Treatment of windfall benefits

Following the High Court ruling in the test case of Needler Financial Services and Taber, the approach should be to disregard windfall benefits when assessing compensation. This applies to all windfall benefits whether they were received as shares, cash or additional sums added to the policy value.

Philip Robinson, Director of the Pensions Review, said:

Windfall benefits have been paid in the form of cash, shares or in some cases as an additional sum added to the policy value.

The High Court ruling confirmed the regulators guidance requiring firms to disregard windfalls received in the form of cash and shares when calculating compensation under the pension and FSAVC reviews. In addition, the Court took the view that benefits received in other forms, such as additional sums added to the policy value, should also be disregarded in calculating compensation.

Separating the relevant value of these policy additions before calculating compensation is complicated and has some practical implications for the firms processing these cases. We intend to consult on this matter when the proposed approach is determined.

The consultation will also include draft guidance on the treatment of windfall benefits when handling mortgage endowment complaints

HOW FIRMS SHOULD PROCEED:

Personal pensions and FSAVC review cases: Earlier this year firms were allowed to suspend completion of cases which involved a windfall benefit received as cash or shares pending the court ruling. Firms must now complete the assessment of financial loss and contact the investor to confirm the outcome of the assessment of their case, including an offer of redress where appropriate. Firms must disregard windfall benefits received in the form of cash or shares in the assessment of financial loss and redress.

Where a windfall benefit has been received as an additional sum added to the policy value, firms should continue to progress cases up to the point where the windfall benefit becomes a relevant consideration (i.e. in the calculation of financial loss). Beyond this stage firms must suspend progress until further guidance is in place. Where an offer of redress has been made for an affected case which has not been accepted, firms should withdraw the offer and explain to the investor that this has been done pending further guidance from the regulator.

Endowment Mortgage Complaints: The FSA intends to publish a consultation paper providing draft guidance on how any windfall benefits received by endowment policyholders should be treated in the calculations of loss and redress. The consultation paper will propose that firms should not normally seek to take windfall benefits into account when assessing financial loss and appropriate compensation.

In the meantime, firms dealing with mortgage endowment complaints involving windfall benefits should not make offers that take into account the value of any windfall benefit(s). All cases should be progressed as far as possible. For cases where the windfall benefit took the form only of shares or cash firms can make offers on the basis that their value is not taken into account. Where cases are delayed pending the issue of formal guidance firms should ensure that complainants are kept informed as to the status of their case and the reasons for delay.

The issue of how to treat windfall benefits received as an additional sum added to the policy value affects only a small proportion of cases and will not hold up the payment of compensation to the vast majority of investors who are entitled to it.

Notes for editors

1. The approach firms must take has been published in a PIA Regulatory Update 94, this will be available on the FSA website at www.fsa.gov.uk

2. The FSA will consult on the treatment of windfall benefits for the handling of mortgage endowment complaints and on the treatment of windfall benefits received as additional sums added to the policy value in all compensation claims. Guidance is unlikely to come into force before April 2002.

3. On 31 July 2001 Judgement was issued in the High Court in the test cases of Needler Financial Services and Taber confirming that the value of windfall benefits, in whatever form they have been paid, should not be brought into account when calculating compensation due to an investor. Leave to appeal the case was not sought before the date of the appeal deadline, September 17, and following this the regulator has taken legal advice on the implications of the judgement on the review of personal pensions and FSAVCs and on the handling of mortgage endowment complaints.

4. Guidance on the treatment of windfalls for the pensions review was published in PIA Regulatory Update 33 in May 1997. Similar principles were applied for the FSAVC review and included in the FSAVC Review Bulletin No 1 published in September 2000. Firms were told to disregard windfall benefits received by investors in the form of cash or shares in the calculations of loss and redress.

5. Windfall benefits are paid by a company either through a demutualisation or other corporate event, such as the distribution of orphan assets. These benefits are often paid in the form of cash, shares and in some cases as additional sums paid directly into a policy.

6. The regulators have not previously issued guidance on the treatment of windfall benefits in the case of endowment mortgage complaints. The consultation will therefore cover windfall benefits in the form of cash and shares as well as policy augmentations.

7. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

8. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.