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Winterthur Life fined 500,000 over mortgage endowment sales
FSA/PN/124/2001
25/09/200 (FSA press release)

Winterthur Life UK Ltd (Winterthur) has been fined 500,000, plus 57,000 costs, for breaches which resulted in the mis-selling of mortgage endowment policies. Around 10,000 customers may be affected and the firm has set aside approximately 10 million for redress.

The firm is using external consultants to carry out a review of mortgage endowment policies, sold between March 1998 and December 1999, to establish more precisely the extent of any mis-selling. Winterthur withdrew from the endowment market in July 2000. The firm is in the process of contacting those policyholders affected. Redress will be offered where appropriate, including to those policyholders who have surrendered their policies.

Carol Sergeant, Managing Director for Regulatory Processes and Risk at the FSA, said:

"This is further delivery on our commitment to deal effectively with endowment mis-selling. We are also dealing with a number of other firms where mis-selling has been identified to ensure that consumers receive proper redress, so further announcements can be expected."

"Where consumers have suffered loss we want to see firms act quickly and decisively to put things right. The level of fine here reflects the fact that Winterthur has dealt with this problem quickly, openly and co-operatively."

Investigations found the following:

The firm had failed to ensure that procedures it used would ensure that suitable recommendations were made. In particular:

The firm set up a computerised point of sale system, called Winteract, which was used by Winterthur’s advisers between March 1998 and December 1999 to generate recommendations for customers. The system allowed advisers to recommend mortgage endowment policies where they were not suitable for customers. In particular:
The Winteract process included the completion of a computerised questionnaire, known as the ‘Attitude Survey’, designed to ascertain a customer’s attitude to risk.
Within this questionnaire, customers had to grade six statements according to their importance to them. The Winteract system then produced an overall score and the type of mortgage recommended would depend on that score.


The system allowed customers who had stated the "certainty of the loan being repaid at the end of the term" was "very important" to be sold a mortgage endowment policy.

Given these customers’ responses to this question, they should not have been recommended an investment product. A repayment mortgage would have been a suitable recommendation for them.

The firm failed to ensure that customers were provided with a clear written explanation of the reasons why a recommendation had been made. In particular:

‘Reason Why Letters’ issued were long and dealt with the reasons why other products had not been recommended, rather than explaining why the chosen product had been recommended.


Where a customer had stated that certainty of repayment of the mortgage was a priority, the letters contained a standard statement that the product recommended did not offer these benefits but that priority had been given to other customer priorities. The Letters did not explain why this had been done.
The firm failed to monitor adherence to the Winteract system, on which it relied, in order to ensure suitable recommendations and failed to maintain adequate systems of internal control. In particular:

Checklists used by a centralised checking unit, as part of the firm’s quality control process, did not give specific consideration to whether the product recommended was suitable for the customer, taking into account their response to questions relating to their attitude to risk.


The advisers had the ability to override the Winteract system and there was no evidence of a requirement for the centralised checking unit to ensure that the recommendation made by the adviser was consistent with that of the Winteract system.
The firm failed to conduct adequate quality assurance checks on the staff carrying out the checking of advisers’ business.
Notes for editors
Firm specific information

Winterthur Life UK Limited is based at Winterthur Way, Basingstoke, Hampshire, RG21 6SZ.


Those customers with policies that are affected will be contacted, over the next 24 weeks by Winterthur as part of the corrective process being undertaken. Winterthur has established a helpline on 0800 138 0290 for policyholders. It is open from 9am to 5pm, Monday to Friday.
FSA’s ongoing work

Since the beginning of the year, the Authority has taken disciplinary action against 57 firms, resulting in fines totalling 2,062,000 for breaches covering a number of areas. A total of 46 million has been set aside for compensation. Of those cases where disciplinary action has been taken, 16 related to pensions review failings, totalling 358,000 in fines.

