Related provisions for PERG 6.7.3
Typical recommendations and whether they will be regulated as advice on contracts of insurance under article 53(1)2 of the Regulated Activities Order. This table belongs to PERG 5.8.4 G.2
Recommendation |
Regulated under article 53(1)2 or not? |
I recommend you take the ABC Insurers motor insurance policy |
Yes. This is even the case if ABC Insurers has many different motor insurance policies, as explained in PERG 4.6.6 G. Although PERG 4.6.6 G is about mortgages the same reason applies to insurance.1 |
I recommend that you take out the GHI Insurers life insurance policy |
Yes |
I recommend that you do not take out the ABC Insurers motor insurance policy |
Yes. See the entry in this table for the recommendation to take out the ABC Insurers motor insurance policy.1 |
I recommend that you do not take out the GHI Insurers life insurance policy |
Yes |
I recommend that you take out either the ABC Insurers motor insurance policy or the DEF Insurers motor insurance policy |
Yes |
I recommend that you take out either the GHI Insurers life insurance policy or the JKL Insurers life insurance policy |
Yes1 |
I recommend that you take out (or do not take out) contents insurance |
No, unless a specific insurance policy is implied by the context |
I recommend that you take out (or do not take out) life insurance |
No, unless a specific insurance policy is implied by the context |
Example 1 |
|
Capital shortfall and higher endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 5 years |
|
Established facts |
|
Endowment surrender value: |
£3,200 |
Capital repaid under equivalent repayment mortgage: |
£4,200 |
Surrender value less capital repaid: |
(£1,000) |
Cost of converting from endowment mortgage to repayment mortgage: |
(£200) |
Total outgoings to date |
|
Equivalent repayment mortgage (capital + interest + DTA life cover): |
£21,950 |
Endowment mortgage (endowment premium + interest): |
£22,250 |
Difference in outgoings (repayment - endowment): |
(£300) |
Basis of compensation |
|
In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid and also because of the higher total outgoings to date of the endowment mortgage relative to the repayment mortgage. The two losses and the conversion cost are therefore added together in order to calculate the redress. |
|
Redress |
|
Loss from surrender value less capital repaid: |
(£1,000) |
Loss from total extra outgoings under endowment mortgage: |
(£300) |
Cost of converting to repayment mortgage: |
(£200) |
Total loss: |
(£1,500) |
Therefore total redress is: |
£1,500 |
Example 2 |
|
Capital shortfall partially offset by lower endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 5 years |
|
Established facts |
|
Endowment surrender value: |
£2,500 |
Capital repaid under equivalent repayment mortgage |
£4,200 |
Surrender value less capital repaid under equivalent repayment mortgage: |
(£1,700) |
Cost of converting from endowment mortgage to repayment mortgage |
(£300) |
Total outgoings to date: |
|
Repayment mortgage (capital + interest + DTA life cover): |
£21,950 |
Endowment mortgage (endowment premium + interest): |
£21,350 |
Difference in outgoings (repayment - endowment): |
£600 |
Basis of Compensation |
|
In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid but has gained form the lower outgoings of the endowment mortgage to date. In calculating the redress the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. |
|
Redress if it is not unreasonable to take account of the whole of the gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£1,700) |
Gain from total lower outgoings under endowment mortgage: |
£600 |
Cost of converting to repayment mortgage: |
(£300) |
Net loss: |
(£1,400) |
Therefore total redress is: |
£1,400 |
Redress if it is unreasonable to take account of gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£1,700) |
Gain from total lower outgoings under endowment mortgage: |
Ignored* |
Cost of converting to repayment mortgage: |
(£300) |
Net loss taken into account: |
(£2,000) |
Therefore total redress is: |
£2,000 |
* In this example, and also in Examples 3, 7, 8 and 9, the complainant's circumstances are assumed to be such as to make it unreasonable to take account of any of the gain from lower outgoings. |
Example 3 |
|
Capital shortfall more than offset by lower endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 8 years |
|
Established facts |
|
Endowment surrender value: |
£7,300 |
Capital repaid under equivalent repayment mortgage: |
£7,600 |
Surrender value less capital repaid: |
(£300) |
Cost of converting from endowment mortgage to repayment mortgage: |
