news

ombudsman
ask ombudsman news
your questions answered
December 2002 issue 23
if my client’s complaint to the Where appropriate, we may inform the FSA if we essential reading for
ombudsman service fails, can my firm become aware of a firm putting pressure on any financial firms and
make the client pay our costs? customers to try and stop them referring their consumer advisers
complaints to us.

Q
One of my clients has complained that we
mis-sold his mortgage endowment policy.
I am certain I can prove him wrong, so it
seems he’s just out for what he can get. how should my firm show we’re
covered by the ombudsman service? in this issue
If he brings the complaint to the ombudsman about this issue – December 2002
Q
service and is unsuccessful, can I claim back the Is there any set wording for the notice I’m
about this issue 1
ombudsman case fee and our associated costs meant to have on display in my offices
from him? I’ll go though the courts if necessary. about the Financial Ombudsman Service? We continue to receive more complaints about mortgage
mortgage endowment
endowment policies than about any other topic, so we
The FSA’s rules require firms to display complaints 3

A No. You cannot claim back these costs

from your client – or suggest to him
that you might do so. Consumers have a
A a notice in their branches or sales
offices to show they are covered by other investment
begin this issue of ombudsman news with a selection of
some of these complaints. These include a case where the
firm refused to pay up after we upheld the complaint, so
the Financial Ombudsman Service [rule reference complaints 7
statutory right to refer disputes to us if they are the customer had to take legal action to get our decision
DISP 1.2.9(3)].
unhappy with the way the firm has dealt with a
enforced through the courts.
complaint. And as a matter of law, the service is This rule does not prescribe the format, size banking: varying
free to consumers. or wording of the notice. So you have the scope interest on savings
We focus, too, on some of the problems that can occur
to produce the notice in your own house style, accounts 10
If a firm threatens to penalise a customer for following the renewal of insurance policies, especially if
to match your marketing and information
exercising the right to refer a complaint to us, then
materials if you wish. insurers fail to make it clear to policyholders that they
the FSA has indicated that it will treat the firm as insurance renewals
must disclose any relevant information when they renew
having failed to meet certain of its Principles for We can provide firms with the artwork for 12
their policies.
Businesses. These are Principle 6 (A firm must pay our logo – provided you agree to comply
due regard to the interests of its customers and with our conditions of use and you don’t round-up of
treat them fairly) and Principle 8 (A firm must use it misleadingly. The complaints we receive about savings accounts
banking cases 17
manage conflicts of interest fairly, both between generally concern changes to the rates of interest. In this
We can also provide an adhesive vinyl window
itself and its customers and between a customer issue we provide banking firms with a reminder of some of
sticker that firms can display to show they are ask ombudsman news
and another client).
covered by the Financial Ombudsman Service. 20
If a firm fails to meet the FSA Principles, the For more details, please contact our technical
... we continue to receive more
regulator can take disciplinary action that, in some advice desk on 020 7964 1400.
circumstances, may put the firm out of business. complaints about mortgage
endowment policies than about
send your questions to: ask-ombudsman-news@financial-ombudsman.org.uk edited and designed
any other topic.
or write to the Editor, ombudsman news, Financial Ombudsman Service, by the publications
South Quay Plaza, 183 Marsh Wall, London E14 9SR. team at the Financial
Ombudsman Service
ombudsman news 1
20 ombudsman news
December 2002 issue 23
December 2002 issue 23
 By mistake, the firm credited all £6,000 of the Two years later, in 1994, he became bankrupt.
second loan to Mr Q’s current account and failed The firm decided not to repossess the house
to pay off the first loan. So Mr Q was making because at that time it was only worth enough
repayments from his current account for the original to pay off the first mortgage.
loan, as well for the new one. It was only when his
s the points they need to consider before they alter interest current account became overdrawn a year later that Mr D was discharged from bankruptcy in 1997.
rates – including the potential impact of the Unfair Terms he became aware of the problem. That year, and the following year, the firm sent him
in Consumer Contracts Regulations. statements showing the amount he still owed
complaint upheld it. Then in 2001 it told him that as the value of the
The position was clear from Mr Q’s bank statements. house had increased sufficiently to pay off both
Finally, our selection of case studies illustrates the wide But he convinced us he had never looked at these – mortgages, he would have to repay his debt
range of matters we have dealt with recently, including a he had just checked his balance from time to time. or sell the house.
complaint about poor advice on investing money for school Under the Consumer Credit Act, the firm should have
fees, a case where a bank had to write off the loan it made documented both loans but it could not produce any Mr D then queried the existence of the second
evidence that it had done so. mortgage and complained about the firm’s delay
to a trader after it incorrectly told him it would provide his
in recovering its debt.
new business with credit card facilities, and a complaint
We required the firm to write-off the first loan and to
about pensions advice that we rejected on the grounds that pay Mr Q £200 for inconvenience. We also required complaint rejected
the customer, a teacher, presented contradictory and it to refund, with interest, the payment protection We were satisfied that the second mortgage existed.
unreliable evidence. insurance premium it had included in the second It had been a legitimate exercise of the firm’s
loan. This was designed for people in employment commercial judgement to wait until the house

... we focus, too, on and Mr Q was retired. had increased sufficiently in value to cover its
debt. The firm had continued to monitor the
some of the problems property’s value.

that can occur

n 23/21 We thought the firm could have done more to keep
following the renewal secured loan – not affected by Mr D informed. But we did not think it appropriate to

of insurance policies. bankruptcy discharge award any compensation for this. Mr D had
benefited from the firm’s delay. He had continued to
In 1992, Mr D took out a second mortgage on his occupy part of the property and had obtained
home to secure his overdrawn business account. income from letting the rest.

