Related provisions for MCOB 7.6.12
Example 8 

Term extends beyond retirement age and policy reconstruction 

Background 

45 year old male nonsmoker, 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 policy anniversary. 

It has always been the intention of the complainant to retire at State retirement age 65. 

Term from date of sale to retirement is 20 years and the maturity date of the mortgage is 5 years after retirement. 

Established facts 

Established premium paid by investor on policy of original term (25 years): 
£81.20 
Premium that would have been payable on policy with term from sale to retirement (20 years): 
£111.20 
Actual policy value at time complaint assessed: 
£12,500 
Value of an equivalent 20year policy at time complaint assessed: 
£21,300 
Difference in policy values at time complaint assessed: 
£8,800 
£4,320 

Basis of compensation 

The policy is reconstructed as if it had been set up originally on a term to mature at retirement age, in this example, a term of 20 years. The difference in the current value of the policy actually sold to the complainant and the current value of the reconstructed policy, as if the premium on the reconstructed policy had been paid from outset, is calculated. The complainant has gained from lower outgoings (lower premiums) of the actual endowment policy 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. 

Redress generally if it is not unreasonable to take account of the whole of the gain from lower outgoings 

Loss from current value of reconstructed policy less current value of actual policy: 
(£8,800) 
Gain from total lower outgoings under actual policy: 
£4,320 
Net loss: 
(£4,480) 
Therefore total redress is: 
£4,480 
Redress if it is unreasonable to take account of gain from lower outgoings 

Loss from current value of reconstructed policy less current value of actual policy: 
(£8,800) 
Gain from total lower outgoings under actual policy: 
Ignored 
Therefore total redress is: 
£8,800 
Additional Information 

If the policy is capable of reconstruction, the complainant must now fund the higher premiums himself for the remainder of the term of the shortened policy until maturity. In this example the higher premium could be £111.20. However the firm should provide the complainant with a reprojection letter based on the reconstructed policy such that the actual monthly payment required to achieve the target sum could be even higher, say £130. The reprojection letter should set out the range of options facing the complainant to deal with the projected shortfall, if any. 
Example 9 

Term extends beyond retirement age: example of failure to explain investment risks 

Background 

45 year old male nonsmoker, 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. 

It has always been the intention of the complainant to retire at state retirement age 65. 

Term from date of sale to retirement is 20 years and the maturity date of the mortgage is five years after retirement. 

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. 

Established facts 

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: 

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. 

Redress generally 

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 

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 