Williams (R) v Financial Ombudsman Service
| Jurisdiction | England & Wales |
| Judge | MR JUSTICE IRWIN |
| Judgment Date | 03 July 2008 |
| Neutral Citation | [2008] EWHC 2142 (Admin) |
| Court | Queen's Bench Division (Administrative Court) |
| Docket Number | CO/3334/2007 |
| Date | 03 July 2008 |
[2008] EWHC 2142 (Admin)
Mr Justice Irwin
CO/3334/2007
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
THE ADMINISTRATIVE COURT
Royal Courts of Justice
Strand
London WC2A 2LL
Mr G Wheeler (instructed by Lawcomm Solicitors) appeared on behalf of the Claimant
Mr J Moffett (instructed by Financial Ombudsman Service) appeared on behalf of the Defendant
In this case the claimant is an independent financial adviser, or was at the time of the events which give rise to the application for judicial review. He has now retired, as the court has been informed.
He advised a client, Mr Christopher Bennett, from 1992, and in a number of ways. In 2002 Mr Bennett was 65 years of age and was contemplating retirement. Being careful with his money, he made a number of investments, including some by-to—let property and two endowment policies. He had also acquired some bonds, ISAs and PEPs.
At the same time he was not a rich man and he needed, within limits, to husband his resources. Nor was he or had he ever been a financial professional; he was by profession an architect. Nor was he particularly sophisticated in his financial dealings.
Mr Williams wrote a report for Mr Bennett, dated 26th April 2002 recording Mr Bennett's investment objectives as follows:
“1. Produce sufficient net spendable income from the pensions and investment income to support Christopher's life-style with the State Pension now being paid, we need to consider carefully what is needed from his other pension funds, if anything at the moment.
2. Maintain Capital Growth to a level that would provide reserves of income as and when needed in the most tax efficient manner. Here TEPs would help to build up capital over the next 10 years —as will the purchase of the second property.
3. Protect the Pension Funds we have set up, particularly in view of the market slump over the past 2 years and 4 months. Too much was taken out too early but it was needed.”
As the defendants adjudicator, Mr Daubney later accurately summarised it:
“The overall aims of the planning to be made in April 2002 were therefore to establish security for the pension provision made whilst at the same time trying to increase the level of income available to Mr Bennett with the possibility of some capital growth. There was no formal analysis of the level of risk Mr Bennett was prepared to accept to meet these requirements.”
Mr Bennett met with Mr Williams again on 1st May 2002 to discuss the prospect of investing in geared Traded Endowment Policies [“TEPs”]. Since it was this advice which was later complained of and this investment which proved a failure, it is necessary to summarise what this meant. An endowment policy is a familiar and long-standing financial vehicle, by which premiums are paid and an insurance company invests those premiums or the sums accumulated from their previous investment. There is usually an element of life insurance within the policy. The product of the investment, after cost is repaid to the policy holder, is largely in the form of bonuses. Bonuses are normally declared each year meaning that the bonus declared is crystallised and, even if the value of the underlying holdings declines, that bonus has been finally allocated to the credit of the policy holder's account. It follows that a conservative approach is usually taken by insurers in the declaration of annual bonuses. There is normally a terminal bonus when the policy matures. By then the risk is abolished for the insurer, since the total return on the investment over the life of the policy can be seen. Thus terminal bonuses tend always to be the key element in making an endowment policy a worthwhile investment. Broadly speaking, with such an investment vehicle as an endowment policy, it is highly desirable to go through to the maturity of the policy.
Every endowment policy has a surrender value, relatively low compared to the prospective total return on the endowment over its life to maturity. The surrender value is what the policy holder can realise from the insurer, if he or she has to stop paying or chooses to stop paying.
By at least the 1990s, investors realised that such policies could be traded, precisely because the surrender value was less than value of the policy to someone who could be assigned the interest and carry the policy though to maturity. Hence the policy holder could sell the interest, get more than the surrender value, and yet still the assignee had the prospect of a return on the exchange. It was for those reasons that a market grew up in traded endowment policies. Those are the basics.
