Scottish Amicable fined 750,000 for mortgage endowment failings

Following a visit by the regulators in January 2001, Scottish Amicable engaged a firm of independent accountants to conduct a sample review of sales of mortgage endowment policies by the firms appointed representatives. This has led to the firm reviewing 33,781 policies from January 1999 to February 2001. 11 million has been set aside for redress payments for this period.

Scottish Amicable has also agreed to ensure that current mortgage endowment policyholders who were sold policies by appointed representatives between 29 April 1988 and 31 December 1998 will receive redress where appropriate.

The failings arose because advisers did not place appropriate emphasis on identifying whether a customer was prepared to take the risk that their mortgage might not be repaid at the end of the term. This resulted in policies being mis-sold.

The size of the fine reflects the serious nature of the firms failings, in particular, its failure to act adequately in response to guidance issued by the regulator in December 1999 (RU72). This guidance had re-iterated the standards to be met when selling mortgage endowments. Firms had to review and where appropriate revise their procedures and were warned that the regulator would take disciplinary action where appropriate.

These failings have, however, been mitigated by the co-operation demonstrated by Scottish Amicable once the failings had been drawn to its attention.

Andrew Procter, Director of Enforcement at the FSA, said:

"This is a continuation of our work to make sure that mortgage endowment customers that have been mis-sold get the compensation that is due to them. The size and nature of Scottish Amicable meant that the firms failings exposed a large number of consumers to potential loss."

"Firms must act promptly and adequately when the regulator issues guidance. The issues relating to mortgage endowments were well known in the industry towards the end of 1999 and the firm should have acted quickly and effectively on our guidance."

Notes for editors

1. A copy of the Final Notice which fully details all of the facts and any mitigating circumstances can be found at www.fsa.gov.uk/pubs/final/index-2003.html.

2. Scottish Amicable demonstrated failings which demand a significant financial penalty. These failings are viewed by the FSA as particularly serious in the light of the following factors:

   • they related to the sale of endowment policies used as vehicles to repay mortgages - a mortgage is for most people the most significant financial transaction of their lives, and where it is missold, it can have the most serious consequences;

   • There were systemic failures in the sales processes used in that period, in that advisers did not, in many cases, place appropriate emphasis on identifying whether a customer was prepared to take the risk that his mortgage might not be repaid at the end of the term, even if he made all the premium and mortgage interest payments. The FSA places very great emphasis on the importance of adequate sales and monitoring systems to ensure compliance with regulatory rules and standards;

   • the size and nature of the firm meant that these failures exposed a large number of consumers to potential loss;

   • they occurred notwithstanding the fact that detailed regulatory guidance had only very recently been issued to the industry in RU72. The FSA regards this as very serious, particularly as RU72 itself had not been issued in a vacuum issues regarding the sale of mortgage endowment contracts were well known in the industry towards the end of 1999, with the publication of the Institute of Actuaries Report, the ABI Ten Point Plan and then RU72. Consequently, by then, firms and their senior management should have been in position to deal effectively with such issues;

   • they were identified by the PIA in January 2001, after firms had been specifically warned by RU72, in December 1999, that the PIA would be visiting firms to assess whether that guidance had been followed;

   • Scottish Amicable and its senior management failed to respond in a timely and effective manner to guidance in RU72 relating to the customers attitude to risk in circumstances where it had a reasonable opportunity to do so. The FSA is of the view that it is imperative that, when detailed regulatory guidance is issued, firms and their senior management react to it in a timely and effective manner.

3. While the failings in this case merit a significant financial penalty, the FSA considers that these failings have been mitigated to a considerable extent by the particularly proactive co-operation demonstrated by Scottish Amicable once the failings had been drawn to its attention by the PIA, including:

   • the speed with which it acted to address the issues raised by the PIA, including:
     
     - the immediate integration of Scottish Amicables compliance arrangements into those of its parent to ensure consistent standards were applied and a comprehensive review of compliance arrangements in place was undertaken;
     - the withdrawal of the Mortgage Endowment Product on 30 April 2001 and the subsequent closure of the Appointed Representative sales channel in August 2001;
     - immediately appointing reporting accountants to conduct an independent sample review of its sales of mortgage endowment policies for the period January to December 2000 to establish whether such policies had been missold and, as a result, consumers had been financially disadvantaged; and
     - the fact that, at the same time and of its own volition, it appointed reporting accountants to assess more widely its compliance function, including its management reporting systems;
     

   • the responsible attitude of senior management in doing so;

   • the diligence and speed with which it conducted the sample review;

   • the fact that it promptly accepted the findings of the review, compensated customers and extended the review to a population of 33,781 policyholders covering a period from 1 January 1999 to February 2001. Scottish Amicable has also agreed to take additional steps to further ensure that current mortgage endowment policyholders who were sold policies between 29 April 1988 and 31 December 1998 will receive redress where appropriate; and

   • the fact that, where there was any confusion or doubt as to whether misselling had taken place, it erred on the side of the consumer.

4. These steps have meant that Scottish Amicable has in place processes that should ensure consumers have been and will be offered redress more efficiently and quickly than if it had not co-operated with the PIA and the FSA in this way.

5. The FSA considers that Scottish Amicables conduct following the identification of the contravention by the FSA is a model of the type of co-operation and acceptance of responsibility by senior management which is desired by the FSA, and which consumers deserve.

6. Accordingly, Scottish Amicable has received considerable credit for this in the amount of the financial penalty the FSA has decided to impose. Without this level of co-operation, the financial penalty would have been substantially higher.

7. The penalty was imposed pursuant to Section 206 Financial Services and Markets Act 2000 in respect of breaches by Scottish Amicable of Rule 7.1.2 of the Rules of the Personal Investment Authority (the PIA Rules), paragraph L8(1) of Schedule L2 of the Adopted LAUTRO Rules (the LAUTRO Rules) and Principle 2 of the Statements of Principle of the Securities and Investments Board (the SIB Principles). Full details of the case are available from the FSA.

8. Scottish Amicable is a limited company with its head office and registered address at PO Box 25, Craigforth, Stirling, Scotland, FK9 4UE.

9. At the time of the findings and prior to 1 December 2001, Scottish Amicable was regulated by the Personal Investment Authority and was subject to its rules and principles.

10. A copy of RU72 can be obtained from the FSAs website at: www.fsa.gov.uk/pubs/additional/regup72.pdf.

11. 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 appropriate degree of protection of consumers; and fighting financial crime.

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