help and advice for firms and consumer advisers

Financial Ombudsman Service to get additional copies of ombudsman
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183 Marsh Wall n provide general guidance on how the n visit you to discuss issues relating to the
ombudsman is likely to view specific issues ombudsman service
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www.financial-ombudsman.org.uk
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n explain how the ombudsman rules and conferences.
n call us on 020 7964 0092 to request
switchboard 020 7964 1000 affect your firm.
phone 020 7964 0132
website www.financial-ombudsman.org.uk email liaison.team@financial-ombudsman.org.uk
phone 020 7964 1400
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We hold the copyright to this publication. But you can freely
reproduce the text, as long as you quote the source.

2 ombudsman news © Financial Ombudsman Service Limited ombudsman news 19

December 2002 issue 23 Reference number 174 December 2002 issue 23
1 mortgage endowment complaints

Here is a selection of some of Mr and Mrs O thought the firm should

pay them:
the many complaints about
n a refund of the premiums they had
mortgage endowment policies paid in to the policy;
that continue to reach us. n the policy’s surrender value;
n an amount equal to the commission
n 23/1 the firm’s representative received
mis-sold mortgage endowment policy for the sale;
– customers’ unrealistic expectations n an amount equal to the capital they
of compensation would have paid on a repayment
mortgage to date, if they had taken
Mr and Mrs O had taken out a repayment this type of mortgage from the outset;
mortgage when they bought their first n the fee that the firm would normally
property. When they moved to a larger charge to convert an endowment
house several years later, they thought mortgage to a repayment mortgage;
they still had the same kind of mortgage. n the additional amounts they had paid
But two years after their move, in the out for an endowment mortgage over
course of a meeting with an adviser to the amount they would have paid for
discuss other financial arrangements, a repayment mortgage; and
they discovered that they had been sold n £10,000 additional compensation.
a mortgage endowment policy.
complaint rejected
After the couple complained to the firm We agreed that the sale of the mortgage
that sold them the policy, it offered them endowment policy had been unsuitable
compensation in accordance with the for Mr and Mrs O. But the firm’s offer of
regulatory guidance. But Mr and Mrs O compensation was fair and reasonable,
were dissatisfied with the amount offered so we did not uphold the complaint.
so they brought their complaint to us.
Initially, Mrs O disagreed with our view.
She eventually decided to accept the
... the firm’s offer of firm’s offer after we had a lengthy
telephone conversation with her.
compensation was fair and We stressed that the offer was in keeping
reasonable, so we did not with the regulator’s guidance and that the
aim was to put her and her husband back
uphold the complaint. in the position they would have been in if
they had taken a repayment mortgage
from the outset.

ombudsman news 3
December 2002 issue 23
 n 23/2 When the adviser had asked them about
mis-sold mortgage endowment policy – their financial objectives, the couple had
attitude to risk not assessed – policy said that their main aim was to pay off the
extends beyond customer’s retirement mortgage, although Mr Y said he also
wanted a new garden path and his wife
Mr and Mrs Y had been in their mid-forties said she wanted to win the lottery.
when they became first-time house
buyers. They took out a mortgage for We concluded that:
£20,000 to buy their council house n the couple’s attitude to risk had
under the ‘Right to Buy’ scheme. Their not been assessed on the ‘fact find’;
adviser arranged a unit-linked mortgage n there was no evidence to show that
endowment policy for them. This extended the adviser had explained the risks
over a 15-year term, which meant it would associated with a unit-linked
not be paid off until after Mr Y had retired. endowment; and
n the adviser had not discussed with
Several years after taking out the mortgage, the couple the fact that the policy
the couple complained to the firm, saying continued after Mr Y retired.
the adviser had never told them there was
a risk that the policy might not produce We were satisfied that the proper advice
enough to repay their mortgage. would have been for the couple to take out
a repayment mortgage with a term that
The firm rejected their complaint. It said coincided with Mr Y’s retirement date.
its records showed that the adviser had:
n discussed with them the possibility of The firm agreed with our view and offered
their having a repayment mortgage; compensation of £2,300, calculated in
n assessed their attitude to risk as accordance with the regulatory guidance.
‘balanced’ (which would suggest that
the endowment policy was suitable);
n explained that the policy ran past
Mr Y’s retirement date; and n 23/3
n checked that they would still be able mis-sold mortgage endowment policy
to afford the premiums after Mr Y – policy incompatible with attitude
had retired. to risk and extends beyond
customer’s retirement
complaint upheld
We noted from the ‘fact find’ completed Mr L complained to the firm after
at the time of the sale that the couple discovering that his mortgage endowment
had no loans, credit cards, store cards, policy was not guaranteed to pay off his
previous investments, savings plans mortgage, and that it continued after his
or life cover. normal retirement date.