(£200) |
Total outgoings to date: |
|
Repayment mortgage (capital + interest + DTA life cover): |
£34,510 |
Endowment mortgage (endowment premium + interest): |
£33,990 |
Difference in outgoings (repayment - endowment): |
£520 |
Basis of Compensation |
|
In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid but has gained from the lower total outgoings of the endowment mortgage. In calculating redress the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. |
|
Redress if it is not unreasonable to take account of the whole of the gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£300) |
Gain from total lower outgoings under endowment mortgage: |
£520 |
Cost of converting to repayment mortgage: |
(£200) |
Net gain: |
£20 |
Therefore, there has been no loss and no redress is payable. |
|
Redress if it is unreasonable to take account of gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£300) |
Gain from total lower outgoings under endowment mortgage: |
Ignored |
Cost of converting to repayment mortgage: |
(£200) |
Net loss taken into account: |
(£500) |
Therefore total redress is: |
£500 |
Example 4 |
|
Capital surplus more than offset by higher endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 8 years |
|
Established facts |
|
Endowment surrender value: |
£7,800 |
Capital repaid under equivalent repayment mortgage: |
£7,600 |
Surrender value less capital repaid: |
£200 |
Cost of converting from endowment mortgage to repayment mortgage: |
(£250) |
Total outgoings to date: |
|
Repayment mortgage (capital + interest + DTA life cover): |
£34,510 |
Endowment mortgage (endowment premium + interest): |
£34,950 |
Difference in outgoings (repayment - endowment): |
(£440) |
Basis of Compensation |
|
In this example, the complainant has suffered loss because of the higher total outgoings to date of the endowment mortgage but has gained because the surrender value of the endowment is greater than the capital repaid. Since the sum of the loss and the conversion cost is greater than the gain, the redress is calculated as the difference between the two. |
|
Redress |
|
Gain from surrender value less capital repaid: |
£200 |
Loss from total extra outgoings under endowment mortgage: |
(£440) |
Cost of converting to repayment mortgage: |
(£250) |
Net loss: |
(£490) |
Therefore total redress is: |
£490 |
Example 5 |
|
Capital surplus partially offset by higher endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 10 years |
|
Established facts |
|
Endowment surrender value: |
£11,800 |
Capital repaid under equivalent repayment mortgage |
£9,700 |
Surrender value less capital repaid: |
£2,100 |
Cost of converting from endowment mortgage to repayment mortgage: |
(£300) |
Total outgoings to date: |
|
Repayment mortgage (capital + interest + DTA life cover): |
£46,800 |
Endowment mortgage (endowment premium + interest): |
£47,500 |
Difference in outgoings (repayment - endowment): |
(£700) |
Basis of Compensation |
|
In this example, the complainant has suffered loss because of the higher total outgoings to date of the endowment mortgage relative to the repayment mortgage. However the sum of this and the conversion cost is less than the complainant's gain from the difference between the surrender value of the endowment and the capital repaid. Thus no redress is payable. |
|
Redress |
|
Gain from surrender value less capital repaid: |
£2,100 |
Loss from total extra outgoings under endowment mortgage: |
(£700) |
Cost of converting to repayment mortgage: |
(£300) |
Net gain: |
£1,100 |
Therefore, there has been no loss and no redress is payable. |
Example 6 |
|
Capital surplus and lower endowment mortgage outgoings |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 10 years |
|
Established facts |
|
Endowment surrender value: |
£10,100 |
Capital repaid under equivalent repayment mortgage |
£9,700 |
Surrender value less capital repaid: |
£400 |
Cost of converting from endowment mortgage to repayment mortgage: |
(£200) |
Total outgoings to date: |
|
Repayment mortgage (capital + interest + DTA life cover): |
£46,800 |
Endowment mortgage (endowment premium + interest): |
£46,300 |
Difference in outgoings (repayment - endowment): |
£500 |
Basis of Compensation |
|
In this example, the complainant has gained both because the surrender value of the endowment is greater than the capital repaid and because of the lower total outgoings of the endowment mortgage. These gains are larger than the cost of converting to a repayment mortgage. Thus no further action is necessary. |
|
Redress |
|
As there has been no loss, no redress is payable. |
Example 7 |
|
Low start endowment mortgage |
