Endowment Mis-selling (Scotland)
7 March 2006
Sandra Osborne (Ayr, Carrick and Cumnock) (Lab): I am pleased to have the opportunity to raise a subject that is of concern not only to many of my constituents, but to thousands of people throughout the length and breadth of Scotland. I draw the attention of the Chamber to early-day motion 1105, which has attracted the support of 51 hon. Members across the parties. That is a good response on a subject that effectively affects only Scotland. I am pleased with that response and the support that the motion attracted.
Mortgages have made front page news, although not necessarily for the best of reasons. It is with some trepidation that I discuss the subject. However, it is much harder to get recognition for the plight of many of our constituents who, through no fault of their own, have found themselves with a substantial shortfall in their endowment policies and no prospect of proper compensation, in spite of the fact that they prudently planned for the long term and had every reason to believe that the advice they received was sound, coming as it did from reputable professionals such as solicitors, major building societies and banks. Solicitors were regarded in such high professional esteem, in fact, that it was deemed unnecessary for them to be regulated by the Financial Services Authority and they were regulated by their own professional body.
Having referred to the publicity in the media, I must give credit where it is due. The BBC Radio Scotland programme "The Investigation" and The Herald newspaper have highlighted the injustice of mis-selling and have supported calls for action to resolve the problem. I welcome that, and those people who are affected are gratified by that support.
The crux of my argument is that a grossly unfair anomaly exists where people living side by side as neighbours have access to widely different compensation arrangements when they have been mis-sold endowment mortgages. Those who purchased their mortgage through banks and building societies can potentially be compensated in full. Those who used solicitors in Scotland will receive, if they are extremely lucky, a token gesture.
As with most financial issues, the scenario is quite complicated. I hope that the Chamber will bear with me if I go into detail about how the situation came about. Mortgage endowment policies were very popular in the '80s and '90s. For a low monthly payment, they were designed to build up a healthy lump sum in 25 years, which would pay off the mortgage with cash to spare. They were linked to stocks and shares and were sold by banks, building societies and, uniquely in Scotland, by solicitors who acted also as estate agents.
In their eagerness to sell the products and to gain commission from the financial companies that promoted them, some banks, building societies and law firms did not inform house buyers of the risks involved. Consumers should have been told that poor performance of the stock market could result in an endowment lump sum not growing enough to repay the mortgage. In many cases, that was not made clear and the policy was mis-sold.
For the avoidance of doubt, I want to emphasise that not everyone who has had to make up a shortfall was mis-sold their policy. In common with many other people, I am in that position. I was aware that the performance of the stock market could affect the return on the policy and although I am not particularly happy about it, I accept it was a risk that I took in the full knowledge of what could happen. For many people, that was not the case. It came as a shock to them to receive the red traffic light letters warning of endowment policy shortfalls. Far from being eventually mortgage free with an additional lump sum, in many cases they have to make up a substantial shortfall, often when they can ill afford to do so. People feel that they have been conned by those who sold them the policies, and they are rightly seeking compensation.
I was a member of the Standing Committee that scrutinised the Financial Services and Markets Bill more than five years ago. It brought in one unified body to replace the previous system of multiple regulators, complaints adjudicators and compensation schemes. It was seen as a huge step forward in resolving disputes quickly and with minimum formality by an independent person. The Bill also introduced tough new rules governing the sale of mortgage endowment policies by banks and building societies. The consequences for endowment policies purchased through a solicitor in Scotland prior to 1 December 2001, when the new legislation came into effect, were not anticipated.
The Bill was subject to substantial consultation, including pre-legislative scrutiny, and had cross-party support. Endowment mis-selling had at that time yet to surface as a major issue and the policies were still regarded as a good thing, in general. Solicitors were not as a profession subject to FSA regulation, as prior to the passage of the Bill FSA regulation was applied where it was deemed proportionate to do so. Some activities were exempted from FSA regulation on the grounds that those engaging in them were overseen by designated professional bodies. Solicitors came under that category, although that has a hollow ring to those who have been mis-sold policies by solicitors in Scotland and have little chance of redress.
Mr. John McFall (West Dunbartonshire) (Lab/Co-op): I apologise because I shall have to leave before the end of the debate; I have another engagement.
