The power to settle financial complaints.
The power to settle financial complaints.
This section of the website describes how we approach complaints involving disputes about "with-profits" bonds.
"With-profits" bonds are lump-sum investments that usually have no set term or fixed maturity date. The consumer’s money is invested in the provider's "with-profits" fund.
The value of the initial investment accumulates through the addition of bonuses, which are decided by the provider's actuaries. Bonuses are usually added every year – based indirectly on what the fund has earned – and once added, they cannot generally be removed.
Disputes about "with-profits" bonds typically focus on issues around the sale and suitability of the product. Issues also arise when a consumer was not aware of the existence of a "market value adjustment" (sometimes called a market value reduction or known by the initials MVA or MVR).
The application of an MVA reduces the surrender value of the bond (or the part of it that is cashed in). Consumers also raise issues about how an MVA is being applied by the product provider.
When a "with-profits" bond was sold in an "advised" sale, a dispute may arise about whether or not this kind of bond was suitable for the particular needs of the consumer.
Our approach to considering the suitability of an investment is described in more detail in the section of our online technical resource on assessing the suitability of investments.
Connected with this will be questions about the level of investment risk the consumer wanted to take in the particular circumstances of the sale, their need to access capital, and any requirements for regular income.
"With-profits" bonds are generally considered to represent a lower risk than investments that are linked directly to the stock market. This is because:
For these reasons, "with-profits" bonds are usually considered by the financial services industry to be suitable for most consumers, including those with a more cautious attitude to risk.
However, "with-profits" bonds are not risk-free.
As a result, it is possible to lose money. And so a "with-profits" bond would not usually be suitable for a "risk averse" consumer.
Because of the early surrender penalties that usually apply within the first five years, we are likely to conclude that a "with-profits" bond is not suitable for a consumer who requires access to some or all of their capital within this period (that is, more than just normal income withdrawals).
Similarly a "with-profits" bond may not be suitable for a consumer who requires access to their capital at a fixed point in the future – or who cannot be flexible over when they may need to cash in their bond.
We may also need to consider access to other savings or investments that could provide flexibility to meet the consumer’s needs.
Mrs A, an 80 year old woman with no previous investment experience, was advised by financial business P Ltd to invest a large proportion of her money into a "with-profits" bond. We noted that on P Ltd’s "risk profile" for Mrs A, it had referred to her as a "risk averse" investor and had noted that she had no other assets to provide further capital.
We concluded that because "with-profits" bonds are not risk free, particularly when used to provide regular income, the advice to Mrs A to invest in a "with-profits" bond was not suitable.
In the relevant circumstances, the current tax treatment of withdrawals from "with-profits" bonds allows a consumer to avoid paying higher-rate tax on withdrawals from a bond – where they are a higher-rate taxpayer at the time of sale and a lower-rate taxpayer at the time they cash in their bond (perhaps because they have retired).
While these features can make "with-profits" bonds attractive to consumers looking to generate an income, the tax benefit by itself is insufficient to prove suitability.
We also consider the extent to which a consumer is dependent on receiving a particular level of income – and whether they can afford to lose any of their capital.
Low or falling bonuses are likely to result from a downturn in financial markets – the same circumstances in which MVAs are applied. So we are more likely to decide that recommending a "with-profits" fund to generate income is not suitable, when market conditions and bonus prospects are poor – and when MVAs are already being applied.
Mr C retired and found that his pension only just covered his living expenses. He received advice from financial business R Ltd to invest the majority of his capital in a "with-profits" bond. Mr C complained when the bonus rate on the bond was reduced to zero. R Ltd explained that an MVA would be applied if Mr C cashed in the bond.
We decided that a "with-profits" bond was not a suitable investment for Mr C, as he was totally reliant on the investment to provide a steady level of income. The possibility of falling bonuses and MVAs meant that a "with-profits" bond could not be guaranteed to provide the steady level of income required.
Providers of "with-profits" bonds reserve the right to apply market value adjustments (MVAs – sometimes also called market value reductions or MVRs).
These are effectively a mechanism that allow "with-profits" fund providers to decide the consumer’s share of the value of the "with-profits" fund, when the consumer decides to cash in their bond. MVAs can apply to all "with-profits" products, including endowments and other policies.
"Market value adjustments" (sometimes called market value reductions or known by the initials MVA or MVR) were relatively rare in the 1990s but became more common from 2001 onwards. The application of an MVA when funds are withdrawn can materially reduce a policy’s projected value and come as an unpleasant shock to the consumer.
