associated story links for further analysis of the FSA/L&G Financial Services and Markets Tribunal:
Endowment row tribunal knocks both L&G and FSA
L&G endowments: PIA spotted wording flaws in later years
Slow progress in improving diversity
Share purchase deal with assets of £28m
Came into effect in January
Three examples of compensation rule issues
Buying in baskets