4 ombudsman news
December 2002 issue 23
... a policy that matured before
he retired would have been the n 23/4
more suitable option ... mis-sold mortgage endowment policy
– whether firm should pay cost of
advice for client

The firm agreed that its sale of this The firm upheld Mr G’s complaint about
policy had been unsuitable, since Mr L his mortgage endowment policy and
had not wanted to take any risk with his offered him redress, calculated in
investment. But it did not accept his accordance with the regulator’s guidance.
complaint about the length of the policy.
It said that he had been made aware of Mr G wanted to put this money towards
this from the outset and that he could, paying off his mortgage and to then switch
if he wished, have chosen a policy with the rest of the amount he owed into a
a shorter term. repayment mortgage. But he wanted first to
take financial advice on how to switch, the
Mr L did not agree with the firm’s ramifications of doing this and the type of
conclusion so he brought the complaint replacement life cover that would be most
to us. appropriate. When the firm refused to
reimburse Mr G for the cost of this advice,
complaint upheld he brought his complaint to us.
We were unable to find any evidence to
support the firm’s sale of a policy that complaint upheld
extended beyond Mr L’s retirement. The Financial Services Authority’s (FSA’s)
The firm’s representative did not appear Guidance on Mortgage Endowment
to have discussed any alternative with Complaints states that:
him, and there was no reason to believe
that Mr L could not have afforded a policy ‘The reasonable costs and expenses the
with a shorter term. complainant may have incurred in limiting
his loss are to be taken into account in
The firm argued that, in all probability, assessing compensation. This is likely to
Mr L would still have been able to afford include the complainant taking advice on
the endowment mortgage after he retired. whether he should convert from an
But in our view, since Mr L could have endowment to a repayment mortgage and
afforded a policy that matured before he incurring expenses in doing so…’
retired, this would have been the more (Paragraph 2.2.15).
suitable option. We decided that the firm
should pay compensation, calculated on The costs Mr G incurred were reasonable
the basis of a comparison between his and were a direct consequence of the mis-
present position and the one he would selling, so we decided that the firm should
have been in if he had taken a repayment reimburse them.
mortgage that matured at his planned
retirement date.

ombudsman news 5
December 2002 issue 23
 n 23/5 We awarded redress in accordance
mis-sold mortgage endowment policy with the regulatory guidance and Mrs C
– firm ignores ombudsman’s decision accepted our decision. This made it
binding on the firm but the firm refused
Mrs C complained to the firm when she to pay. So Mrs C has now taken legal
realised that the firm’s representative had action to enforce our decision through the
given her incorrect advice. He had told her courts, as she is entitled to do under the
that her mortgage endowment policy was Financial Services and Markets Act 2000.
guaranteed to repay her mortgage and
to provide an additional lump sum.
The firm ignored her complaint, so
Mrs C came to us.

We wrote to the firm and asked it to

send us a copy of the relevant file.
It failed to respond. Mrs C’s evidence
therefore remained unchallenged.
... this made it binding on the firm
We concluded that the firm’s sale of but the firm refused to pay.
the policy had been unsuitable. Mrs C
had no previous investment experience,
had previously had a capital repayment
mortgage and, on the basis of the
information she provided, was not
prepared to take a risk with her mortgage.

The policy premiums had been invested in

a high-risk fund for the first 10 years and
had then gradually been transferred into
a low-risk fund, so we concluded that this
was a medium- to high-risk investment.

complaint upheld
The firm eventually contacted us just
before we issued a final decision. In a very
brief note, it claimed that the complaint
was time-barred under the Limitation Act
and that we could therefore not consider
it. This was not in fact the case, because
three years had not yet elapsed since the
date when Mrs C ought reasonably to
have been aware that she had cause
for complaint.

6 ombudsman news
December 2002 issue 23
 2 other investment complaints

These case studies illustrate A year after taking out the life insurance,
Mr E died of lung cancer. The firm refused
some of the complaints we
to pay the sum assured under the policy,
have dealt with recently about on the grounds that Mr E had failed to
a wide range of other disclose his chest problems. So Mrs E
investment matters. brought the complaint to us.

complaint upheld
n 23/6 We discovered that Mr E’s doctor had
life insurance – claim declined on diagnosed Chronic Obstructive Pulmonary
grounds of non-disclosure Disease when Mr E first consulted him,
although the doctor had not told Mr E
Before Mr and Mrs E took out a joint life this. He had simply told him he had a
insurance policy, they were asked to chest infection.
complete a questionnaire about their
smoking and alcohol consumption. Mr E had not failed to disclose relevant
The questionnaire asked whether they information when he completed the
had consumed more alcohol ‘in the past’ questionnaire. He had completed it
than they did now. However, it did not correctly, to the best of his knowledge.
include any questions about whether When we put this to the firm, it agreed
they had previously smoked more. to pay the claim.

Mr E had, in fact, been a heavy smoker

at one time. Several years before taking
out the policy, he had consulted his n 23/7
doctor about what he thought was a inappropriate advice – investment of
chest infection. On his doctor’s advice, funds needed for school fees
he had cut down on the number of
cigarettes he smoked. Mrs J complained about the investment
advice the firm gave her in connection with
money she planned to use to pay her
children’s school fees. She thought the
product that the firm had recommended
... a year after taking out the represented too high a risk.
life insurance, Mr E died of
Since she had made it clear that she would
lung cancer. need to withdraw some of the money fairly
soon, she also thought the firm should not
have advised her to invest all of it.

ombudsman news 7
December 2002 issue 23
 The firm rejected her complaint. It said the When the firm checked its tape recording of
investment was consistent with Mrs J’s Mrs G’s call, it found that she had not asked
attitude to risk and that it had not been how much she would receive and the firm
wrong to invest all of the money. It claimed had not quoted any figures to her.
that Mrs J already had sufficient money in a It therefore rejected her complaint.
savings account to cover the first year’s
school fees, so would not have needed to complaint rejected
make an early withdrawal. The only telephone call Mrs G had made to
the firm was the one it had recorded.
complaint upheld And the firm had been under no obligation
The purpose of the investment was to to tell her, in the course of that call, that it
provide funds to meet a known and would deduct charges if she withdrew her
imminent cost, so we did not think a high- money. When Mrs G had taken out the
risk strategy was appropriate. Moreover, policy, the firm had sent her a brochure that
a high-risk strategy did not match Mrs J’s included clear information about the
attitude to risk. And there was no evidence charges that it might deduct when the
that she had sufficient funds set aside to policy was surrendered. We considered this
cover the first year’s school fees, so the information was sufficient and we did not
firm should not have advised her to invest uphold her complaint.
all the money.

