DISP App 2.5 Additional considerations

This section addresses issues which may be relevant to the standard redress for unsuitability cases, as well as some post-retirement cases upheld on the grounds of affordability.

Firms will need to consider the importance for many complainants of having life assurance in place to ensure a mortgage is paid off in the event of death.

If a complaint is upheld and the policy is to be surrendered as part of the settlement, the firm should remind the complainant in writing that the life cover within the endowment will be terminated and that it may therefore be appropriate to take advice about the merits or otherwise of taking out a stand-alone life policy in substitution.

If a need for life assurance at inception has been established so that a deduction representing its cost has been made from the redress payable under DISP App 2.2.4 G, the firm should advise the complainant that the firm would be responsible for paying any premium for an appropriate replacement policy which exceeds that used for calculating the deduction or alternatively will, where possible, provide the cover itself at that cost. If it is not possible for the firm to provide the cover itself at the original cost, it may choose to discharge that obligation by the payment of an appropriate lump sum. Any such amount should enable the complainant to effect the cover at the original cost, with no additional cost in respect of increased age or deterioration in health. This option may be particularly relevant if the firm against which the complaint has been made is an independent intermediary which cannot itself provide the cover, although it may be possible for such a firm to arrange for the product provider to offer cover to the complainant at the original premium on payment by the independent intermediary of an appropriate lump sum to meet any increased cost.

Firms will not be responsible for any increased costs resulting from the complainant choosing another product provider or for increased premiums charged by another provider chosen by the complainant in respect of the risk now presented, for example, higher premiums charged by the other provider due to deterioration in health, unless the original product provider no longer writes new business and is unable to offer revised life cover on a decreasing term assurance basis.

There can be exceptional circumstances where, in order to retain suitable life cover, the endowment policy has to be retained and any additional costs will be the responsibility of the firm that sold the endowment policy.

The same considerations will apply to the establishment of the need for other policy benefits including critical illness cover, disability cover and waiver of premium.

If, as a result of policies being surrendered or reconstructed, or if any form of underpinning or guarantee is given, there is a potential tax liability for the complainant, it will be appropriate for firms to undertake in writing to the complainant to reimburse any tax payable, or which becomes payable. Firms should make this payment on production of appropriate evidence of the liability and payment having been made.

Firms proposing to offer arrangements involving some form of minimum underpinning or 'guarantee' should discuss their proposals with the FSA and the Inland Revenue at the earliest possible opportunity (see DISP App 2.5.8 G). The FSA will need to be satisfied that these proposals provide complainants with redress which is at least commensurate with the standard approaches contained in this appendix.

One of the reasons for introducing the guidance in this appendix is to seek a reduction in the number of complaints which are referred to the Financial Ombudsman Service. If a firm writes to the complainant proposing terms for settlement which are in accordance with this appendix, the letter may include a statement that the calculation of loss and redress accords with the FSAguidance, but should not imply that this extends to the assessment of whether or not the complaint should be upheld. Firms should point out that if the complainant remains dissatisfied, he may refer the complaint to the Financial Ombudsman Service.

A statement under DISP App 2.5.11 G should not give the impression that the proposed terms of settlement have been expressly endorsed by either the FSA or the Financial Ombudsman Service.

Windfall benefits should be determined in accordance with the principle in Needler Financial Services and Taber ('Needler'). The basic legal principle in Needler is that a windfall benefit is not to be taken into account in determining the amount of an investor's recoverable loss. The following paragraphs explain our views as to how firms may act in accordance with that principle.

A windfall benefit arises where:

1. (1)

   there has been a demutualisation, distribution or reattribution of the inherited estate, or other extraordinary corporate event in a long-term insurer; and

2. (2)

   the event gave rise to 'relevant benefits', as defined in DISP App 2.5.15 G (below).

'Relevant benefits' are those benefits that fall outside what is required in order that policyholders' reasonable expectations at that point of sale can be fulfilled. (The phrase 'policyholders' reasonable expectations' has technically been superseded. However, the concept now resides within the obligations imposed upon firms by FSA Principle 6 ('...a firm must pay due regard to the interests of its customers and treat them fairly....') Additionally, most of these benefits would have been paid prior to commencement, when policyholders' reasonable expectations would have been a consideration for a long-term insurer.)

The issue of free shares or cash on a demutualisation, and additional bonuses and policy enhancements given by way of incentive to approve a reattribution or distribution of an inherited estate should, unless there is evidence to the contrary, be treated as relevant benefits for the purposes of DISP App 2.5.15 G. Whether additional bonuses and policy enhancements on a demutualisation are relevant benefits should be determined by applying the test in DISP App 2.5.15 G to each benefit.

Firms should review the terms on which proposals were put to policyholders and the reasons given for a corporate event when determining whether a benefit should be treated as a relevant benefit.

Firms should not normally bring windfall benefits which are relevant benefits (as defined in DISP App 2.5.14 G) to account when assessing financial loss and redress. Where a windfall benefit is in the form of a policy augmentation the benefit should be deducted from the overall value of the policy when making this assessment.

A relevant benefit derived from a corporate event may only be brought to account if the firm is able to demonstrate, with written records created at the time of the advice, that:

1. (1)

   The firm foresaw the prospect of the event and the benefit;

2. (2)

   The firm's advice included a statement recommending the particular policy because of the possibility of the benefit in question; and

3. (3)

   The statement was a material factor in the context of the advice and the decision to invest.

If a firm considers that it can meet this requirement, the firm should by letter explain clearly to the complainant the reasons why it proposes that the benefit should not be treated as a windfall and should be taken into account. The firm should provide the complainant with copies of the relevant documents.

The letter should also explain how the proposed value of the benefit has been calculated and should inform the complainant that if he does not accept the proposal to take the benefit into account he may tell the firm, with reasons. The letter should also say that, if he remains dissatisfied with the firm's response, he may refer the matter to the Financial Ombudsman Service.