Consumers sometimes complain that the possibility of an MVA applying was not explained to them – and that they would not have purchased the bond if they had been aware of such a possibility. The outcome of these kinds of complaints usually turns on two factors:
In some cases, the consumer’s complaint about the application of an MVA may relate to an underlying mismatch between their "attitude to risk" at the time of the sale and the product involved. In these cases we will consider whether the consumer was a cautious investor or someone who did not want to take any investment risk.
Our general approach is that the possibility of an MVA applying is an important feature of "with-profits" policies – and is something that a consumer would want to understand before they bought a policy.
Before 2001 MVAs were rare, so we would not generally expect a financial business to have significantly highlighted the possibility of an MVA alongside other risks at the time of the sale.
But after 2001 MVAs became more common – and in deciding complaints, we would investigate whether the MVA had been discussed in more detail, especially with more cautious or less experienced consumers.
However, whether the sale was made before or after 2001, in deciding complaints we would investigate whether MVAs were clearly explained in the policy document, the policy literature, and preferably in the "reasons why" / "suitability letter" as well.
In examining whether the consumer should have been aware of the existence of an MVA, we use the "reasonable person" test. In other words, would a reasonable person without any specialist financial knowledge have been able to understand from the policy wording (and the point-of-sale information) when an MVA might apply and how much it might be?
It is not normally possible to predict the exact amount of an MVA that may or may not apply in the future. So in deciding a complaint, we look at the wording to check that it is not misleading in suggesting that any deduction would be small or would apply only for a short period of time.
Similarly, MVAs that are described as occurring only in "exceptional" circumstances – or highlighted as a rare event – may be difficult to justify in a complaint, if MVAs are already applying in the fund, or where the application of MVAs is under active consideration.
Where we believe that the explanation provided in the documentation was unclear or misleading in a particular case, we need to consider whether this influenced the decision to invest. We may conclude that the consumer would not have proceeded if they had received an appropriate explanation of MVAs. But this will not always be the case.
Mrs D received advice from financial business S Ltd to invest in a "with-profits" bond in 2003. Mrs D had no experience of "with-profits" bonds and had no other investments. We noted that on S Ltd’s "risk profile" for Mrs D it stated that she only wanted to make "low risk" investments.
When Mrs D surrendered the bond, an MVA was applied and she complained that she had not known about the existence of MVAs. We decided that, although MVAs were briefly explained in the product policy and literature, this was not a sufficient explanation.
The advice to invest had been given at a time when MVAs were commonly applied by bond providers. We decided that S Ltd should have been aware of this. Had Mrs D been told this, as an inexperienced investor with a "low risk" profile, we concluded that she would not have invested in the "with-profits" bond.
We receive complaints from consumers that they were not told that MVAs were being applied at the time of sale – and that they would not have invested if they had known.
We would usually expect a "tied agent" to know if the financial business they were "tied to" was applying MVAs at the time of sale. If the recommendation was made by an independent financial adviser (IFA), we would also expect the IFA to have been able to discover whether a provider was applying MVAs at the time of sale.
The fact that MVAs were in place at the time of sale does not mean that we will uphold the consumer’s complaint. We will look at each case on its own individual merits. This includes looking closely at the issue of suitability, and whether the existence of the MVA affected the suitability of the "with-profits" bond for that consumer.
If the fact that MVAs were already being applied was not specifically highlighted to the consumer, we consider whether the consumer was given a fair representation of the product – and crucially, whether this would have affected their decision to purchase the product or not. While we may often decide that the consumer would not have proceeded, this will not always be the case.
complaints about the size and timing of an MVA and the operation of the fund
We do not normally consider a complaint about the timing or size of an MVA. Under rule 3.3.1 (11) of FSA’s "DISP" rules (the complaints-handling rules that businesses must follow), we may dismiss a complaint if it is about a legitimate exercise of a financial business's commercial judgement. Imposing an MVA would usually be this type of exercise.
We sometimes receive complaints about the investment management of a fund. These includes complaints about the perceived lack of active management. We also receive complaints that the asset mix after the sale was less exposed to a wide range of asset types than the consumer had expected. This may happen when a fund has been closed. We discuss these concerns with the regulator on a case-by-case basis.
When the complaint does not relate to an MVA and we decide that a sale was not suitable, appropriate redress is generally to put the consumer into the position they would be in if they been given suitable advice.
Where a complaint relates to an MVA, one way of putting things right is to allow the withdrawal without deducting the value of the MVA.
We will generally direct redress to be paid at the appropriate rate – reflecting the lost investment opportunity. But if we believe that the consumer would have retained the money (or invested it in a bank or building society account), if they had not invested it in the "with-profits" bond, it might be appropriate to apply interest instead.
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This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.