We decided the appropriate remedy was

for the firm to pay Mrs J an amount n 23/9
equivalent to a full refund of her initial pension opt-out advice – customer’s
investment, less the amounts she had evidence unreliable and contradictory
subsequently withdrawn.
Mrs A had a permanent job teaching five
mornings a week at a local school. She
worked at the same school every
n 23/8 afternoon as a supply teacher. Her
whether firm should have informed complaint concerned the advice she
customer about charges it would deduct said the firm had given her about her
when she cashed-in the investment pension arrangements. She claimed that
she had acted on the firm’s advice to
Mrs G complained to the firm when it opt-out of the teachers’ pension scheme,
deducted charges from the amount she as the firm told her that supply teachers
received when she cashed in her were not eligible to be in the scheme.
investment. She said the firm’s customer
service representative had not mentioned Mrs A said she had subsequently discovered
any deductions when she had telephoned that supply teachers were eligible to join the
the firm to make arrangements and to find scheme, so she complained to the firm.
out how much money she would get. However, it refused to uphold her complaint
so she came to us.
8 ombudsman news
December 2002 issue 23
 ... her evidence was unreliable
and contradictory, so we did
not uphold her complaint.
complaint rejected
We asked Mrs A to send us some of her
recent payslips. We noted that one of
them showed that her employer had n 23/10
deducted a contribution to the teachers’ life insurance – premium receipt books
scheme. Mrs A said this deduction had been no proof that policy still valid
made in error and that the money had been
refunded to her shortly afterwards. She said Mrs B brought her complaint to us after the
that no other pension contributions had been firm refused to pay out on two life insurance
deducted from her pay on any other occasion. policies belonging to her late father, Mr W.
We asked to see other payslips, but Mrs A It had told her that the policies no longer
was unable to supply any. existed but that it would send her £37.18
as a goodwill gesture.
We checked with the teachers’ pension
scheme and with the county council that complaint rejected
employed Mrs A. We found that she had been When we looked into the matter, we found
a member of the scheme but, before the date that Mr W’s mother had taken out the policies
when she said the firm had advised her, she for him in 1916 and 1918. After Mr W died in
had completed and signed an opt-out form, 2000, his daughter had found the receipt
and had received a refund of four months’ books for the policy premiums. She had no
worth of contributions. other documents relating to the policy, but
she sent the books to the firm, hoping to get
When we asked Mrs A about this, she said a considerable sum.
the date she had originally given us had been
incorrect and that the firm had advised her We explained to her that the firm had
a month earlier than that. This would have been correct in telling her that it could not
meant she was advised before she completed pay out on a claim simply on production of
the opt-out form. premium receipt books. These books merely
proved that premiums had been paid, not
However, the firm’s ‘fact find’, completed at that the policies still existed.
the time of the sale, showed the date that
Mrs A had quoted originally. Since Mrs A’s Initially, the firm had been unable to trace the
evidence was unreliable and contradictory, policies at all. Eventually it confirmed that
we did not uphold her complaint. they had lapsed in 1938, when Mr W’s
mother had died and the premium payments
had stopped. The sum that the firm had
offered Mrs B as a gesture of goodwill –
£37.18 – represented the total death benefit
it would have paid out under the policies had
her father died in 1938, immediately before
the policies lapsed.

ombudsman news 9
December 2002 issue 23
 3 banking: varying interest on
savings accounts

The complaints we receive about savings As the Regulations have been in force since
accounts tend to relate to firms having varied 1 July 1995, firms should already have
their interest rates. These cases raise reviewed the terms of their contracts.
questions such as: However, it may be timely to provide a
n Can the firm reduce the interest rate by reminder about the potential impact of these
more than a fall in the Bank of England Regulations on variations in interest rate for
base rate? savings accounts. In some circumstances,
n Can the firm leave the interest rate where the Regulations may require firms to send
it is if the Bank of England base rate personal notification of interest rate changes
goes up? to customers where, currently, the Banking
n How will the customer know if either of Code (the ‘code’) does not. However, the
these has happened? industry has promised to update this part of
n Can the customer withdraw the money the Code once the FSA publishes its guidance.
if dissatisfied?
The Regulations are relevant to what the
The Unfair Terms in Consumer Contracts contractual terms require the firm to do,
Regulations (the ‘Regulations’) are often rather than to what the firm voluntarily does
relevant to the individual complaints we deal in practice, or what the Code requires. If the
with. The Financial Services Authority (FSA) contractual terms do not comply with the
and the Office of Fair Trading, amongst others, Regulations, the firm may find that it is
have the power to take firms to court for unable to vary interest rates – even if, in
breaches of these regulations. The FSA has practice, the firm follows, or goes beyond,
recently been consulting about its approach to the Code requirements.
that power, in the context of interest-rate-
variation provisions, and about its view of Firms need to consider a number of points
what good practice might require. before they vary the interest rate on savings
accounts. For example:

... firms need to n Do the contractual terms only allow an

interest-rate change for a valid reason?
consider a number of n Are particular valid reasons specified in
points before they vary the contractual terms?
n Does the interest-rate-variation provision
the interest rate on create a significant imbalance in favour of
savings accounts. the firm?
n Do the contractual provisions require the
firm to send customers personal
notification?