The structure of the investment offered to Mr Bennett had some refinements. He was to invest directly some of his own money in the purchase of the policies offered to him but the majority of the purchase price was to be loaned to him by the Newcastle Building Society, acting as a bank. The continuing stream of premium payments necessary to carry the policies to maturity would also be funded from that loan.
The building society would take the TEPs themselves as security, valued at a proportion of their surrender value, from time to time, while also taking a charge on other PEPs and investments owned by Mr Bennett. The premium stream thus had the effect, since it was being funded by loan, of creating a build-up of debt, the interest on the successive borrowed premiums itself being added to the monies owed, with a compound effect. The purpose of borrowing to purchase the policies and to fund the premium stream was said to be to enable Mr Bennett to invest enough to make the whole scheme worthwhile. The policies were deliberately chosen with successive maturity dates from 2008 to 2014, in order to ensure Mr Bennett could maximise his capital gains tax relief, one of the advantages of this scheme being that gains are capital gains and are not subject to income tax. As I have observed, the adjudicator found there was no formal risk analysis of this transaction to Mr Bennett, a fact which is not itself the subject of criticism.
Mr Bennett entered the contracts with Policy Portfolio on 15th May 2002. The starting value of the loan for him was £84,942, which purchased seven TEPs for a total price of £79,848, the remainder of the loan being devoted to paying premiums.
One aspect of this deal, present no doubt in the small print, was that the Newcastle Building Society had the right to withdraw from advancing further monies to pay premiums if they felt that their security was becoming insufficient. Since their principal security consisted of a proportion of the surrender value of the policies themselves, calculated from time to time, this meant in effect that the building society could withdraw if the returns on the policies became too poor.
The security on the surrender values of the policies must of course be taken to have been satisfactory at the outset, otherwise the building society would not have entered the agreement. Of course the surrender values could change as time went on, depending on the underlying performance of the assets. It is agreed by Mr Williams that he did not warn Mr Bennett of this factor as a risk.
These policies did not perform well for Mr Bennett. It was suggested by Mr Wheeler, counsel for the claimant, that this was in fact because of a change in the mix of investments which yielded the gross returns for the endowment policies, whereby a much more cautious investment approach was followed, with reduced equity holdings. This was not challenged as a major cause by the defendant. As the claim in this action recites:
“The Newcastle Building Society continued to pay the premiums due under the policies until September 2005. At that time, in view of the fact that the TEPs had performed poorly, and the loan value had exceeded the percentage of the surrender values of the TEPs, it would not pay any further premiums. Mr Bennett has incurred a substantial loss as a result of his investment in TEPs (a loss estimated by the claimant to be in the region £30,000 to £40,000). He is incurring interest charges under the loan at the rate of £16.39 a day.”
The short procedural history of this complaint and case from that point is as follows. Mr Bennett made a complaint to the Financial Ombudsman Service about the advice received from the claimant on 6th December 2005. In accordance with the ombudsman's normal practice, the complaint was considered first by an adjudicator, Mr Daubney, who issued a non-binding adjudication on 6th September 2006. The adjudicator concluded that the complaint should be upheld.
Because the claimant did not accept the adjudicator's non-binding adjudication, the complaint was referred to an ombudsman. The ombudsman Mr Tilson issued his provisional decision on 13th December 2006 and he indicated that he was minded to uphold the complaint. The ombudsman subsequently issued a final decision on 18th January 2006 and did the complaint. Thereafter an application for judicial review was issued by this claimant on 13th April 2007.
It is helpful to recite the complaint which Mr Bennett made in simple terms, so that it can be the focus of later consideration:
“I was never made aware of the high risks attaching to the gearing of this traded endowment policy portfolio. There was never any indication that it was possible I might have to fund the policy premiums myself. Had I been made aware of this then I should not have proceeded. My concern has always been to ensure that I have...
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