Advisers should take on board Financial Ombudsman decisions when making recommendations, writes Alan Lakey.
Advice is an elastic process, whereby it is fair to say that if ten advisers are provided with an identical set of client circumstances, they are likely to produce a number of versions of ‘best advice’.
In a reasonable world this would not create problems, but in today’s turmoil of opportunism, rampant claims management companies and questionable ombudsman adjudications, it pays to keep tabs on regulatory thinking.
Let’s be clear here: the Financial Ombudsman Service (FOS) is a regulatory body and its preferences and idiosyncrasies expose advisers to summary judgement, effectively dictating behaviours.
Now I must confess to a sad hobby which involves hours scanning the ‘FOS database’ to understand the reasoning behind the adjudication and final decision process.
Advisers need to reflect on the viewpoints and trends that percolate through these decisions, because they may well have a significant future impact.
Level or decreasing term?
One common complaint theme relates to using a level term assurance to protect a capital and repayment mortgage. I know many advisers consider this a sensible method of providing additional funds over and above that needed to repay the mortgage.
The FOS does not agree with this form of logic and in case DRN1665759 the ombudsman considered a decreasing term assurance to be more appropriate.
Given this mindset, it seems that advisers need to separate the mortgage and family cover to ensure that they do not find themselves paying compensation and interest at 8%.
CIC with or without life cover?
98% of CIC plans are sold with integral life assurance. The truth is, it is often cheaper to include it than not, and who would complain about free life assurance? In addition, a CIC plan without integral life cover arguably leaves the adviser open to a complaint if the insured dies within the qualifying period and the claim is declined.
The FOS seems to disagree. Case DRN2511357 highlights a single man who was advised to protect his mortgage with an accelerated CIC/life plan with additional income protection.
He benefited from his employers death-in-service scheme and the ombudsman concluded that this meant that the life cover was not needed. Again, the plan was level term and it was stated that a decreasing term plan “would have better met his needs”.
This raises a number of concerns. How many employees can rely on their employer’s patronage, as opposed to providing for themselves and having total control?
How many people stay with their employer for more than a few years? How many single men will subsequently form relationships and wish to protect their families against the financial impact of premature death?
More pointedly, why does a non-qualified ombudsman believe that he or she is better able to determine what is best for a consumer?
Flexible whole of life?
Mr and Mrs ‘E’ took out a whole of life plan including critical illness cover to protect their repayment mortgage, case DRN9554053. They complained that they were told the mortgage was conditional on taking out the plan.
The ombudsman considered that both life and critical illness were suitable recommendations but took the view that a whole of life plan was unsuitable, because it would run beyond the term of the mortgage and would not decrease in line with the mortgage balance.
“More importantly, the policy reviews meant it was always likely they would end up paying more for their cover or accept a reduction in cover… the obvious alternative to a whole of life policy would have been a term assurance providing a guaranteed level of cover for the full mortgage term.”
With borrowers frequently choosing or being forced to extend their mortgage terms a whole of life plan may well prove suitable due to its adaptability.
The FOS will point out that no case sets a precedent, but we can see some common themes arising and advisers would be well advised to take on board the ombudsman decisions when making recommendations.
Alan Lakey is director of CIExpert