10 ombudsman news
December 2002 issue 23
To illustrate this, we look here at three of the most where the change is not for a valid reason, even
typical situations surrounding interest-rate changes. if it is for a reason specified in the contract:

where the change is for a valid reason and that The power to change interest rates is likely to be
reason is specified in the contractual terms: unfair unless:
n the account is not a term account; and
Power to change: The fact that the valid reason is n the contractual terms require the firm to
specified in the contract does not automatically give customers sufficient advance personal
guarantee that the interest-rate-variation provision notice to enable them to close their account
will be fair. It might still be unfair – if it creates a without becoming affected by the change.
significant imbalance in favour of the firm. That
might be so, for example, where the customer
is locked in and has to accept the new rate. Arguably, it is unlikely that making special provision
for accounts with little money in them (a de minimis
Requirement to notify: The Regulations are provision) could turn an invalid reason for an
unlikely to require personal notification to interest-rate change into a valid one. But it might
customers of an interest-rate change (for a be possible for a reasonable de minimis provision,
specified valid reason) in all cases. Fairness incorporated in the contractual terms, to modify the
might require personal notification in some firm’s obligation to give customers personal notice
cases, depending on the other terms of the – if this were confined to circumstances where
account. But it is unlikely that a requirement there is no possibility of material detriment to
for personal notification alone will render fair the customers.
an otherwise unfair interest-rate-variation
provision, particularly in relation to a
customer who is locked in.
... the power to change
interest rates may still
where the change is for a valid reason but
that reason is not specified in the be unfair – if it creates a
contractual terms:
significant imbalance in
Power to change: The power to change interest favour of the firm.
rates may still be unfair – if it creates a significant
imbalance in favour of the firm.

Requirement to notify: The Regulations are likely

to require the contractual terms to say either: the
firm will give customers prompt personal notice
once the change takes place and customers can,
at that time, close their account freely; or the firm
will give customers sufficient advance personal
notice to enable them to close their account
without becoming affected by the change.
ombudsman news 11
December 2002 issue 23
 4 insurance renewals

Insurers want to make it as easy as possible for We will not normally support a firm in declining
their customers to renew their policies and it is a claim if it asked a similarly general question
normal market practice for them to notify when a policy was renewed, and it then bases
policyholders when a policy is about to expire. its rejection of the claim on the customer’s
It is now it is a requirement under the General failure to provide full disclosure of information
Insurance Standards Council’s Code that firms in response to the question.
should do this in good time. This is a useful
service for many customers. Our general approach to renewals is to apply
the spirit of the Statement of General Insurance
Most insurers want policyholders – when they Practice. That is, to expect firms to ask clear
renew – to disclose any changes in their questions about information that the
circumstances that might be material. But there policyholder can reasonable expect to possess.
are wide variations in how clear firms make this
to their customers. Frequently, policies are If a firm wants policyholders to check and
renewed without any specific questions being re-confirm all the information they provided
asked of customers other than about their originally, then it is good practice for the firm
credit card details. And in a case reported on to send them a copy of that information, or
page 16 of this issue (23/15), the firm’s to ask all the questions afresh. A firm that does
renewal letter to the customer opened with the not follow good practice may not be able to use
words ‘If you want to renew then do nothing, it’s a customer’s failure to provide information as
that easy’. a reason to decline a claim.

If a customer fails to disclose relevant Of course, the fact that a firm may not set out
information when renewing a policy, the firm its questions clearly does not absolve the
might reject the whole claim. We take the view policyholder of all responsibility for disclosing
that if the firm wants to reject a claim on the relevant information. In case 23/15 (on page 16
grounds of a customer’s failure to disclose of this issue), for example, although the firm
information, then it should be able to show that had not set out its questions at all clearly, the
it asked the customer clear questions when the policyholder should have known that his insurer
customer renewed the policy. would have wanted to know about his drink-
driving offence.
Customers cannot be expected to remember all
the details of information they provided
perhaps several years earlier. So if firms ask ... if a customer fails to disclose
them general questions such as ‘has anything
changed in the information we asked for in your
relevant information when
proposal form?’ when they are renewing a renewing a policy, the firm might
policy, the responses are unlikely to be reliable.
reject the whole claim.
12 ombudsman news
December 2002 issue 23
 case studies – insurance The firm based its rejection of the claim on
renewals the renewal notices that, since 1991, had
stated, ‘any item worth more than £500
n 23/11 is not insured at all unless specified’.
household contents – renewal – The firm said that Mr K should have
change of policy terms – whether noticed this and made sure that each
sufficient to note amendment on item of expensive jewellery was
renewal documents individually specified.

