Endowment policies: mis-selling awards hang in the balance

Compensation could be reclaimed by advisers if there is no shortfall at the end of the term. By Annie Shaw

People battling for compensation over mis-sold endowment policies may have been dealt a serious blow in the courts.

Retired independent financial adviser (IFA) Eifion Hughes, from Rhyl, has won the right to recover a large part of the compensation he had been ordered to pay by the Financial Ombudsman Service (FOS) for mis-selling a Norwich Union policy. This right depends on how well the endowment performs at maturity in 2010. If there is no shortfall, he can reclaim some of the £1,689 award.

Mr Hughes, 56, says: "I do not believe the policy was mis-sold. I do not believe it will fall short, so I would not pay. I just got stubborn."

Critics of the mis-selling compensation regime suggest that many customers are managing to claim redress while at the same time benefiting from improved endowment payouts as the stock market has picked up in recent years.

Simon Mansell, of Worcester-based IFA Temple Bar, says: "Unlike the FOS, a court would want to see a loss before it can award compensation. No loss, no compensation."

But David Cresswell, a spokesman for the FOS, says people have misunderstood what has happened in the Hughes case. "First of all, there was no ruling. The judge gave a consent order, which was an agreement between the two parties about how the matter should be settled. That was an arrangement they came to themselves. Second, the case was heard in a county court, which does not create any precedent in law."

Nevertheless, critics hope the case will open the door for other IFAs and financial providers to refuse to pay compensation unless there is the proviso of a refund if the client is found to have suffered no eventual loss.

"The FOS would like to think this is a one-off case, but there are cases like this going on all the time in local courts up and down the country," says Evan Owen, chairman of the IFA Defence Union, a body whose stated purpose is to "fight regulatory injustice".

Meanwhile, the former Tory minister Lord Hunt is carrying out a review of how the FOS deals with compensation claims. He has called for evidence from Lord Lipsey, former member of the Personal Investment Authority (forerunner of the Financial Services Authority), who alleges that many people who received compensation for mis-sold financial products had provided misleading information to the regulator.

Lord Lipsey said recently: "A lot of people had been sold pensions perfectly validly and they had either forgotten what had happened or they remembered but knew it was in their interests to forget what had happened to them."

But the FOS maintains mis-selling is determined on the basis of the suitability or otherwise of the product, not on its performance – although that would have a bearing on the amount of compensation ordered. The size of any award is calcu- lated according to the current surrender value without projections, such as the value of any terminal bonus.

Previous attempts by IFAs to have endowment mis-selling awards cut have failed. IFA John Joseph said he was threatened last year with having his licence to trade revoked when he refused to pay compensation to a client, Jacqueline Barnett, over Standard Life endowments unless she paid back subsequent demutualisation benefits. In the face of the FSA threat, Mr Joseph backed down.

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