I congratulate my hon. Friend the Member for Ayr, Carrick and Cumnock (Sandra Osborne) on raising the debate. She approached me on the subject in my capacity as Chairman of the Treasury Committee, as it has considered endowment mis-selling. As a result, I have written to the FSA, the Financial Ombudsman Service and to the Minister at the Treasury. I know that he will be as helpful as possible. However, the anomaly that makes Scotland stand out must be addressed. I will pursue those official lines, but in the event that we draw a blank there has to be a voluntary agreement so that people who have been mis-sold policies do not end up getting just £1,000.
Mr. Jimmy Hood (in the Chair): Order. I am afraid that the right hon. Gentleman is making a speech, not an intervention.
Mr. McFall : I had just finished, Mr. Hood.
Sandra Osborne : I thank my right hon. Friend for that intervention. It is gratifying to have the support of the Chairman of the Treasury Committee, that august and powerful body, and for him to be behind the campaign. I thank him for his efforts to date an look forward to working with him on the issue in future if necessary.
The bottom line is that if the policy was sold by a bank or a building society, the complaint should first be made to them. If that is not satisfactory, the matter can be taken to the financial services ombudsman. If the ombudsman upholds a complaint of mis-selling, he has a legal power to order a bank or building society to pay compensation for a shortfall. As I understand it, about 60 per cent. of cases heard by the FSA are upheld and full compensation is awarded.
If an endowment policy was mis-sold by an adviser regulated by the FSA, compensation is based on comparing the current financial position, taking the endowment policy into account, with what the position would be now if the client had taken out a repayment mortgage at the outset. Many people have told me that if the risk had been made clear to them they would have opted for a repayment mortgage. That is a clear and fair criterion for awarding compensation.
On the other hand, if the endowment mortgage was bought from a solicitor in Scotland before 2001, a complaint cannot be made to the financial services ombudsman. Mortgage policies sold by Scottish solicitors in the 1990s are regulated by the Law Society of Scotland, which has no legal powers to order compensation for a shortfall in a mis-sold policy. It can only deal with a complaint that claims inadequate professional services, and latterly for stress and inconvenience, with a maximum award of £1,000 in cases dating from 1991 until April 2005. On that date, the compensation threshold was increased to £5,000 for new business. In cases where policies were purchased before 1991, the Law Society will not even hear the complaint. Obviously, where cases are upheld, the £1,000 limit is significantly less than the shortfalls of thousands of pounds that people face.
The chances of a case being upheld are slim. The Law Society received 113 complaints about alleged endowment mis-selling in the first nine months of 2004. Just one case was upheld, triggering a compensation payout of £240, and 46 cases were abandoned because of the strenuous legal process that complainants must follow. In contrast to the FSA system, people are subjected to the rigorous legal process that is applied by the Law Society, in which the burden is on the complainant to prove that they were mis-sold a policy.
I am aware of only two cases that were upheld by the Law Society in 2005, one of which was that of Gail McEwan. She received a payment of £500. I should like to pay tribute to her; she has been instrumental in setting up a group in Scotland to campaign for justice for those who were mis-sold endowments. I and other hon. Members with similarly affected constituents fully support that.
Many people have taken their case to the Scottish legal services ombudsman, but her role is limited to investigating how the Law Society has handled complaints made by legal services consumers about solicitors. In the case of Gail McEwan, the ombudsman published a 30-page report upholding her complaint about the way in which the Law Society managed her original complaint. I believe that the office is now inundated with similar complaints.
I thank the Minister for his response to me in a letter of 7 November 2005. He stated that consumers who purchased through a solicitor in Scotland prior to the Financial Services and Markets Act 2000 retain their legal right to pursue misrepresentation through the courts. That is indeed so, but only cases up to the value of £1,500 can be heard in the small claims court without the services of a solicitor.
Gail McEwan and her group have looked at the possibility of bringing a test case, but the pursuers panel, which is, of course, made up of solicitors, has advised that the costs of doing that could potentially be up to £50,000—an unrealistic sum for people already caught in the endowment trap. In any case, why should one set of consumers be left out on a limb because they made their purchase from one vendor rather than another? That cannot be fair.
This state of affairs is a good example of why the law on financial regulation was changed. The old arrangements left many gaps that meant that consumers did not have the level of protection that they have now, but there are still thousands of people in Scotland who face financial ruin as a result of the current legislation.