|
Background |
|
Capital sum of £50,000 |
|
25 year endowment policy |
|
Duration to date: 10 years |
|
Endowment premium per month: starting at £35 in first year, increasing by 20% simple on each policy anniversary, reaching £70 after five years and then remaining at that level. |
|
Established facts: |
|
Endowment surrender value: |
£8,200 |
Capital repaid under equivalent repayment mortgage: |
£9,700 |
Surrender value less capital repaid: |
(£1,500) |
Cost of converting from endowment mortgage to repayment mortgage: |
(£250) |
Total outgoings to date |
|
Repayment mortgage (capital + interest + DTA life cover): |
£46,800 |
Endowment mortgage (endowment premium + interest): |
£45,640 |
Difference in outgoings (repayment minus endowment): |
£1,160 |
Of this difference in outgoings, £800 arose in the five year period when the complainant was paying a low endowment premium. |
|
Basis of compensation |
|
In this example, the complainant has suffered loss because the surrender value of the endowment is less than the capital repaid but has gained from the lower total outgoings of the endowment mortgage. As in Example 3, in calculating redress the whole of the gain should be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to do so. However, unlike Example 3, in a low start endowment mortgage the complainant may have chosen to pay a lower than usual premium in the early years (this would need to be established on the facts of the case). Where it has been established that the complainant chose to make lower payments, even if it is unreasonable to take account of the whole of the gain from total outgoings, the gain from paying a lower premium during the low start period is normally taken into account. In such cases the redress is calculated as the capital loss plus the conversion cost minus the total amount by which repayment mortgage outgoings would have exceeded the actual low start endowment mortgage outgoings during the five year low start period. |
|
Redress if it is not unreasonable to take account of the whole of the gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£1,500) |
Gain from total lower outgoings under endowment mortgage: |
£1,160 |
Cost of converting to repayment mortgage: |
(£250) |
Net loss: |
(£590) |
Therefore total redress is: |
£590 |
Redress if it is unreasonable to take account of gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£1,500) |
Gain from total lower outgoings during low start period of endowment mortgage: |
£800 |
Cost of converting to repayment mortgage: |
(£250) |
Net loss taken into account: |
(£950) |
Therefore total redress is: |
£950 |
Application of article 33 to arrangements for making introductions. This table belongs to PERG 5.6.20 G.
Type of introduction |
Applicability of exclusion |
|
1 |
Introductions are purely for the purpose of the provision of independent advice – Introducer is completely indifferent to whether or not transactions take place after advice has been given. |
Exclusion not relevant as introducer is not arranging under article 25(2). |
2 |
Introduction is one-off or otherwise not part of pre-existing ongoing arrangements that envisage such introduction being made. |
Exclusion not relevant as introducer is not arranging under article 25(2). |
3 |
Introducer is not indifferent to whether or not transactions take place after advice has been given, but is indifferent to whether or not the transactions may involve a contract of insurance. |
Exclusion will be available provided the introduction was made with a view to the provision of independent advice on investments generally. |
4 |
Introducer is not indifferent to whether or not transactions take place after advice has been given (for example, because he expects to receive a percentage of the commission), and introductions specifically relate to contracts of insurance. |
Exclusion is not available. If introducer is an unauthorised person, he will need authorisation or exemption as an appointed representative. If introducer is an authorised person (such as an IFA introducing to a general insurance broker), he will need to vary his Part IV permission accordingly. If introducer is an appointed representative, he will need to ensure that his agreement covers making such arrangements. |
Example 8 |
|
Term extends beyond retirement age and policy reconstruction |
|
Background |
|
45 year old male non-smoker, having taken out a £50,000 loan in 1998 for a term of 25 years. Unsuitable sale identified on the grounds of affordability and complaint raised on 12th policy anniversary. |
|
It has always been the intention of the complainant to retire at State retirement age 65. |
