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Case studies

Endowment complaints

Introduction

Endowment cases once comprised almost 20% of the workload of my office. I now see fewer complaints, but I do still receive many complaints about Law Society of Scotland handling of these cases. Often the complaints to me are made by third party agents and often they indicate that there is a great deal of misunderstanding about how both I and the Law Society of Scotland approach these types of complaints.

The Law Society of Scotland operates under law set by Parliament. It cannot simply make up the rules under which it deals with cases. The law it operates under is not the same as the law that the Financial Ombudsman Service (FOS) operates under. I say this as I find people often complain that the FOS would have come to a different conclusion and taken different things into account. I too operate according to the law under which my office was established. This means I am often limited in what I can do. In particular where the Law Society of Scotland has followed existing law, or there is no evidence to support the complaint made. Law was set and policy applied regarding necessity for and form of evidence required, well in advance of my coming into office and consistency of approach is now an important issue.

Rather than recount case studies I detail below my role and frequently asked questions about these cases to set out how they are consistently dealt with.

The Ombudsman’s role

Like the Law Society of Scotland as the Scottish Legal Services Ombudsman I have no power to assess or order compensation for shortfalls, or potential shortfalls on endowment policies. As with other complaints, I can only investigate the Law Society of Scotland’s handling of the complaint and can not look at the original complaint against the solicitors and the alleged mis-selling.

It follows I am unable to overturn the Law Society’s decision in endowment cases, or indeed any complaints. As Ombudsman I can look at the reasoning and available evidence to see whether or not the manner of decision-making by the Law Society appeared reasonable, but I can only assess the Law Society against the policies and powers that were in place at that time (as determined by Parliament). Please visit the Law Society of Scotland’s web site for further information on their policies and practice concerning endowment mis-selling complaints.

Types of common complaints and Scottish Legal Services Ombudsman’s response

The Law Society refused to investigate my endowment mis-selling complaint because they said it was time barred as I complained more than three years after receiving my second warning letter

A complaint concerning the advice received by a Scottish solicitor in connection with endowment policies must be made to the Law Society within 3 years of the second warning letter advising you of a potential shortfall on your policy. This differs from the Financial Services Authority (FSA) rules on time bar. FSA requires complaints to be brought within 3 years of a Red (high risk) projection letter. Under Law Society policy, the warnings do not have to be Red. Also since 1 June 2004 firms have been required by the FSA to give six months notice of the date after which the complaint would be time barred. The Law Society does not require firms to do this.

I investigate and assess each case on a case by case basis, but generally if the Law Society has followed its own policies for time bar consistently, I am not critical. Consistency in approach to these cases is now a crucial matter.

If, however, the complainer has information from their policy provider which gives them a date by which they need to complain by, and the complainer complains by this deadline, even although this is outside the Law Society’s time limits, I generally ask the Law Society to reconsider its decision not to investigate the complaint.

The Law Society refused to investigate my complaint about my policy sold by a solicitor in 1988 because it said it had no power to do so

Again, as Ombudsman I can only assess the Law Society’s handling of a complaint against the Law Society’s established rules and guidelines.

Only after the Solicitors (Scotland) Act 1988 came into effect on 30 January 1989 were solicitors required by law to provide an adequate professional service and that was accompanied by the Law Society having the power to investigate complaints of poor service. Prior to that, the Law Society had no power to consider the question of the service provided. The Law Society did not acquire the legal power to order solicitors to pay compensation until mid 1991, and even then that is limited to £1,000.

If I can see that the Case Manager explained the Law Society’s powers in relation to inadequate professional service and it appears that the advice was provided before 30 January 1989 I am normally satisfied with the manner of decision-making by the Law Society of Scotland.

Further the Law Society of Scotland normally explains that it could investigate a complaint of professional misconduct, but it would be difficult to prove that type of complaint. That is right because the Law Society of Scotland did, in 1988, have the powers to investigate complaints of professional misconduct. Professional misconduct has to be proved beyond reasonable doubt. But the Law Society of Scotland does insist that the complaint must from the very beginning look as though it would be capable of passing the full test for professional misconduct. The Law Society of Scotland has obtained Counsel’s Opinion and has accepted Counsel’s advice that the Law Society of Scotland can indeed set a high hurdle at the outset. The Law Society of Scotland puts the obligation on the complainer to provide evidence of professional misconduct. That is a difficult standard to reach. The evidential test is beyond reasonable doubt. The Law Society of Scotland expects complainers making professional conduct allegations to be able to provide evidence more or less at the start of a complaint that is strong enough to trigger the Law Society of Scotland’s obligation to investigate.

If there is no evidence of professional misconduct then the Law Society of Scotland does not investigate and if I agree there is no evidence, I am not normally critical of this manner of decision-making.

The Law Society of Scotland did not take into account my views and appeared to take the solicitors’ word for it, on the balance of probabilities, even though the solicitors had destroyed their file

The Law Society of Scotland has a complaints process that, like many other complaints processes, relies on evidence in order to prove, or disprove a complaint. One of the problems with many endowment complaints is the lack of evidence.

Written evidence is preferable to peoples’ recollections in these cases. Often recollections concern events when the policy was sold many years ago and memory can fade or verbal accounts of events be contradictory.