In 1984, Mr K took out index-linked complaint upheld

household buildings and contents We considered that the firm’s decision to
insurance. This included cover for his exclude all personal possessions worth
personal possessions, which were valued more than £500 constituted an unusual
at £9,150 in total. He renewed the and onerous policy term. And such policy
insurance every year. However, when he terms should be clearly drawn to the
was burgled in 2001, the firm rejected attention of policyholders. It is not
most of his claim. It said that some of the sufficient for firms merely to print them
personal possessions that had been stolen on the renewal notice without giving
were worth more than £500 each and that policyholders any explanation or notice
such items were not covered unless they of the change. Most insurance policies
were insured separately. contain a price limit on claims for any
single article but it is not common for a
Mr K was very surprised by this. He said he firm to withdraw all cover for such items.
had no reason to think these possessions
were not covered, as they were items of The firm knew that Mr K had over £10,000
jewellery that his wife had owned since he worth of personal possessions and it
first took out the insurance in 1984. should have made it clear to him that he
He pointed out that the firm’s promotional had to specify any item over £500. We
literature stated ‘New for Old Replacement concluded that the firm was unreasonable
means exactly that.’ and that it promised to limit its settlement of Mr K’s claim on
‘Reimbursement in full at today’s prices, the grounds that the claim did not meet
whatever the original cost’. The literature strict policy terms that the firm had not
also said that index-linking ‘automatically made clear to him. We required it to meet
takes account of inflation when assessing his claim in full, although we said it could
claims and renewal premiums’. Since deduct the additional premiums it would
none of the stolen items of jewellery have charged for the past five years if
had been worth more than £500 in Mr K had specified the valuable items.
1984, he considered that they should
all still be covered.

ombudsman news 13
December 2002 issue 23
 ... there was nothing to suggest
that the firm had subsequently
altered the policy terms.
n 23/12
household buildings – change of policy
terms – need for clear notification –
swimming pool dome – dome specifically confirmation that the dome was covered.
excluded from policy – intermediary It was not reasonable of the firm to expect
stating policy covered dome – whether the couple to have then checked the policy
insurer entitled to reject claim for storm terms to see if the intermediary’s
damage to dome statement was true.

Before Mr and Mrs A took out household The couple had every reason to believe
insurance with the firm in 1994, they that the dome was covered when they
asked their intermediary if the policy first took out the policy. There was nothing
would cover the PVC dome over their to suggest that the firm had subsequently
swimming pool. The intermediary wrote to altered the policy terms and notified its
them confirming that the dome would be customers that it had done this, so we
covered ‘at no extra cost’ so they took out did not agree that it should have rejected
the insurance and renewed it each year. the claim.

In October 2001, a storm damaged the The firm agreed to meet the claim, but
dome and Mr and Mrs A made a claim. said it would not cover the swimming pool
However, the firm told them the policy dome against any loss after Mr and
specifically excluded swimming pool Mrs A’s current insurance expired.
covers. Mr and Mrs A disputed this and
said that if the policy wording had
been amended, the firm should have
n 23/13
informed them.
motor – renewal – firm choosing not to
invite renewal – whether policyholder
The firm argued that swimming pool
entitled to compensation when policy
covers had probably been excluded even
not renewed
in 1994, although it could not produce a
copy of the original policy to confirm this.
Shortly before Mr E renewed his car
It said Mr and Mrs A should have checked
insurance in February 2002, the firm
the policy terms at the outset to see if the
wrote to tell him that it was transferring
policy was suitable for them. Dissatisfied
customers to a subsidiary. It said Mr E
with this response, the couple brought
would not be able to renew his policy.
their complaint to us.
The subsidiary had different underwriting
criteria and was not prepared to insure
complaint upheld
him because of the number of claims he
Mr and Mrs A had specifically asked
had made.
whether the policy would include their
dome and in our view they were entitled
Mr E was upset about this decision, saying
to rely on the intermediary’s letter as
it was a ‘one-sided variation’ of his policy.
He did not think the subsidiary was
14 ombudsman news
December 2002 issue 23
 reasonable to have counted windscreen complaint upheld
damage as a ‘claim’. He said he was We asked the firm to send us a recording
entitled to £300 for distress and of the telephone conversation in which
inconvenience and he asked for his Mr H had said he would not renew his
policy to be reinstated. policy. But it could neither do this nor
supply any notes of the conversation.
complaint rejected Nor could it produce a copy of the letter
The insurance contract was an annual policy it said it had sent Mr H, acknowledging
and the firm was entitled to decide not to his decision to cancel the policy.
offer renewal. It was also entitled to decide
how many claims policyholders could make As the monthly premium was small, we
before it would decline to insure them. We were not surprised that Mr H had failed to
did not agree that the firm had exercised its notice that the deductions from his bank
discretion unreasonably or that Mr E’s account had stopped. We thought he
complaint was justified. should have noticed that he had not
received a new certificate, but we accepted
his statement that he believed the policy
had been renewed automatically, as usual.
n 23/14
motor – renewal – automatic renewal – We put it to the insurer that Mr H had
failure to pay premiums – whether intended to renew his insurance and
policy should have been renewed – his failure to do so was an innocent
whether subsequent loss covered oversight. It agreed to reinstate the policy
and to reimburse the cost of repairs plus
Mr H had insured his car with the same interest, subject to his paying the
firm since 1994. He renewed his policy outstanding premiums.
every year and, from 1997, the firm had
renewed the policy for him automatically.

