Example 9 |
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Term extends beyond retirement age: example of failure to explain investment risks |
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Background |
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45 year old male non-smoker, having taken out a £50,000 loan in 1998 for a term of 25 years. Unsuitable sale identified on the grounds of affordability and complaint raised on 12th anniversary. |
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It has always been the intention of the complainant to retire at state retirement age 65. |
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Term from date of sale to retirement is 20 years and the maturity date of the mortgage is five years after retirement. |
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In addition, an endowment does not meet the complainant's attitude to investment risk and a repayment mortgage would have been taken out if properly advised. |
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Established facts |
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Surrender value (on the 25 year policy) at time complaint assessed: |
£12,500 |
Capital repaid under repayment mortgage of term to retirement date (20 years): |
£21,000 |
Surrender value less capital repaid: |
(£8.500) |
Difference in outgoings (repayment - endowment): |
£5,400 |
Cost of converting from endowment mortgage to repayment mortgage: |
£200 |
Basis of compensation: |
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The surrender value of the (25 year term) endowment policy is compared to the capital that would have been repaid to date under a repayment mortgage arranged to repay the loan at retirement age, in this example, a repayment mortgage for a term of 20 years. The complainant has gained from lower outgoings of the endowment mortgage to date. In calculating the redress, the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. The conversion costs are also taken into account in calculating the redress. |
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Redress generally |
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Loss from surrender value less capital repaid: |
(£8,500) |
Gain from total lower outgoings under endowment mortgage: |
£5,400 |
Cost of converting to a repayment mortgage: |
(£200) |
Net loss: |
(£3,300) |
Therefore total redress is: |
£3,300 |
Redress if it is unreasonable to take account of gain from lower outgoings |
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Loss from surrender value less capital repaid: |
(£8,500) |
Gain from total lower outgoings under endowment mortgage: |
Ignored |
Cost of converting to a repayment mortgage: |
(£8,700) |
Therefore total redress is: |
£8,700 |
Related provisions for BIPRU 3.4.103
Information and supporting documentation (see REC 5.2.4 G).
(1) |
Details of the applicant's constitution, structure and ownership, including its memorandum and articles of association (or similar or analogous documents ) and any agreements between the applicant, its owners or other persons relating to its constitution or governance (if not contained in the information listed in REC 5.2.3A G)1. |
(2) |
Details of all business to be conducted by the applicant, whether or not a regulated activity (if not contained in the information listed in REC 5.2.3A G)1. |
(3) |
Details of the facilities which the applicant plans to operate, including details of the trading platform, settlement arrangements, clearing services and custody services which it plans to supply. |
(4) |
Copies of the last three annual reports and accounts and, for the current financial year, quarterly management accounts. |
(5) |
Details of its business plan for the first three years of operation as a UK recognised body (if not contained in the information listed in REC 5.2.3A G)1. |
(6) |
A full organisation chart and a list of the posts to be held by key individuals (with details of the duties and responsibilities) and the names of the persons proposed for these appointments when these names are available (if not contained in the information listed in REC 5.2.3A G)1. |
(7) |
Details of its auditors, bankers, solicitors and any persons providing corporate finance advice or similar services (such as reporting accountants) to the applicant. |
(8) |
Details of any relevant functions to be outsourced or delegated, with copies of relevant agreements. |
(9) |
Details of information technology systems and of arrangements for their supply, management, maintenance and upgrading, and security. |
(10) |
Details of all plans to minimise disruption to operation of its facilities in the event of the failure of its information technology systems. |
(11) |
Details of internal systems for financial control, arrangements for risk management and insurance arrangements to cover operational and other risks. |
(12) |
Details of its arrangements for managing any counterparty risks, including details of margining systems, guarantee funds and insurance arrangements. |
(13) |
Details of internal arrangements to safeguard confidential or privileged information and for handling conflicts of interest. |
(14) |
Details of arrangements for complying with the notification rules and other requirements to supply information to the FSA. |
(15) |
Details of the arrangements to be made for monitoring and enforcing compliance with its rules and with its clearing, settlement and default arrangements. |
(16) |
A summary of the legal due diligence carried out in relation to ascertaining the enforceability of its rules (including default rules)and arrangements for margin against any of its members based outside the United Kingdom, and the results and conclusions reached. |
(17) |
Details of the procedures to be followed for declaring a member in default, and for taking action after that event to close out positions, protect the interests of other members and enforce its default rules. |
(18) |
Details of membership selection criteria, rules and procedures. |
(19) |
Details of arrangements for recording transactions effected by, or cleared through, its facilities. |
(20) |
Details of arrangements for detecting financial crime and market abuse , including arrangements for complying with money laundering law. |
(21) |
Details of criteria, rules and arrangements for selecting specified investments to be admitted to trading on (or cleared by) an RIE, or to be cleared by an RCH and, where relevant, details of how information regarding specified investments will be disseminated to users of its facilities. |
(22) |
Details of arrangements for cooperating with the FSA and other appropriate authorities, including draft memoranda of understanding or letters. |
(23) |
Details of the procedures and arrangements for making and amending rules, including arrangements for consulting on rule changes. |
(24) |
Details of disciplinary and appeal procedures, and of the arrangements for investigating complaints. |