Files of the firm of solicitors provide a primary source of written evidence. Unfortunately however these are sometimes just not available. In such cases I check to see whether the Law Society has followed its policies in relation to destruction of files by solicitors. For many of the complaints I see it is the Law Society’s 1989 Investment Business Rules that apply. The 1989 Investment Business Rules for solicitors say that records should be kept for 10 years after the advice was provided but do not specify how much information had to be gathered, filed, or provided to the client. Due to the unspecific nature of these Rules the Law Society of Scotland finds it acceptable if solicitors have destroyed their files after 6 years, in accordance with the Financial Services Authority guidelines. For my part I have to accept this. I am however pressing the Law Society of Scotland to identify what evidence exists to show why, when and how files were destroyed. And whether practice rules require to be tightened in this area. I can understand how frustrating it is to clients to be told the complaint will not succeed as the solicitors have destroyed files.

In all cases I check too to see if the Law Society of Scotland has properly identified what other evidence might be available. Have they for example checked if clients have their own files? Does the policy provider hold records? Sometimes these checks do reveal additional evidence.

If however these checks reveal nothing, then I am bound to accept there is no evidence one way or another. In such cases the Law Society of Scotland does not then reconstruct what probably happened — unlike the Financial Ombudsman Service. Instead a complaint about the service provided is decided on the balance of probabilities and often this means a case cannot succeed as if there is no definite evidence and the Law Society of Scotland cannot positively prove a complaint, it takes no further action.

I have already been awarded compensation for a mis-sold policy by the Financial Ombudsman Service yet the Law Society’s investigation was very limited

Where a policy was purchased though a firm of solicitors before 1 December 2001 it is the Law Society which is the regulator to which the complaint must be brought. The Law Society considers endowment mis-selling complaints against its own Investment Business Rules (IBRs) and assesses whether the firm provided an adequate professional service using its own guidelines and expectations. This is very different from the way the financial services sector assesses endowment mis-selling complaints.

There are various Investment Business Rules each effective at different dates as follow:

The Rules are different and so different considerations apply according to when a policy was purchased. Most complainers are bringing complaints about policies sold in early 1990s so it is these Rules that apply so I set out below the implications, in simple terms, of the different rules.

Conduct of Investment Business Rules 1989

In accordance with the 1989 IBRs as Ombudsman I check to see whether the Law Society of Scotland has acted within its own guidelines. Below is part of the 1989 Rules which are referred to most often by the Law Society, dealing with complaints it receives:

PART 4 CLIENT RELATIONS AND PUBLICATIONS

Know your client and the market (‘best advice’)

4.1 A certified person shall take all reasonable steps to ensure that:

(a) after making due enquiry as to the client’s personal and financial situation and investment objectives and the investments available on the market generally:-

  1. the certified person has an adequate and reasonable basis for any investment recommendations made or to exercise of discretion on behalf of a client; and that where that recommendation is to acquire a life policy or units is a regulated investment scheme, there is no other investment which would be likely to secure the client’s investment objectives more advantageously; and
  2. he is satisfied that the client (other than an execution-only client) understands the risks involved in any investment agreement recommended or effected by the certified person and that any such agreement and any investment recommendation or any exercise of discretion on behalf of a client is suitable for that client;

In answer to complaints about risk or not being advised about the possibility of a shortfall as the Ombudsman I assess the Law Society of Scotland against its own interpretation of the relevant IBRs.

The 1989 Rules say that a solicitor should take reasonable steps to make sure that the client understood the risk involved in any investment agreement recommended or effected by the solicitor. The Law Society of Scotland’s policy on this is that it considers that the reasonable step is covered by the policy provider providing information.

There is nothing in the Rules which states that a solicitor had to give specific advice about possible shortfalls and the risks involved. It was thought that the policy provider would provide sufficient information through their illustrations and any additional information provided at the time the policy was taken out, notably a document showing different examples of growth rates, at least one of which will not produce enough to pay off the mortgage.

Further, there is no specific requirement under the 1989 Rules that the solicitor required to investigate the client’s “attitude to risk”. The Rules required a solicitor to take reasonable steps to find out about a client’s financial position and investment objectives and investments available on the market at the time and ensure that there was no other investment which would be more advantageous in meeting the client’s objectives but this is not the same as requiring a solicitor to establish “attitude to risk”.

The 1989 Rules did not require a solicitor to prepare a formal fact find although a style was available in the guidance notes to the 1988 Rules. The 1989 Rules say that the solicitors should ensure that there was no other investment which would be likely to secure the client’s investment objectives more advantageously. According to the Financial Services Act 1986, a repayment mortgage is not an investment. There was, therefore, no requirement for solicitors to mention a repayment mortgage. This means that a complaint that “Repayment mortgages were not discussed with me” will not succeed.

The solicitor was instead expected to review the market and maintain a central file comparing suitable products from which choices could be made for individual clients. Unfortunately comparisons were not required to be retained on individual client files so unless clients retained notes of what they were told from the time it is rare that a check can be carried out whether appropriate comparison occurred.

Finally, and most importantly I state the Law Society is unable to award compensation on endowment shortfalls. The Society only received the power to award compensation for stress and inconvenience and loss on 3rd June 1991 in addition to its other powers. It follows even if complaints about policies purchased prior to 1991 succeed compensation will not be payable. Moreover, the maximum level of compensation the Society can order a solicitor to pay is £1000 where the advice was given before 1 April 2005 and only £5000 where the advice was given post 1 April 2005. Thus only if endowment loss were at or under these figures can full loss ever be awarded.

Source: http://www.slso.org.uk/cases-endowments.shtml