Prudential has been told to compensate a couple it sold a mortgage endowment to back in 1997.
The Financial Ombudsman Service ruled the insurer must pay up compensation, given the ages of the clients at the time it sold the policy, plus deteriorating health and the sale of a business.
The couple, referred to as Mr and Mrs P, complained about a 20-year term mortgage endowment policy, arguing it was unsuitable and the premiums should be refunded with interest.
The couple, who were represented by a claims management company, said the policy had a sum assured of £100,000, which matched a commercial repayment mortgage they already had in place to finance their business.
The advice involved them replacing an existing whole of life policy held with another provider, because they wanted a product that would also generate a lump sum during their lifetime.
Mr P was aged 60 at inception and Mrs P nearly 50. So premiums would have run beyond Mrs P’s state pension age and would have been a commitment through to age 80 in Mr P’s case.
A Fos adjudicator stated if Mr and Mrs P had wanted to achieve an investment return during their lifetime on the premiums they paid, there were alternative options better aligned with their objectives.
But Prudential disagreed, arguing it considered the alternatives and pointed out that pensions could generally only return a maximum of 25 per cent tax free cash, compared with the endowment if it ran its term.
It was recorded by the provider that Mr and Mrs P wanted to invest in a with-profits fund, which wouldn’t be an option via a personal equity plan (Pep).
The term of 20 years appeared not to have been a problem, as the premiums would be met by the family business, which was at the time it was operating on a profitable basis, Prudential added.
At this point, the adjudicator reminded Prudential that Mr P’s health was rapidly deteriorating and Mr P retired at the age of 71 when the business was sold, with the commercial loan repaid six years earlier in 2004.
The adjudicator said Mr and Mrs P had therefore not been served well by the endowment, owing to its inherent inflexibility.
Prudential noted a large investment made by the couple in a Prudential Inheritance bond in 2009, following the sale of their business.
This was sold by another adviser unconnected with the one that sold the endowment policy, but Prudential suggested the decision to surrender the endowment one year later in 2010 was therefore unlikely to be influenced by affordability issues.
Reviewing the case, ombudsman James Harris said Mr and Mrs P’s main objectives in 1997 were to ensure their business’ commercial mortgage remained protected, while also generating a lump sum for the future.
He said what was in dispute was whether a 20-year term endowment policy – the Home Purchaser plan – was a suitable means by which to try and meet these objectives.
His final decision stated the plan was not suitable and demanded Prudential compensate the pair.
“I accept that on the face of it, the new plan might’ve looked like quite good value when compared to the existing whole of life policy, which Mr and Mrs P had put in place three years earlier, in 1994,” it read.
“For an extra £70 per month, the endowment would provide the same level of £100,000 of life cover but also (to an extent) address Mr and Mrs P’s savings requirement.
“But the purpose of the 1997 recommendation wasn’t simply to try and ‘improve’ on what was already in place. In many respects that was immaterial. Rather, the purpose was to provide Mr and Mrs P with a suitable means by which to meet their objectives at that time.”
Mr Harris said the recommended endowment policy provided life and critical illness cover far beyond the remaining seven year term of the commercial mortgage – and on a level basis that the repayment mortgage didn’t require.
From a savings perspective, for the policy to be fully effective, Mr Harris said it committed them to meeting the premiums of more than £400 per month until around Mr P’s 80th birthday and well past Mrs P’s retirement.
Prudential was told to pay to Mr and Mrs P a refund of the premiums paid to the Home Purchaser policy; less the cost of £100,000 of decreasing life and critical illness cover for the first seven years from commencement of the policy only and minus the surrender value paid in August 2010.
Prudential must add 8 per cent simple interest on each premium added to the date of settlement.
