(an extract from the Financial Conduct Authority web
Royal & Sun Alliance fined £950,000 for mortgage endowment failings
27 March 2003
The Financial Conduct 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
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:
"This further action on mortgage endowment mis-selling should leave mis-selling
firms in no doubt of our commitment to tackle those firms who make
unsuitable recommendations to their customers, and to secure compensation
for those who have lost out as a result.
"We place great emphasis on the importance of adequate sales systems.
It is the firms responsibility to ensure these systems are in place. The
serious nature of R&SA’s failings, and the size and nature of the firm
meant a significant number of its customers have been exposed to actual or
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.
Notes for editors
- A copy of the Final Notice, which fully details all of the facts and
any mitigating circumstances, can be found on the FSA website
- R&SA demonstrated failings which demand a significant financial
penalty. These failings are viewed by the FSA as serious in the light of
the following factors:
- 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
- the size and nature of R&SA meant that these failures exposed a
large number of customers to the possibility of loss.
- 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
- R&SA has previously been the subject of formal disciplinary action
resulting in adverse findings. Royal Life Insurance Limited (now Royal &
Sun Alliance Life and Pensions Limited) and Sun Alliance Life Limited were
jointly fined £225,000 in October 1998 and ordered to pay costs of
£100,000 by the Membership and Disciplinary Tribunal of PIA in respect of
a failure adequately to progress certain aspects of the Pensions Review in
accordance with PIA Rule 7.2.2. R&SA Life and Pensions Ltd and RSA Linked
Insurances Ltd were two of three companies disciplined and fined by the
FSA in August 2002 the total sum of £1.35 million in respect of failings
arising out of the conduct of their Pensions Review.
- Royal & Sun Alliance Life & Pensions Limited and Royal & Sun Alliance
Linked Insurances Limited are part of the Royal & Sun Alliance Group which
includes a substantial UK Life operation. Their registered offices are
located at New Hall Place, Old Hall Street, Liverpool L3 9UE. RSA decided
as of 8 August 2002 to no longer offer life and pensions products to new
- Royal & Sun Alliance Life & Pensions Limited was formerly called Royal
Life Insurance Limited. Royal & Sun Alliance Linked Insurances Limited was
formerly called Royal Heritage Life Assurances Limited. Both were
regulated by the PIA until 30 November 2001. Since 1 December 2001 they
have been regulated by the FSA.
- 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
- The FSA aims to maintain efficient, orderly and clean financial
markets and help retail consumers achieve a fair deal.