The Personal Investment Authority introduced the PIA Rules in 1995; these were largely adopted from the LAUTRO and FIMBRA Rules that had been introduced by those Self-Regulating Organisations to comply with the ‘safeguard’ stipulations of the Financial Services Act 1986.


The LAUTRO and FIMBRA Rules, and the follow-on PIA Rules, were therefore the respective current ‘conduct of business rules’ governed by the Financial Services Act 1986 up to 1st December 2001, by which date the Financial Services and Markets Act 2000 gave the FSA direct regulatory control.



Up to 1st December 2001, consumers’ complaints were dealt with by either LAUTRO or FIMBRA, or, following the merging of these Self Regulating Organisations in 1994, by the Personal Investment Authority (PIA) Ombudsman. But, on the matter of the specifics of the Financial Services Regulations relevant to them, consumers generally were kept in a state of ignorance.


In the case of Endowment Mortgages, this was the situation at least until December 1999 / January 2000, when, following from the findings of targeted supervisory visits undertaken by it during the summer and autumn of 1999, the FSA began to issue a series of Factsheets (related further below) in an effort to inform consumers with respect to what information and advice they should have been given when they were sold an Endowment Mortgage, what would constitute grounds for complaint, and whether they may have an entitlement to compensation.

 

The Regulatory Regime practised by LAUTRO, FIMBRA and the PIA was such that the aggrieved consumer was not made aware of the specifics with respect to the requirements incumbent upon the Financial Services Institutions and their Intermediaries, as had been set down within the various statutory Rules and Regulations.

And, in this state of ignorance, the aggrieved consumer was required to follow a defined complaints procedure and submit the substance of his complaint, first to the Financial Institution / Service Provider against whom he was complaining, and then to the Self Regulating Organisation or Ombudsman.

 

The Regulatory Regime practised by LAUTRO, FIMBRA and the PIA was therefore such that the aggrieved consumer had to relate his grievance, not on the objective basis of an informed awareness of what would constitute a breach of a particular Rule or Regulation, but on the subjective basis that the Financial Institution / Service Provider, Self Regulating Organisation or Ombudsman would decide whether or not one of the Rules or Regulations had been breached.

And, this Regulatory Regime was also such that the aggrieved consumer was kept ignorant of the powerful courses of action for damages available to him under Section 62 of the Financial Services Act 1986. (See Section 2.5.5.)

Small wonder then, that, in spite of all the Rules and Regulations, a blatant disregard for the consumer’s interests, by both the Financial Services Institutions and those dealing in their products, continued to prevail.

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But, throughout all this time, there had been a persistent clamour of protest in the United Kingdom, from personal finance journalists, from the Consumer Association, and from the dissident few among consumers, on the matter of the unfairness of Endowment Mortgage Contracts, with the means by which consumers were induced to enter into such contracts being a matter of particular dispute.  

In October 1997, largely following from the so-called Personal Pensions Scandal (discussed in the Section 2.5.7), the U.K. government reformed the supervision of the Financial Services Industry by establishing a single regulator, the Financial Services Authority (FSA). The FSA took charge of the Designated Agency functions under the U.K. Financial Services Act 1986, the PIA came under its direct control.

But it would take another two years before the scale of the Misrepresentation of Endowment Mortgages to consumers would finally begin to dawn on the FSA. 

 

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From 1998, the FSA, itself, undertook firm-based supervisory activity on behalf of the PIA. But, while it now did so under the supervision of the FSA, the PIA still retained control with respect to dealing with consumers’ complaints and with respect to enforcement of the Regulations.

 

During the summer and autumn of 1999, the FSA (ostensibly on behalf of the PIA) undertook a series of targeted supervisory visits to participants in the mortgage endowment market –––– both product providers and independent financial advisors.


In December 1999, following from the findings of those visits, the PIA and the FSA, jointly, issued a public warning to PIA regulated firms, stating that:

Also in December 1999, the FSA Factsheet: ‘Is an Endowment Mortgage right for you?’  –––– was issued.

