Legal & General Assurance Society Ltd v Financial Services Authority, Court of Appeal - United Kingdom Financial Services and Markets Tribunals, January 18, 2005, [2005] UKFSM FSM012

Resolution Date:January 18, 2005
Issuing Organization:United Kingdom Financial Services and Markets Tribunals
Actores:Legal & General Assurance Society Ltd v Financial Services Authority
 
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16208-00002 LT:1003871.2 18 January 2005 THE FINANCIAL SERVICES AND MARKETS TRIBUNAL LEGAL & GENERAL ASSURANCE SOCIETY LIMITED Applicant -and- THE FINANCIAL SERVICES AUTHORITY Respondents Tribunal: Judge David Mackie CBE QC Ms Sandi O'Neill Mr Peter Burdon Sitting in public in London for the Applicant: Mr Charles Flint QC and Mr Ben Jaffey instructed by Freshfields for the Respondents: Mr Hodge Malek QC and Mr Simon Hattan instructed by the FSA ©CROWN COPYRIGHT 2005 16208-00002 LT:1003871.2 18 January 2005 I N D E X Clause Page A INTRODUCTION..........................................................................................................1 Progress of this case.......................................................................................................2 B JURISDICTION OF FSA ..............................................................................................3 C JURISDICTION AND FUNCTION OF THE TRIBUNAL..........................................4 D RELEVANT RULES OF REGULATION ....................................................................6 Regulatory Guidance......................................................................................................8 Approach to the Rules....................................................................................................9 E GENERAL BACKGROUND........................................................................................9 Application of the rules................................................................................................10 L&G's Flexible Mortgage Policy .................................................................................11 F PROCEDURES CASE.................................................................................................13 FSA's Claims and L&G's Reply...................................................................................13 The approach to Rule 7.1.2 ..........................................................................................15 The Components of the Procedures Case.....................................................................15 The PFR Form..............................................................................................................16 PFR - Discussion..........................................................................................................18 Guidance about the PFR Form.....................................................................................20 Written Guidance ­ Discussion....................................................................................24 Mortgage Guides and Other Written Guidance............................................................25 Mortgage Guides and Other Written Guidance ­ Discussion......................................27 Key Features Documents .............................................................................................27 Personal Illustrations ­ Discussion ..............................................................................29 Sample Wording...........................................................................................................30 Sample Wording - Discussion......................................................................................34 Training........................................................................................................................37 Training - Discussion ...................................................................................................39 PFR Checking Unit ......................................................................................................40 Supervision...................................................................................................................41 Standards......................................................................................................................42 PIA Investigation of L&G............................................................................................44 Referral to Enforcement and Endowment Sales Review .............................................46 Other Witnesses dealing with the Procedures Case .....................................................48 Expert Actuarial Evidence ­ Policy Review Facility...................................................49 The Procedures Case ­ Conclusions ............................................................................50 G MIS-SELLING.............................................................................................................51 FSA's Claims and L&G's Reply...................................................................................51 The Approach to Rule L8(1)........................................................................................52 Events leading to ESR..................................................................................................53 The ESR .......................................................................................................................54 The Debate about the value of the work done by PwC and KPMG.............................56 The Expert Evidence about the ESR............................................................................57 Adequacy of the sample size........................................................................................58 The 60 Cases ................................................................................................................62 The 13 Cases about which we heard evidence from customers...................................62 The 47 Cases about which we heard no evidence........................................................64 The Misselling Case ­ Conclusions .............................................................................66 Paragraph 1-6 7-9 10-11 12-21 22-25 27-28 29-30 31-32 33-36 37-38 39-41 43-52 53-59 60-70 71-74 75-77 79-89 91-100 101-109 110-115 117-124 125-126 127-131 132-137 138-144 145-147 148-152 153-154 155-159 160-162 163-164 165-174 175-179 180-181 182-193 195-200 201-204 16208-00002 LT:1003871.2 18 January 2005 H THE DECISION OF THE RDC ­THE FURTHER DECISION NOTICE.................66 Should we consider the Decision of the RDC?............................................................66 The Further Decision Notice ("The Notice") ...............................................................66 I CONCLUSION............................................................................................................68 What happens next .......................................................................................................69 ATTACHMENTS I Conclusions about 13 alleged mis-sales about which we heard evidence from customers.....70 II Decisions on the 47 alleged mis-selling cases.........................................................................89 III Personal Financial Review ("PFR") Form................................................................... IV Key Features Document ("KFD") and typical personal illustration................................... 207-214 215-219 220-221 16208-00002 LT:1003871.2 1 18 January 2005 A INTRODUCTION1. In this case Legal & General Assurance Society Limited ("L&G") challenge a decision of the Financial Services Authority ("FSA") which on 24th October 2003 issued, through its Regulatory Decisions Committee ("RDC"), a Decision Notice imposing a penalty of £1.1 million (reduced from an earlier penalty of £1.3 million) for alleged rule breaches in sales of low cost with-profits endowment mortgage policies under L&G's Flexible Mortgage Plan ("FMP") between 1st January 1997 and 31st December 1999 (the "Relevant Period").2. FSA makes two claims. First it says that L&G's sales and compliance procedures failed to ensure that their advisers sold FMPs only to those customers for whom they were suitable. Secondly FSA says that FMPs were sold to customers for whom they were not suitable either because those customers were not prepared to accept the risk that the policy might mature with insufficient value to pay off the mortgage ("the capital shortfall risk") or because they did not properly understand the risk. FSA seeks to prove first that L&G's compliance procedures were deficient ("the procedures case") and, secondly that there was actual mis-selling of FMPs by L&G representatives and that the proportion of these was unacceptably high. FSA claims that this mis-selling ("the mis-selling case") was caused by, or contributed to, the deficiencies in L&G's procedures.3. L&G deny these allegations and maintain that they had proper and reasonable sales and compliance procedures in place during the Relevant Period and that the allegations of mis-selling are flawed. L&G say that they took proper steps in accordance with the rules and followed the guidance of the regulator which in substance approved the very methods of which criticism is now made. L&G claim that they were subjected to an unfair inquiry by FSA and that the Decision of the RDC was unjust.4. Our task is to decide whether L&G broke the rules and, if they did, what if any penalty should be imposed. As the case has attracted interest it may help if we point out that it is not:- (a) an appeal against the FSA decision. It has been a fresh hearing based on all the evidence now available; (b) an evaluation of who was responsible for what went wrong with endowment mortgages in general so as to cause so much anxiety and risk of hardship among customers; (c) an overall appraisal of the role and performance of L&G as a provider of endowment policies for paying off mortgages or of FSA and its predecessor as regulator. We are concerned only with whether FSA has proved the particular charges it brings against L&G; 16208-00002 LT:1003871.2 2 18 January 2005 (d) a decision about compensation due to customers. That is decided by a separate process which applies standards more favourable to the customer...

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