The Authority has also suspended 17 firms for failing to renew professional indemnity cover and 4 on the grounds that they may not be fit and proper to carry on investment business. 2 registered individuals and 1 firm have been terminated on the grounds that they are no longer fit and proper to carry on investment business. 8 firms have been expelled and 3 have been suspended from PIA on the grounds that they no longer meet financial resources requirements.

Endowment Specific Information

The FSA is continuing its focussed work looking at individual firms. This has included reviewing both historical selling practices and, in some cases, the way in which premiums were set and represented to consumers. The FSA has also reviewed current selling practices by looking at business written in the fourth quarter of 2000. The focus has been on firms with a market share of mortgage endowment sales of 0.1% or more.
As a result of these areas of work the FSA is in detailed discussion with a number of firms.

The exact approach on any action to be taken by a firm will depend on the particular problems identified but in several cases, proactive review by firms is likely to be an effective way of reaching the consumers concerned.

Any consumers that feel they have grounds for a complaint, for example where they believe that they may have been mis-sold an endowment because their attitude to risk was such that it was inappropriate for them to take investment risk in paying their mortgage, should complain to the firm that gave them the advice in the first instance. The FSA factsheet ‘Endowment mortgage complaints’ will assist consumers in assessing what they can complain about, how to make a complaint, if compensation is due and how it is decided, and where to get further help.

In May 2001, FSA issued guidance on how firms responsible for mis-selling should deal with complaints and calculate the redress due.
In most cases where financial redress is due, compensation will be calculated to reflect the difference, in terms of impact on the individual’s finances, between having an endowment mortgage compared with a repayment mortgage. This will take into account the capital repaid on a repayment mortgage, compared with the surrender value on the endowment, and any difference in monthly outgoings.

The guidance also covers the procedure to be followed in switching from an endowment mortgage to a repayment mortgage, where a consumer has a valid complaint, with the costs usually to be borne by the firm.

In the 16 month period to the end of June 2001, over 35 million has been paid in compensation to 10, 671 consumers, making the average payout 3, 360.

Consumer publications available free of charge include the FSA factsheet: ‘Endowment mortgage complaints’ and FSA Guides to "making a complaint", "financial advice" and "repaying your mortgage". These are available from the Consumer Helpline on 0845 606 1234 or on the website www.fsa.gov.uk.
FSA Rules and Procedures

In determining whether disciplinary action should be taken and, if so, the sanctions applicable, various factors are taken into account and each case needs to be treated on its own merits.

Examples of such criteria, following a firm’s response once breaches have been identified, are:-



Any steps which the firm has taken to address the concern (including any steps taken to identify whether investors have suffered loss and to compensate those who have suffered loss)


Any steps which the firm has taken to ensure that problems do not arise in the future


The degree of urgency with which the firm has taken any of the above action


The attitude of the firm’s governing body and senior management once the breach was identified


The degree of co-operation shown to the Regulator in investigating the breach.

These criteria are also reflected in the Enforcement Manual for disciplinary actions after the FSA takes on its full powers at the end of November 2001.

Winterthur demonstrated commitment to these factors in addressing this matter.

Winterthur was found to be in breach of the following Rules and Principles:


Rule 7.1.2(1) of the PIA Rules and Principle 2 of the Statements of Principle, in that it failed to establish procedures to ensure that its Representatives’ best endeavours would result in them recommending Winterthur’s HomeProvider Policy only when such policies were suitable for such investors;


Rule L3.15 of the adopted Lautro Rules, and Principle 2 of the Statements of Principle, in that it failed to provide written explanations that made clear why recommendations had been made; and


Rules 7.2.1(1) and 7.1.5, in that it failed to monitor the conduct of its staff with a view to ensuring compliance with the Rules and failed to establish and maintain a system of internal control appropriate to the size and type of its business.


The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.


The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.
of homeowners are bracing themselves for the latest news on their endowments as insurance companies prepare to reveal how their with-profits investment funds fared last year.
 

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