Tens of thousands of people with a Scottish Provident insurance policy could be in line for a refund of thousands after the life company Phoenix has been forced to admit that it overcharged.
The scandal has only come to light through the efforts of a retired independent financial adviser who analysed the charges on his own policies to spot the anomaly.
He contacted The Independent to warn others that they may have been hit and, like him, end up having the value of their policies depleted by hundreds of pounds, often requiring a rise in premiums.
Phoenix snapped up the "zombie" funds – those closed to new business – of Scottish Provident, along with a raft of other former life insurers. The former adviser claims it has been overcharging by a fifth for years.
After he challenged the firm, it reduced the charge by that amount and eventually refunded the extra charges to his policies.
He says the firm has been overcharging by applying a rounded bid/offer spread of 6 per cent to the monthly life assurance premiums paid by customers invested in Phoenix's range of life funds.
However the contractual bid/offer amount is just 5 per cent, which means Phoenix has been overcharging by 20 per cent.
According to the former adviser's research – and he's spent a lot of time looking at statistics and facts – Phoenix reduced the charges from 6 per cent to 5 per cent on around 27 funds last September – months after he had contacted the firm. However, policyholders could still be out of pocket for the years of overcharging before that.
"The bid/offer spread issue is not exclusively a problem with my policies, but rather an indisputable issue across their entire ex-Scottish Provident unit-linked life portfolio - and perhaps pensions too," he claims.
"We are talking about 1 per cent of the ex-Scottish Provident premium income over the last 10 to 14 years, or more," he adds. "Whichever way you look at it, a significant sum is involved, and I can't believe that their actuarial management people did not know what was going on."
We put the claims to Phoenix. It responded: "The complaint has been dealt with thoroughly and we have made some payments to him to acknowledge any distress and inconvenience that any servicing-related problems have caused. We do understand he remains unhappy with some of our responses and have reminded him of his right to refer the matter to the Financial Services Ombudsman."
On the issue of the bid/offer spread overcharging, it said: "He raised a specific issue relating to how the bid/offer spread had been calculated for his policy. We accepted his point and refunded some charges to his policy. As part of our normal process, we will of course review to see if this applies to any other policyholder and rectify the situation if it does. We are very grateful to him for bringing it to our attention."
The response angered the retired financial adviser even more. "It's true they say they have adjusted my policies in respect of the bid/offer spread problems I raised with them in April 2014," he said. "But they admit that they have not yet done anything to compensate other policyholders, although they have had 10 months to take action.
"The 'distress and inconvenience' payments that they mention relate to other errors by Phoenix, which I discovered in 2010 and 2011, and it is misleading to suggest they are connected with this issue."
Phoenix then confirmed that it had started analysis to see if any other customers were affected by the issue in June 2014. A spokesperson said: "This analysis is still ongoing but we do now know that some other customers have been affected.
"We will ensure that there is no customer detriment and will contact all those impacted as soon as our analysis has been finalised. We will remediate all affected customers so that they are put back into the position that they should have been in."
It couldn't say how many people may be affected but it has 5 million policyholders.
The zombie collector: how Phoenix took wing
Phoenix Life is a FTSE 250 company whose chairman, Sir Howard Davies, is set to take over as chairman of the troubled Royal Bank of Scotland. Sir Howard was chairman of the Financial Services Authority, as it was then called, during a period in which the Equitable Life scandal blew up, which led to many pointing the figure at the City watchdog for regulatory failings.
Phoenix Life grew out of another company, Resolution Life, which was set up in 2004 to specialise in snapping up so-called zombie life insurance funds. These were with-profits investment funds that were closed to new business and performing poorly because of the lack of incentives for potential new customers.
Resolution reckoned that by pulling together funds from many different companies, it could manage them more efficiently and profitably as it had no need to spend on acquiring new customers.
In the following years, it took over funds from a wide number of household names and went through a couple of different name changes before emerging as Phoenix Life, with 5 million policyholders.
Phoenix Life customers were formerly customers of, among others, Scottish Provident, Royal & Sun Alliance, Swiss Life, Britannic Assurance, Abbey National, Allianz Cornhill, Pearl and Scottish Mutual.