Endowment Mortgage Misselling (F.S.A. Guide )

FSA/PN/039/2003
27 March 2003

The Financial Services Authority (FSA) has fined Royal & Sun Alliance Life and Pensions Limited and Royal & Sun Alliance Linked Insurances Limited (R&SA) £950,000, for mortgage endowment miss-selling and related deficiencies in its sales systems and control functions between January 1997 and July 1999.

During this period R&SA sold 35,000 policies. R&SA has set aside £11 million for redress for miss-sales made during this period. Additionally a further 2,000 short-term contract polices have been reviewed and redress of £5.6million has been offered to consumers.

Following visits by regulators, in July 2001 R&SA was required to conduct a sample review of past mortgage endowment business conducted during the period from 1 July 1998 to 30 June 1999. An independent firm of accountants then reviewed the results. FSA believes that up to 20 per cent of customers during this period could have been sold unsuitable policies.

Current mortgage endowment policyholders who were sold policies between 29 April 1988 and January 2000, when R&SA ceased offering such policies to new customers, will receive redress where appropriate.

Carol Sergeant, Managing Director for Regulatory Processes and Risk at the FSA, said:

R&SA advisers failed in some cases to recommend mortgage endowments only to those customers who were prepared to take the risk that their mortgage might not be repaid at the end of the term. R&SA also had serious flaws in the required procedures including failure to monitor and check the suitability of the sale of its mortgage endowments.

As a separate issue, R&SA mortgage endowment policies were usually recommended for a term of 25 years but could also be sold for shorter periods giving the policy less time to achieve the target sum. In December 1996, R&SA issued guidance to its advisers telling them not to sell short-term contracts unless the customer was insistent, in which case that insistence should be documented on file. Despite this, some advisers did not appear to take account of or, in some cases, know about the guidance.

R&SA failed to take sufficient steps to address the problems regarding the sale of the short-term contracts for some 18 months. R&SA has now proactively examined and dealt with each case. As of February 2003, out of the 2,081 policies sold 1,779 (85%) of customers have been offered redress totalling some £5.6 million.

The size of the fine reflects the seriousness of R&SA’s contraventions. The breaches identified in R&SA's internal procedures and the potential miss-selling occurred over a lengthy period of time.

These failings have, however, been mitigated by the fact that between 1994 and 1997 R&SA warned a significant number of its policyholders of the risk of policies not providing sufficient funds at maturity to pay off the mortgage. This was in addition to the industry-wide re-projection exercise, instigated by the FSA. The firm also proactively identified the issue in relation to short-term mortgage endowment contracts and, through redress, has ensured no customer has suffered losses.

• they related to the sale of mortgage endowment polices used as vehicles to repay a mortgage – a mortgage is for most people the most significant financial transaction of their lives, and where it is mis-sold, it can have the most serious consequences;
• there was a serious flaw in the processes in that the three risk categories used in RSA's fact find documentation at the material time January 1997 – July 1999 did not require the attitude to risk of wholly risk-averse customers to be explicitly recorded. The process of checking fact find documents could not therefore have enabled fact find checkers to easily identify wholly risk-averse customers from that documentation alone. The FSA places great emphasis on the importance of adequate systems to ensure compliance with regulatory rules and standards;
• there were also failings by R&SA to monitor its own processes adequately; and
• the size and nature of R&SA meant that these failures exposed a large number of customers to the possibility of loss.

1. While the failings in this case merit a significant financial penalty, the FSA has recognised that the failings have been mitigated by R&SA. In addition to those measures outlined early in the press notice R&SA:

• has devoted substantial resources over a considerable period of time to the review of its mortgage endowments;
• has readily agreed to deal with qualifying cases identified through the sample past business review through a process that will lead to an offer of redress.
• The penalty was imposed pursuant to Section 206 of the Financial Services and Markets Act 2000 ("FSMA") in respect of breaches of Rules 7.1.2(1) and 7.2.1 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").