FSA 'in error' over L&G mis-selling

The Financial Services Authority (FSA) suffered its first major defeat in a tribunal yesterday, when Legal & General won a qualified victory in its challenge against a £1.1m fine for endowment mis-selling.

The Financial Services Authority (FSA) suffered its first major defeat in a tribunal yesterday, when Legal & General won a qualified victory in its challenge against a £1.1m fine for endowment mis-selling.

More than a year after the start of L&G's battle with the regulator, the Financial Services & Markets Tribunal ruled that the FSA had been "in error in its approach to the mis-selling case", adding that its conclusions were "not justified by the material before it".

The FSA had accused L&G, the UK's third largest insurer, of widespread mis-selling of endowment mortgages in the late 1990s, arguing there were "fundamental deficiencies" in the insurer's sales and compliance procedures. The Tribunal was headed by David Mackie QC and included two lay people.

Although the verdict failed to exonerate L&G completely - acknowledging there had been mis-selling within its mortgage division - the Tribunal turned its criticism on the Personal Investment Authority (the FSA's predecessor) for failing to spot the holes in L&G's procedures during two supervision visits in the 1990s. While giving L&G credit for having procedures in place that required advisers to warn customers of the risks of potential endowment shortfalls, the Tribunal said there were not sufficient measures in place to ensure its advisers followed the due process.

However, it added that during two routine inspections of L&G, in 1996 and 1999 - which included a full examination of the mortgage endowment sales process and documentation - the regulator had failed to find any serious fault which it deemed to merit enforcement action.

Only after these inspections did the FSA begin to change its position, and claim that L&G's sales procedures and documentation were not sufficiently rigorous, it said.

The Tribunal also criticised the FSA's assessment of the extent of the mis-selling at L&G, arguing that the regulator's assertion, that some 60 out of a sample of 250 customers were mis-sold, was incorrect. In fact, it said, just eight of the 60 were proven to have been mis-sold, while a further 14 were deemed likely to have been mis-sold.

A further hearing will now be held to determine L&G's fine. But the Tribunal recommended that the penalty should be reduced from the proposed £1.1m.

David Prosser, the chief executive of L&G, said: "We are pleased the case has now been heard by an independent body. The Tribunal has agreed with us that the [FSA] 'reached conclusions not justified by the material before it'.

"It should be emphasised that at no stage was this case concerned with the rights or compensation of any customer who felt that they had been mis-sold. A process for dealing with customers ... has already been agreed with the FSA."

In a statement, the regulator said: "The FSA will give careful consideration to the Tribunal's observations on its handling of this case and look to identify improvements to its own procedures as a result."

While the case will have ended up costing L&G more in legal fees than it stands to save through a lowering of its fine, the verdict will be seen as a strong victory for the insurer, the first major financial services firm to formally stand up to the regulator's enforcement division.

Neil Fagan, a senior partner at the City law firm Lovells, said the verdict could give other firms the courage to appeal against the FSA. He said: "I think if there's one thing that might come out of this ... it may put some steel in the backbone of some firms. I think that one or two people might think that if they feel aggrieved about the way the FSA has handled them in its enforcement process, they might now appeal - because the Tribunal has shown this is an independent process."