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In January 2000, under the direction and guidance of the FSA, and as part of its (i.e. the FSA’s) Action Plan to address the problems it had found within the industry, endowment providers sent letters to all their customers believed to be using their endowment policy for repaying their mortgage, stating that consumers would start to receive individual re-projections of their policies from April 2000.

These letters were required to enclose a copy of the FSA Factsheet: ‘Your endowment mortgage - what you need to know. (January 2000)’

By October 2000 the FSA had prepared a further Factsheet: ‘Endowment Mortgage Complaints’; this was ‘specifically aimed at consumers concerned about the advice they received when they took out their endowment policies’.

These Factsheets came some way further to informing the consumer as to what might constitute a compensatable cause for complaint.

But, at this time, even though the PIA was under the direct control of the FSA, consumer complaints were still being dealt with by the PIA Ombudsman.

This continued to be the case up to 1st December 2001, when the provisions of the U.K. Financial Services and Markets Act 2000 came into force. From 1st December 2001 onwards, consumers’ complaints have been dealt with by a ‘wholly independent body’, the Financial Ombudsman Service.



Following on from the previously issued Factsheets by the FSA, the Financial Ombudsman Service issued its own ‘Consumer Factsheet on Mortgage Endowment Complaints’. The complaints process under the Financial Ombudsman Service also became much more ‘consumer friendly’.

While the initial stage of the complaints procedure still required the consumer to first submit the substance of his grievance to the Financial Institution / Service Provider against whom he was complaining, the Financial Ombudsman Service adopted a much more proactive role when it came to the second stage of the complaints procedure.

An easy-to-fill-out special Mortgage Endowment Questionnaire was incorporated into the second stage of the complaints procedure, which questionnaire, effectively, obviated the need for any knowledge, on the part of the consumer, of the specifics of the compensatable causes for complaint.

 

Every effort was made to ensure that consumers, who could be due compensation as a result of having been mis-sold Endowment Mortgages, were both made aware of the fact AND were fully informed with respect to what would give rise to a cause for compensation.

The later Factsheets issued by the FSA and the Financial Ombudsman Service clearly set down the what conduct by the party that sold the Endowment Mortgage policy would give rise to a cause for compensation.

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But the FSA also needed to ensure that closure would be brought to the problem.

Where it could be shown that Financial Services Institutions / Endowment Providers had sent re-projection letters or other letters to consumers and that the consumers had received those letters, AND that those letters fully informed the consumers as to what would give rise to a cause for complaint and that they may have an entitlement to compensation

(IRRESPECTIVE of WHETHER OR NOT there was a PROJECTED SHORTFALL),
                                                     ——— this effectively established a SET TIME that could be reasonably deemed to be the time at which those consumers discovered these facts —— the Time of Discovery.



The time period within which consumers had to exercise their right to compensation effectively commenced from the date on which they received these letters. (All this, assuming that these matters were made clear within what was communicated within these letters, e.g. within Factsheets [issued by the FSA or the Financial Ombudsman Service] enclosed with these letters.)



The general time limit within which consumers had to exercise their right to complain through the Financial Ombudsman Service was set at 6 years after the event complained about (for endowment mortgages, this would normally be the date the policy started), or 3 years from the Time of Discovery, if this gave the complainant more time.


The 3 year limitation period from the Time of Discovery for submission of complaints to the Financial Ombudsman Service mirrored the period applicable in respect of latent damage in the case of Negligence under the U.K. Limitation Act. 

 

From 1st June 2004, as further manifestation of the fiduciary duty to act in the interests of the customer, the FSA also required that Financial Services Institutions / Endowment Providers communicate this fact clearly to customers / consumers.

From 1st June 2004, the FSA therefore required that customers / consumers, had not only to be fully informed as to their right to compensation, but had also to be given a clear 'final date' for making a complaint to the Financial Ombudsman Service.

And for this 'final date' to apply, the Financial Services Institutions / Endowment Providers had to be able to show that the 'final date', and an explanation that time will expire at that date, had been communicated to each consumer at least six months before that final date.

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NOTE !

By not invoking the postponement provisions of the U.K. Limitation Act 1980 with respect to the 6 year limitation period from Time of Discovery in the case of 'fraud' or 'concealment', the U.K. Financial Services Authority effectively diverted attention from the systemic deliberate breach of fiduciary duty by those in the U.K. Financial Services Sector. (See Section 2.9: The Time Limit for Legal Action.)