|
Term from date of sale to retirement is 20 years and the maturity date of the mortgage is 5 years after retirement. |
|
Established facts |
|
Established premium paid by investor on policy of original term (25 years): |
£81.20 |
Premium that would have been payable on policy with term from sale to retirement (20 years): |
£111.20 |
Actual policy value at time complaint assessed: |
£12,500 |
Value of an equivalent 20-year policy at time complaint assessed: |
£21,300 |
Difference in policy values at time complaint assessed: |
£8,800 |
£4,320 |
|
Basis of compensation |
|
The policy is reconstructed as if it had been set up originally on a term to mature at retirement age, in this example, a term of 20 years. The difference in the current value of the policy actually sold to the complainant and the current value of the reconstructed policy, as if the premium on the reconstructed policy had been paid from outset, is calculated. The complainant has gained from lower outgoings (lower premiums) of the actual endowment policy to date. In calculating the redress, the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. |
|
Redress generally if it is not unreasonable to take account of the whole of the gain from lower outgoings |
|
Loss from current value of reconstructed policy less current value of actual policy: |
(£8,800) |
Gain from total lower outgoings under actual policy: |
£4,320 |
Net loss: |
(£4,480) |
Therefore total redress is: |
£4,480 |
Redress if it is unreasonable to take account of gain from lower outgoings |
|
Loss from current value of reconstructed policy less current value of actual policy: |
(£8,800) |
Gain from total lower outgoings under actual policy: |
Ignored |
Therefore total redress is: |
£8,800 |
Additional Information |
|
If the policy is capable of reconstruction, the complainant must now fund the higher premiums himself for the remainder of the term of the shortened policy until maturity. In this example the higher premium could be £111.20. However the firm should provide the complainant with a reprojection letter based on the reconstructed policy such that the actual monthly payment required to achieve the target sum could be even higher, say £130. The reprojection letter should set out the range of options facing the complainant to deal with the projected shortfall, if any. |
Example 9 |
|
Term extends beyond retirement age: example of failure to explain investment risks |
|
Background |
|
45 year old male non-smoker, having taken out a £50,000 loan in 1998 for a term of 25 years. Unsuitable sale identified on the grounds of affordability and complaint raised on 12th anniversary. |
|
It has always been the intention of the complainant to retire at state retirement age 65. |
|
Term from date of sale to retirement is 20 years and the maturity date of the mortgage is five years after retirement. |
|
In addition, an endowment does not meet the complainant's attitude to investment risk and a repayment mortgage would have been taken out if properly advised. |
|
Established facts |
|
Surrender value (on the 25 year policy) at time complaint assessed: |
£12,500 |
Capital repaid under repayment mortgage of term to retirement date (20 years): |
£21,000 |
Surrender value less capital repaid: |
(£8.500) |
Difference in outgoings (repayment - endowment): |
£5,400 |
Cost of converting from endowment mortgage to repayment mortgage: |
£200 |
Basis of compensation: |
|
The surrender value of the (25 year term) endowment policy is compared to the capital that would have been repaid to date under a repayment mortgage arranged to repay the loan at retirement age, in this example, a repayment mortgage for a term of 20 years. The complainant has gained from lower outgoings of the endowment mortgage to date. In calculating the redress, the gain may be offset against the loss unless the complainant's particular circumstances are such that it would be unreasonable to take account of the gain. The conversion costs are also taken into account in calculating the redress. |
|
Redress generally |
|
Loss from surrender value less capital repaid: |
(£8,500) |
Gain from total lower outgoings under endowment mortgage: |
£5,400 |
Cost of converting to a repayment mortgage: |
(£200) |
Net loss: |
(£3,300) |
Therefore total redress is: |
£3,300 |
Redress if it is unreasonable to take account of gain from lower outgoings |
|
Loss from surrender value less capital repaid: |
(£8,500) |
Gain from total lower outgoings under endowment mortgage: |
Ignored |
Cost of converting to a repayment mortgage: |
(£8,700) |
Therefore total redress is: |
£8,700 |