The power to settle financial complaints.
The power to settle financial complaints.
This section of our website describes our approach to complaints made by consumers that an investment or pension has been “churned”.
"Churning" is a term sometimes used to describe situations where a financial business has persuaded a consumer to surrender or sell an existing investment – and to take out another that served more or less the same purpose.
This is usually disadvantageous to consumers, because they are likely to incur costs when selling or surrendering an investment – as well as when setting up or buying its replacement. It could also involve:
We look at the characteristics of both the old and new investments and consider whether they serve the same or similar purposes for the consumer. If it seems to us that the consumer was advised to surrender or sell one investment and replace it with another which provided similar benefits, we ask the financial business why it gave this advice.
If we are satisfied that the old investment could have done roughly the same job as its replacement – for example, they were both endowment policies designed to repay a mortgage of the same size at the same time – then we are likely to say that churning took place and will uphold the complaint.
But we may not uphold the complaint if:
Financial businesses sometimes say that the new investment was required because the one it replaced was performing poorly. We are unlikely to be persuaded by this, unless the new investment provided a guarantee as to its performance.
If we uphold a complaint about "churning", we may ask the financial business to re-instate the original investment and to absorb the costs of doing so.
But it may not always be possible to re-instate the original investment. And the number of variables – for example, different premiums, terms, sum assureds, product providers, funds and uncertainties about future growth – mean that an exact calculation of the consumer’s loss cannot be made until all the investments have matured – which might be many years later.
This is why we may be required to estimate the loss, by taking into account:
Where the investments that were churned were endowment policies (whether or not they were sold to help repay a mortgage), we may apply a formula to work out how much compensation should be awarded.
The formula can provide only an estimate of the consumer’s expected loss. So businesses sometimes tell us that they want to carry out a full actuarial calculation. If a business chooses to do this, we will take those calculations into account as well.
We begin by comparing the amount the consumer invested in the original policy with the amount they got back (if any) when they cashed in that policy:
| A = |
the total premiums paid on the surrendered policy; |
| B = | interest on each premium, calculated from the date it was paid until the date of surrender; |
| C = | the surrender proceeds; |
| D = | A + B - C; |
| E = | interest on D, calculated from the date of surrender until the date of payment by the business; |
| F = | D + E |
We usually say that interest should be paid at the rate of 8% per annum simple (from 1 April 1993 and 15% before that date). This is the rate payable on court judgments.
Next, we seek to compensate for any extra costs of the new policy. We do this by comparing:
This comparison will be on a "like for like" basis. So if the original policy had a sum assured of £20,000, and the new policy has a sum assured of £40,000, we will compare the cost of the original policy with 50% of the cost of the replacement policy.
This means the final compensation figure will be F + I, where:
| G = | the total premiums paid for the same sum assured over the whole term of the new policy; |
| H = | the total premiums that would have been paid into the original policy – from the start of the new policy to the maturity date of the original policy; |
| I = | G - H |
There is an example of how we approach complaints about the churning of mortgage endowment policies in the section on our website about mortgage endowment redress in more complicated cases.
If the amount invested in the new investment was larger than the surrender value of the original investment, we may say that the excess should remain invested in the new investment.
But if the surrender value of the original investment was less than the minimum amount that could be invested in the new investment, we are likely to say that the amount paid into the new investment should be returned to the consumer, together with an appropriate amount of interest.
where the original policy can be reinstated
Assuming the premiums paid into the original policy and the new policy are the same, the new policy’s premiums should be refunded directly to the financial business that provided the original pension policy.
The business against which the complaint is upheld should ensure that the same value of pension is bought in the original policy that would have been accrued if the premiums had always been paid into that policy. This means the business may have to pay an additional compensation payment into the original policy.
If reinstating the original policy does not require a refund of all the premiums invested in the new policy (for example, because the new policy was set up with higher contributions than the original policy), we will consider whether an increase in the level of pension contributions was suitable for the consumer at the time that the churn occurred.
If we decide that the increase was appropriate, we are likely to say that those premiums paid into the new policy that are not required to reinstate the original policy at the appropriate level should remain in place.
But if we decide that this pension “top up” was not suitable, we may say that these additional premiums should be refunded to the consumer, together with an appropriate level of interest.
where reinstatement is not possible
We usually say that the value of the new policy should be "brought up" – to match what the value of the original policy would have been, if premiums had continued to be paid into it. Where the level of premiums to the new policy differ from the original policy, the calculation should be carried out on a pro rata basis.
We will normally tell the financial business against which the complaint is upheld to cover the cost of any penalty that the consumer would incur, if they choose to transfer their policy to a new provider.
If the consumer does not want to transfer the policy, and the new policy’s charges are higher than the original policy’s charges, we will say that compensation should be paid to reflect the additional costs applicable to the new policy.
contact our technical advice desk on 020 7964 1400
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.