Conduct, that should have been categorised as Systemic Fraud (systemic fraudulent misrepresentation), was effectively whitewashed down to Negligence (i.e. classified as Mis-selling, and treated as though the conduct constituted Negligence). This enabled the FSA to avoid having to address the burning issue of the statutory offences for fraudulent misrepresentation under the U.K. Financial Services Act 1986. This will become evident in the following Sections.


 

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While, from January 2000 onwards, progressive efforts had been made by the Financial Services Authority to ensure that consumers, who could be due compensation as a result of having been mis-sold Endowment Mortgages, were made aware of the fact — it was not until after commencement of the Financial Ombudsman Service (from December 2001), with its much more proactive policy in dealing with consumers' complaints, that the full scale of the Endowment Mis-selling Scandal began to come into focus.


By the autumn of 2004, over £1.0 billion had already been recovered as compensation for wronged consumers.

By July 2006 the compensation figure was £2.2 billion and rising.

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A Fork in the Road

As related above, from 1st December 2001, complaints between consumers and Financial Services Providers have been dealt with by a ‘wholly independent body’, the Financial Ombudsman Service.


BUT, while the Financial Ombudsman Service is presented as a ‘wholly independent body’, the Guidance Parameters under which it operates are set by the FSA.


UNFORTUNATELY, the Financial Services Authority, both in the Factsheet literature it had been distributing to consumers since December 1999 / January 2000, and in the determinant guidance parameters it subsequently set for the Financial Ombudsman Service, chose continuance with the Whitewash Policy as had been developed by the predecessor Self Regulating Organisations  (i.e. LAUTRO, FIMBRA and the PIA).


This Whitewash Policy was most particularly manifest in the manner whereby major infringements of Common Law and Statute Law, in the matters of Fraudulent, Negligent and Statutory Misrepresentation, were collectively classified as ──── Mis-Selling.


This Whitewash Policy ensured that the Management Personnel of the Financial Services Institutions would not be subjected to prosecution for the offences under the Section 47 or Section 133 fraudulent misrepresentation provisions of the U.K. Financial Services Act 1986, or under the corresponding provisions of the successor U.K. Financial Services and Markets Act 2000.

(The genesis and perpetuation of this Whitewash Policy will be explained further in Section 2.5.7, The Whitewash Road.)

 

The FSA’s adoption of the Whitewash Policy, as practised by LAUTRO, FIMBRA and the PIA, also ensured continuance with the latent limitations set by those Self Regulating Organisations on the ‘determinant factors’ that would give rise to compensation for consumers.

These latent limitations were manifest through an inertial silence by the FSA, with no interrogation of the fact that the sales and advice policy of the Financial Services Institutions and their Management Personnel, and the successful perpetuation of their Endowment Mortgage Gravy Train, was wholly premised on the most critical financial analysis information necessary to a informed decision being deliberately withheld from the consumer.

(These matters will be discussed further in Section 2.5.8, The Appalling Vista, and will be exposed, in detail, in later Chapters.)

 

Also, even though the FSA saw fit to issue a series of Factsheets to consumers regarding Endowment Mortgages (as outlined above), it, like the predecessor Self Regulating Organisations, chose to remain silent on the Fact that, under Section 62(2) of the Financial Services Act 1986, actions for damages (through the Courts) could be taken by a person (any person, not just a consumer) who suffers loss as a result of a ‘contravention by a member of a recognised self-regulating organisation or a person certified by a recognised professional body of any rules of the organisation or body’. (See Section 2.5.5.)


AND, even though under Section 150 of the Financial Services and Markets Act 2000 such a contravention of an FSA Rule, again, constitutes a cause of action for damages through the Courts, both the FSA and the Financial Ombudsman Service, in their various Publications / Factsheets informing consumers as to what course of action they can take, have chosen not to empower the consumer with this information.



ALL THIS, when the overriding maxim applied by them is:

'The consumer has the right to expect and to be given all the relevant information necessary to enable him to come to an informed decision.'

 

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