Financial services firms: take note (and keep a record!)

A high street bank has been ordered by the Financial Ombudsman Service (FOS) to compensate one of its customers after its records failed to demonstrate the customer had legitimate reasons for taking out an unsuitable life insurance policy to cover her mortgage.

The customer, referred to as “Miss H”, complained to FOS on the basis that she was obliged to take out a level term assurance (LTA) policy as a condition of a capital repayment mortgage she had arranged with the bank in 1990 for £43,700. Furthermore, Miss H complained that the LTA policy had been set up with too much life cover (the amount of cover being £45,000 instead of £43,700).

Whilst the bank accepted that the LTA had been provided with too much cover and agreed to refund the difference in premiums Miss H had paid (plus interest), it did not accept that Miss H was obliged to take out the LTA policy. The bank had kept records of its dealings with Miss H in 1990 and these showed that Miss H was provided with illustrations for a 25 year decreasing term assurance (DTA) policy at £5.10 per month and an LTA policy at £7.35 per month. As the names suggest, an LTA policy is a form of life insurance where the amount of cover stays the same whereas, with a DTA policy, the amount of cover decreases over time. DTA policies are therefore typically taken out for loans that decrease (e.g. mortgages). Despite this, and the fact that the DTA policy was the cheaper option, Miss H opted for an LTA policy. No reason for Miss H’s decision was recorded by the bank.

When the case was referred to FOS, Ombudsman Kim Davenport commented: “While [the bank] has said that Miss H insisted on taking out a LTA policy, and this was recorded by the adviser at the time, I would have expected to see a reason given for her wanting the increasingly surplus life cover this policy provided as she repaid the capital loan”.

FOS therefore ordered the bank to compensate Miss H for the difference between the cost of an LTA and DTA policy (plus interest).

This decision, which was handed down in July 2019, highlights the importance of financial services firms keeping accurate records of their dealings with customers. This is particularly important where a customer makes a decision which would not typically be expected and if that is the case, recording the reason why the customer has made that decision could be instrumental in rebutting future complaints and avoiding substantial compensation costs.