Related provisions for DISP App 1.4.13

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To access the FCA Handbook Archive choose a date between 1 January 2001 and 31 December 2004 (From field only).

12It would not be unreasonable if a firm providing redress in these circumstances were to frame its offer of redress on the assumption that the complainant will agree to surrender the policy. However, firms should bear in mind that there may be circumstances where it is appropriate for the complainant to retain the policy, for example, where it is being retained as a savings vehicle.
12The standard approach to redress can be illustrated by the following examples, which show how redress would be calculated in certain hypothetical but typical scenarios. (Because the examples are illustrative, round numbers have been used for 'established facts' in each example. The payments should be taken as being made monthly: firms should not approximate by assuming that payments are made annually. If the complainant has benefited from MIRAS, the calculations should allow

12Table of examples of typical redress calculations

Example 1

Capital shortfall and higher endowment outgoings

Example 2

Capital shortfall partially offset by lower endowment mortgage outgoings

Example 3

Capital shortfall more than offset by lower endowment mortgage outgoings

Example 4

Capital surplus more than offset by higher endowment mortgage outgoings

Example 5

Capital surplus partially offset by higher endowment mortgage outgoings

Example 6

Capital surplus and lower endowment mortgage outgoings

Example 7

Low start endowment mortgage

12Example 1

Example 1

Capital shortfall and higher endowment mortgage outgoings

Background

Capital sum of £50,000

25 year endowment policy

Duration to date: 5 years

Endowment premium per month: £75

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

12Example 2

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

Endowment premium per month: £60

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.

12Example 3

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

Endowment premium per month: £65

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

12Example 4

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

Endowment premium per month: £75

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

12Example 5

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

Endowment premium per month: £75

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.

12Example 6

Example 6

Capital surplus and lower endowment mortgage outgoings

Background

Capital sum of £50,000

25 year endowment policy

Duration to date: 10 years

Endowment premium per month: £65

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.

12Example 7

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

DISP App 3.7.8ERP
If a firm chooses to make this presumption, then it should do so fairly and for all relevant complainants in a relevant category of sale. It should not, for example, only use the approach for those complainants it views as being a lower underwriting risk or those complainants who have cancelled their policies.
The firm should, for the purposes of redressing the complaint, use the value of £9 per £100 of benefits payable as the monthly price of the alternative regular premium payment protection contract. For example, if the monthly repayment amount in relation to the loan only is to be £200, the price of the alternative regular premium payment protection contract will be £18.
DISP App 1.4.9GRP
12If it is not possible for a firm to reconstruct a policy, then it should offer the investor equivalent redress, for example, by paying a cash lump sum equivalent to the amount that would have been credited to a reconstructed policy.

12Example 8

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

Difference in outgoings (20 year policy - 25 year policy):

£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.

12Example 9

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

12Example of assessment set out at 1.3.10

The following example illustrates the position:

Surrender value

£10,000

TEP value

£16,000

Loss calculated by standard approach

£5,000

Remortgaging costs

£300

Total

£15,300

Complainant receives £16,000 all ultimately funded from the TEP sale.

Surrender value

£10,000

TEP value

£13,000

Redress calculated by standard approach

£5,000

Remortgaging costs

£300

Total

£15,300

Complainant receives £15,300, £13,000 ultimately funded from the TEP sale and £2,300 ultimately funded from the firm.

DISP App 3.1.5GRP
In this appendix:(1) "historic interest" means the interest the complainant paid to the firm because a single premium payment protection contract was added to a loan or credit product;(2) "simple interest" means a non-compound rate of 8% per annum; and(3) "claim" means a claim by a complainant seeking to rely upon the policy under the payment protection contract that is the subject of the complaint.
DISP App 3.9.2GRP
In assessing redress, the firm should consider whether there are any other further losses that flow from its breach or failing that were reasonably foreseeable as a consequence of the firm's breach or failing, for example, where the payment protection contract's cost or rejected claims contributed to affordability issues for the associated loan or credit which led to arrears charges, default interest, penal interest rates or other penalties levied by the lender.
DISP App 3.4.1GRP
DISP 1.3.3 R requires the firm to put in place appropriate management controls and take reasonable steps to ensure that in handling complaints it identifies and remedies any recurring or systemic problems. If a firm receives complaints about its sales of payment protection contracts it should analyse the root causes of those complaints including, but not limited to, the consideration of:(1) the concerns raised by complainants (both at the time of the sale and subsequently);(2)
DEPP 6.5D.4GRP
(1) The FCA3 will consider reducing the amount of a penalty if a firm will suffer serious financial hardship as a result of having to pay the entire penalty. In deciding whether it is appropriate to reduce the penalty, the FCA3 will take into consideration the firm’s financial circumstances, including whether the penalty would render the firm insolvent or threaten the firm’s solvency. The FCA3 will also take into account its statutory objectives3, for example in situations where
DEPP 6A.2.3GRP
The FCA1 will consider it appropriate to impose a suspension, restriction, condition,3 limitation3 or disciplinary prohibition3 where it believes that such action will be a more effective and persuasive deterrent than the imposition of a financial penalty alone. This is likely to be the case where the FCA1 considers that direct and visible action in relation to a particular breach is necessary. Examples of circumstances where the FCA1 may consider it appropriate to take such
DEPP 6.7.1GRP
Persons subject to enforcement action may be prepared to agree the amount of any financial penalty, or the length of any period of suspension, restriction, condition,5 limitation or disciplinary prohibition5 (see DEPP 6A)4, and other conditions which the FCA seeks to impose by way of such action. These4 conditions might include, for example, the amount or mechanism for the payment of compensation to consumers. The FCA recognises the benefits of such agreements, as4 they offer
ICOBS 3.2.8RRP
The requirements relating to the placing and receipt of orders do not apply to contracts concluded exclusively by exchange of e-mail or by equivalent individual communications.[Note: article 10(4) and 11(3) of the E-Commerce Directive]
EG 10.2.2RP
1The broad test the FCA will apply when it decides whether to seek an injunction is whether the application would be the most effective way to deal with the FCA's concerns. In deciding whether an application for an injunction is appropriate in a given case, the FCA will consider all relevant circumstances and may take into account a wide range of factors. The following list of factors is not exhaustive; not all the factors will be relevant in a particular case and there may be
EG 11.1.3RP
1The FCA has power to apply to the court for a restitution order under section 382 of the Act and (in the case of market abuse) under section 383 of the Act. It also has an administrative power to require restitution under section 384 of the Act. When deciding whether to exercise these powers, the FCA will consider whether this would be the best use of the FCA's limited resources taking into account, for example, the likely amount of any recovery and the costs of achieving and