So after he had an accident in October

2001, he was shocked when the firm ... he was shocked
rejected his claim, telling him he was when the firm
no longer insured. The firm said that
Mr H had telephoned in April 2001 to rejected his claim,
say he had decided not to renew. It said telling him he was no
it had subsequently written to him to
confirm his instructions. longer insured.
Mr H denied this. He said he had no idea
that his insurance had lapsed and he had
not noticed that the monthly premiums
were no longer being deducted from his
bank account. The firm told him he should
have realised he did not have a valid policy. ombudsman news 15
December 2002 issue 23
 ... it was regrettable that the
firm did not record its
n 23/15
motor – renewal – non-disclosure – telephone conversations with
automatic renewal – whether firm customers.
made policyholder aware of need to
disclose change of circumstances

Mr J’s motor insurance was due for complaint rejected

renewal on 30 January 2001. The firm sent We did not think that the firm’s renewal
him renewal papers, including a letter that invitation made it clear that policyholders
opened with the line ‘If you want to renew had to disclose new information to the firm.
then do nothing, it’s that easy’. Further on, So we did not think it was entitled to
the letter said, ‘If your details aren’t the decline to meet claims on the grounds that
same, then please ring us’. a policyholder had failed to disclose routine
information, including minor offences.
The letter referred to the premium
being based on ‘the details we already It was regrettable that the firm did
have on file for you. These are listed for not record its telephone conversations
you on the enclosed renewal notice’. with customers, since a recording would
However, the renewal notice did not have resolved the dispute. In the absence
include any information about driving of a recording, we had to decide what had
offences or accidents. At the end of the occurred on a balance of probabilities.
letter, there was a checklist that included
a request to call the firm if any details We thought it highly improbable that any
such as ‘convictions or prosecutions’ member of the firm’s staff would have
had changed. overlooked the significance of Mr J’s being
disqualified from driving. If he had
Mr J’s car was stolen in July 2001 and the mentioned it, we thought the firm would
firm found out that he had been convicted have said it was not prepared to offer him
of a drink-driving offence on 11 January cover on any basis.
that year. So it told him that it would not
meet the claim and that it was cancelling We also thought that any driver would
his policy from the date of the renewal. know their insurer would consider the
conviction and disqualification highly
Mr J said he had been away from home significant and would realise they had
until February 2001, but that he had called to disclose this when renewing their
the firm then and disclosed his conviction. insurance. So we decided that in this
The firm agreed that he had called, but it particular case the firm acted reasonably
said he had not mentioned his conviction. in cancelling the insurance from the date
It said he had only asked about reducing of renewal.
his cover from comprehensive to third
party, fire and theft.

16 ombudsman news
December 2002 issue 23
 5 round-up of banking cases

A round-up of some of the n 23/17

cash machine – account-holding firm
banking cases we have dealt
responsible
with recently.
Mrs T had a bank account with firm A.
n 23/16 She tried unsuccessfully to withdraw £30
debit card – implied request for from this account, using a cash machine
overdraft owned by firm B, a member of the same
cash machine network as firm A. She
Mr M objected when the firm chased him later managed to withdraw the £30 from
to repay the overdraft on his current another machine.
account. The main reason for the overdraft
was that he had placed two bets with a However, firm A debited her account
bookmaker, using the debit card for his with the first (unsuccessful) withdrawal
current account. He said that the firm was as well as with the second one. Firm A
responsible for letting his overdraft arise, said that was not its responsibility and
since it should not have made the that Mrs T should pursue a complaint
payments if there was not enough money against firm B.
in his account.
complaint upheld
complaint rejected Having examined the records for firm B’s
If a customer uses a debit card or a cheque cash machine, we were satisfied that
when there is not enough money in the Mrs T had not received the first £30.
account, the firm is entitled to treat this as Her complaint was therefore not about
a request for an overdraft. It is a matter for firm B’s machine failing to issue the
the firm’s commercial discretion whether money, as firm A had apparently
to grant the overdraft. If the customer has suggested. It was about firm A debiting
a good history with the firm, the firm may her account with money she had not
well agree to do so, sparing the customer received. We required firm A to credit
the embarrassment of having the payment Mrs T’s account, and to compensate her
‘bounced’. But it is not obliged to do this. for the inconvenience it had caused by
We rejected Mr M’s complaint. trying to fob off her complaint.

... the firm is entitled to

treat this as a request for
an overdraft.
ombudsman news 17
December 2002 issue 23
 ... we required the firm to write
off the loan it had made, and
to pay a further £2,500.
n 23/18
credit card – trader misled about available
facilities n 23/19
personal loan – churned – insurance
Mr Z set up a specialist travel agency with cover lost
£12,000 of his own money. In April 2001, he
opened a business account with the firm after In 1999, Mr C took out a £7,000 personal loan
meeting one of the firm’s business managers. with the firm, which included the cost of
insurance to cover his repayments if he lost his
Mr Z expected to do most of his business by job. Two years later, in 2001, his employers
phone or through the internet, so he wanted to reduced his hours and he fell behind with his
have the facility to accept credit card payments. payments. The firm’s debt management team
The manager told him this would be possible advised him to take out a new £5,000 loan to
after his company had been trading for a cover the balance of the old one.
probationary period of six months.
In 2002, Mr C was made redundant. When
During this time, Mr Z invested more money in he tried to claim on his redundancy insurance,
the business, including a loan from the firm. he discovered that the new loan had no
However, at the end of the probationary period, insurance cover.
the firm would not enable him to accept credit
card payments. It said this was a matter of complaint upheld
policy, since it considered this type of travel We decided that Mr C would not knowingly have
agency too high-risk for such facilities. given up redundancy insurance in 2001, when
he was already working shorter hours. The firm
complaint upheld should not have advised him to take the new
There was nothing wrong with the firm having loan without making it clear to him that the
a policy of refusing credit-card-acceptance insurance cover would lapse and that there
facilities to types of business it considered was no redundancy cover on the new loan.
high-risk. But the firm’s business manager We required the firm to make up the insurance
should have known that this policy applied to benefits Mr C had lost.
this type of travel agency.

