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Endowment illustration literature misled clients over charging levels

  • 03/12/2002
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Life insurers and endowment providers acted under Lautro rules to the detriment of mortgage borrowers

Mortgage endowment policies sold in the 1980s and 1990s may be suffering investment shortfalls now because customers were quoted one level of charges ‘ as companies believed they were required to do so ‘ when higher charges were actually imposed once a policy began its life.

Life insurers and endowment providers believed they could not disclose true charges in projections under the industry standard, Life Assurance and Unit Trust Regulatory Organisation (Lautro) rules.

Between 1988 and 1994, companies were required to base all product illustrations on two projected rates of return set by Lautro, as well as a standardised charging structure. This charging structure was set in the region of a 2% bid/offer spread, plus 0.2% annual management charge (AMC) for mortgage endowments. However some products, such as those offered by Axa, carried a bid/offer spread of 5% and AMC of 1%.

As a result, consumers may not have been aware that illustrations and projections did not reflect true returns. Companies selling endowments would have had to produce higher returns than those quoted in projections, simply to meet the maturity value companies initially targeted to meet.

Paul Gregory, head of retail market services at Clerical Medical, said: ‘Even if investments had a steady growth rate of 7.5% pa over the 25 years and all other elements of the illustrations were correct, the fact that charges were higher means, by definition, illustrations would not be fulfilled.’

IFA Tudor House Financial Services disclosed the discrepancy in 2001. A letter from Standard Life to Tudor House said: ‘Lautro… specified the wording to accompany illustrations and required us to state that ‘illustrations comply with the rates of return and other factors set out in the Lautro bases’. We did not give any illustration or explanation of the growth rate required on the basis of our own charges because…such an illustration was prohibited by the Lautro rules.’

However, the Financial Services Authority said providers were not prohibited from informing con- sumers of charges companies would impose. ‘Lautro rules did not prohibit a firm from advising customers that illustrations were based on the use of Lautro charges, as opposed to their own charges, and thereafter outlining how this may affect the potential returns,’ states a letter from the FSA to Tudor House.

Faye Goddard, technical director at the Association of Independent Financial Advisers, said: ‘We used to have to compare the charges of companies when finding quotes. But when we got quotes and projections from three companies they would be identical, because of the standard [Lautro] charges. But there was nothing to stop IFAs doing their own calculations manually.’

So far, only Clerical Medical and Scottish Widows have admitted original illustration literature lacked clarity, and have offered to rebate those additional charges above Lautro quoted rates, either through increased allocation rates on client premiums or as bonus rates.


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