People were encouraged, in the 1980s and 1990s, to take out endowment mortgages as a method of paying for their homes. Those who sold the policies received generous commission at that time. Some people have as many as five endowment policies, as they were encouraged to top up existing policies if they moved house. As a result of that anomaly, people are having to sell their properties because they cannot afford to convert to a repayment method so late in their mortgage arrangements. Others must extend their retirement plans. For many it is now an uphill struggle to find additional money every month to meet their mortgage payments.
I have examples of the situation that people are in as a result of the anomaly. The first account states:
"I am a single working woman of a certain age who is now stuck with a sizeable repayment mortgage—the endowment has cost me thousands of pounds and it seems most unjust that because I was offered (I did not seek it) advice at the time of concluding missives on a house purchase I now find I have no right to redress or consumer protection."
Here is another case:
"I am told that there will be a shortfall of as much as £6000. It would appear that my wife would be better off financially if I were to die before the termination of the policy."
A third explains:
"We took this endowment on in completely good faith according to the advice of our lawyer. If he would have given any indication of the slightest risk of shortfall we would have taken a different style of mortgage. These policies were strongly recommended then".
A further example reads:
"It took me a year to realise the situation vis à vis mortgage selling via a solicitor and why we did not qualify for compensation. During this time I now feel that to add insult to injury rather than helping me understand the legal position the Law Society was playing silly games."
The final example comes from someone who says:
"As a naive 20 year old in a new city buying his flat I was sold an endowment by my then solicitor. This I was informed was the only option for a skint first time buyer."
The Law Society of Scotland says that it has the greatest sympathy with people who are suffering a shortfall in relation to endowments they have bought. It has taken extensive advice on what it can do to help and says that it is legally unable to order more compensation. However, as I understand it the Law Society of England and Wales already advises its member firms to adopt exactly the same approach to its members as the Financial Services Authority does to its members: it should establish the background nature of the complaint and, if that is upheld, the client should be awarded compensation to address the mortgage shortfall in full. Compensation payments should be obtained via the relevant firm's professional indemnity insurer.
That seems to have happened in certain cases in Scotland, but the Law Society does not have precise figures on how often it happens. I am not aware of any such instance, and given the number of complaints that are being made it has certainly not been the standard response. That places the Law Society of Scotland in a unique position within the UK marketplace as the only regulatory body not able, or perhaps not willing, to require enforcement so that its members make good in full any financial loss sustained by their clients as a result of inappropriate advice.
There is a school of thought that argues that the reason so few cases have been upheld is that Scottish lawyers are so good and do not make many mistakes. The evidence of a fourfold increase in complaints since 2001 would suggest the contrary. I do not accept that argument.
I note the announcement made in the past few days of Scottish Executive plans to introduce the Legal Profession and Legal Aid (Scotland) Bill. Scots who receive poor service from their lawyers will soon be able to claim up to £20,000 in compensation. The current system of self-regulation will be abolished and regulation will be passed to a new commission—an independent body with an inbuilt majority of lay members. That will be funded by a levy on lawyers and an additional charge on the firms that attract the most complaints. I am not sure how, if at all, that will affect people who have been mis-sold endowment mortgages. However, it will be interesting to pursue that aspect of the matter, and I should be grateful if the Minister could give me some information about it.
The Minister said in his letter that consumers who have taken financial advice in Scotland subsequent to 1 December 2005 will all benefit from the framework of protection set out in the Financial Services and Markets Act 2000. Presumably the new Scottish legislation will not be relevant to them, as financial services are reserved to Westminster and consumers throughout the UK have enjoyed the same rights since 2005. Clearly, that is how it should have been all along and it was a mistake to exclude solicitors from regulation by the FSA when the legislation was introduced. In any case, many Scottish solicitors were registered with the FSA in the 1990s prior to December 2001 when the Act came into effect.
I have been asked to explain why in those circumstances people cannot have access to the FSA complaints system, including the ability to apply to the Financial Ombudsman Service for an adjudication on an endowment mis-selling case. Also, many solicitors acted as agents for bodies, such as building societies, that come under FSA regulation. What are the implications of that? Has the Minister looked into whether there is any scope for the financial services ombudsman to consider those cases as appropriate?
That brings me to the thorny subject of retrospection. I am aware that the Government regard it as a problem, but in the light of what I have explained it is essential to consider what could be done to help the group in question, by any means available. I know that discussions have taken place between the Treasury and the Scottish Executive, and I hope that my hon. Friend can shed some light on a possible way forward.