Mr Z would not have invested so much extra

money in his business if the manager had not n 23/20
led him to believe he would be able to accept personal loan – maladministration –
credit cards after a satisfactory probationary financial difficulties
period. We required the firm to write off the loan
it had made, and to pay Mr Z a further £2,500. Mr Q took out a £3,000 personal loan, and kept
up the payments for three years. Then he took
out a £6,000 loan. He agreed with the firm that
it would use part of this to pay off the balance
of the first loan. It would then credit the rest to
his current account, where he planned to use it
18 ombudsman news
December 2002 issue 23
to cover the costs of moving house. s
 By mistake, the firm credited all £6,000 of the Two years later, in 1994, he became bankrupt.
second loan to Mr Q’s current account and failed The firm decided not to repossess the house
to pay off the first loan. So Mr Q was making because at that time it was only worth enough
repayments from his current account for the original to pay off the first mortgage.
loan, as well for the new one. It was only when his
s the points they need to consider before they alter interest current account became overdrawn a year later that Mr D was discharged from bankruptcy in 1997.
rates – including the potential impact of the Unfair Terms he became aware of the problem. That year, and the following year, the firm sent him
in Consumer Contracts Regulations. statements showing the amount he still owed
complaint upheld it. Then in 2001 it told him that as the value of the
The position was clear from Mr Q’s bank statements. house had increased sufficiently to pay off both
Finally, our selection of case studies illustrates the wide But he convinced us he had never looked at these – mortgages, he would have to repay his debt
range of matters we have dealt with recently, including a he had just checked his balance from time to time. or sell the house.
complaint about poor advice on investing money for school Under the Consumer Credit Act, the firm should have
fees, a case where a bank had to write off the loan it made documented both loans but it could not produce any Mr D then queried the existence of the second
evidence that it had done so. mortgage and complained about the firm’s delay
to a trader after it incorrectly told him it would provide his
in recovering its debt.
new business with credit card facilities, and a complaint
We required the firm to write-off the first loan and to
about pensions advice that we rejected on the grounds that pay Mr Q £200 for inconvenience. We also required complaint rejected
the customer, a teacher, presented contradictory and it to refund, with interest, the payment protection We were satisfied that the second mortgage existed.
unreliable evidence. insurance premium it had included in the second It had been a legitimate exercise of the firm’s
loan. This was designed for people in employment commercial judgement to wait until the house

... we focus, too, on and Mr Q was retired. had increased sufficiently in value to cover its
debt. The firm had continued to monitor the
some of the problems property’s value.

that can occur

n 23/21 We thought the firm could have done more to keep
following the renewal secured loan – not affected by Mr D informed. But we did not think it appropriate to

of insurance policies. bankruptcy discharge award any compensation for this. Mr D had
benefited from the firm’s delay. He had continued to
In 1992, Mr D took out a second mortgage on his occupy part of the property and had obtained
home to secure his overdrawn business account. income from letting the rest.

help and advice for firms and consumer advisers

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2 ombudsman news © Financial Ombudsman Service Limited ombudsman news 19

December 2002 issue 23 Reference number 174 December 2002 issue 23
 ask ombudsman news
your questions answered

if my client’s complaint to the on any customers to try and stop them referring
ombudsman service fails, can my firm their complaints to us.
make the client pay our costs?

Q
One of my clients has complained that we
mis-sold his mortgage endowment policy.
I am certain I can prove him wrong, so it
seems he’s just out for what he can get. how should my firm show we’re
covered by the ombudsman service?
If he brings the complaint to the ombudsman

Q
service and is unsuccessful, can I claim back the Is there any set wording for the notice I’m
ombudsman case fee and our associated costs meant to have on display in my offices
from him? I’ll go though the courts if necessary. about the Financial Ombudsman Service?

A A
The FSA’s rules require firms to display
No. Consumers have a statutory right to
a notice in their branches or sales
refer disputes to us if they are unhappy
offices to show they are covered by
with the way the firm has dealt with a complaint.
the Financial Ombudsman Service [rule reference
And as a matter of law, the service is free to
DISP 1.2.9(3)].
consumers.
This rule does not prescribe the format, size
If a firm threatens to penalise a customer for
or wording of the notice. So you have the scope
exercising the right to refer a complaint to us, then
to produce the notice in your own house style,
the FSA has indicated that it will treat the firm as
to match your marketing and information
having failed to meet certain of its Principles for
materials if you wish.
Businesses. These are Principle 6 (A firm must pay
due regard to the interests of its customers and We can provide firms with the artwork for
treat them fairly) and Principle 8 (A firm must our logo – provided you agree to comply
manage conflicts of interest fairly, both between with our conditions of use and you don’t
itself and its customers and between a customer use it misleadingly.
and another client).
We can also provide an adhesive vinyl window
If a firm fails to meet the FSA Principles, the sticker that firms can display to show they are
regulator can take disciplinary action that, in some covered by the Financial Ombudsman Service.
circumstances, may put the firm out of business. For more details, please contact our technical
Where appropriate, we may inform the FSA if advice desk on 020 7964 1400.
we become aware of a firm putting pressure s

send your questions to: ask-ombudsman-news@financial-ombudsman.org.uk

or write to the Editor, ombudsman news, Financial Ombudsman Service,
South Quay Plaza, 183 Marsh Wall, London E14 9SR.

20 ombudsman news
December 2002 issue 23