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 Endowment Misselling

(an extract from the Financial Conduct Authority web site)

Royal & Sun Alliance fined 950,000 for mortgage endowment failings

FSA/PN/039/2003
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 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:

"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&SAs failings, and the size and nature of the firm meant a significant number of its customers have been exposed to actual or potential loss."

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&SAs 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

  1. A copy of the Final Notice, which fully details all of the facts and any mitigating circumstances, can be found on the FSA website
  2. 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 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").
  1. 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.
  2. 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 customers.
  3. 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.
  4. 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 crime.
  5. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.


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