Lloyds Bank has been ordered to compensate a life insurance customer after it failed to convince the 'insistent' client to take out a more suitable policy.
In a Financial Ombudsman Service decision, partly upheld in July, the ombudsman found the client had taken out an unsuitable form of life insurance to cover her mortgage and — given the adviser's report did not provide a reason for the choice — she was owed compensation.
The customer, who the Fos called Miss H, initially complained that she was missold the policy because she was obliged to take out level term assurance (LTA) as a condition of a mortgage she had arranged with Lloyds in 1990.
An LTA policy is a form of life insurance where the amount of cover stays the same, compared to decreasing term assurance (DTA) where the cover gets smaller over time.
During the initial investigation, the adjudicator flagged that Lloyds had arranged an LTA for Miss H rather than a DTA, more typically taken out for loans that decrease the way mortgages do.
Although Miss H had not initially complained about this fact, the adjudicator recommended Lloyds compensate Miss H for the difference in cost between the LTA policy she took out and a DTA she ought to have bought, plus interest.
Lloyds rejected this, arguing its adviser had told Miss H to take out a DTA but that she had opted for an LTA instead.
When the case was referred to the ombudsman, ombudsman Kim Davenport saw a 'recommendation analysis' form — completed by the adviser in July 1990 — which showed they had advised Miss H to take out a DTA policy.
But Mr Davenport said: “While Lloyds has said that Miss H insisted on taking out a LTA policy, and this was recorded by the adviser at the time, I would have expected to see a reason given for her wanting the increasingly surplus life cover this policy provided as she repaid the capital loan.”
The ombudsman therefore ordered Lloyds to compensate Miss H for the difference between the cost of an LTA and DTA policy.
However Lloyds dodged potentially hefty compensation costs as the ombudsman ruled in its favour over Miss H's complaint that the policy had been missold to begin with.
Miss H complained the policy had been missold because she already had life cover and that the amount of cover was too much (the initial £45,000 total rather than the £43,700).
Miss H had first approached Lloyds for a mortgage in April 1990 and initially opted for a repayment loan of £45,000.
A fact find — conducted with Lloyds and completed in August 1990 — recorded she would borrow £43,700 over the 25 years and not the £45,000 previously agreed, but when the mortgage completed the amount of cover on the LTA stayed at £45,000.
Miss H said she first complained to Lloyds about the LTA policy in November 2015 but the ombudsman could find no record of a complaint dated prior to July 2018. Eventually a telephone call in September 2018 between Lloyds and Miss H established the precise nature of her complaint.
Lloyds sent a ‘final response letter’ where the bank appreciated the policy had been set up with too much cover and agreed to refund the excess premiums plus interest.
But the bank refuted her other complaint, rebutting it did not accept the type of life insurance Miss H already had — a death-in-service benefits through her pension scheme — to cover the mortgage, which was the reason she had been required to take out an LTA policy.
The adjudicator and the ombudsman backed Lloyds and said the bank was entitled to require borrowers to have adequate life insurance in place as a condition of lending and that it was a “legitimate commercial decision” at the time.
Mr Davenport agreed with the bank that Miss H's death-in-service benefit could not be used as cover for a mortgage, as the lump sum was unlikely to be sufficient to cover the loan and Miss H could have nominated a family member and Lloyds would not have claim to the funds.
Mr Davenport also acknowledged the bank had already agreed to pay out the difference between the £45,000 and the £43,7000 cover.
Therefore overall, the ombudsman ordered Lloyds to compensate Miss H for the difference between the overall costs of an LTA policy for £45,000 (the policy she did take out) and the policy she ought to have had — a DTA policy for £43,700 — plus interest.
imogen.tew@ft.com
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