Firms fined over geared traded endowment policy advice
Two firms have been fined for a number of failures connected to sales of geared traded endowment policies (geared TEP’s). These are the first acts of enforcement since the FSA began a targeted programme examining advice and sales processes of firms recommending geared traded endowment policies.
Knowlden Titlow Financial Services Ltd were fined £35,000 and Derrick Hales Financial Planning Ltd £10,500. In the case of Knowlden Titlow, the firm will stop selling geared traded endowment policies and contact all customers sold unsuitable policies, offering redress where appropriate. The FSA noted that the firm failed to:
- ensure that all of its advisers fully understood the policies and their risks before recommending them to customers.
- gather enough information about its customers to support and ensure the suitability of its recommendations
- adequately explain the risks associated with geared traded endowment polices.
In the case of Derrick Hales Financial Planning Ltd, the firm will stop selling geared TEP’s and conduct a review of earlier business to identify the degree to which their customers may have been given unsuitable advice. They are also required to “make good any loss suffered” where applicable in addition to providing additional compliance training to staff.
Permission for Derrick Hales and Kathleen Hales to perform the role of compliance officer and partner respectively was cancelled. The grounds for the cancellation were that they failed to act with due care and diligence to ensure compliance with FSA rules and principles.
The FSA noted the firm failed to:
- gather enough information about its customers
- communicate clearly to customers the characteristics and risks associated with geared traded endowment polices
- ensure advisers properly understood the products they were selling
- did not properly review sales
Geared TEP’s began to really grow in popularity at the beginning of the decade as minimum investment amounts for portfolios started to fall and the availability of credit grew. In these complex investments the investor borrowed money to purchase policies. Borrowing also financed premium payments and the purchase of further policies. The endowments already in the portfolio were used as collateral while maximum loan to values were based on the surrender value of the policy. More recently, the initial investment came from cash, a mortgage or using existing bond holdings as collateral. The FSA’s Jonathan Phelan said “We found with both firms that their advisers did not understand how these products work”, nor where they able to demonstrate a “clear grasp of the risks involved”. As a result they were not able to advise customers if policies were suitable for them.
When credit is cheap and easy to obtain and bonuses and surrender values are good, these products can look attractive. However the element of gearing makes them incredibly risky. Some investors could be tempted to increase gearing by borrowing a higher percentage of the surrender value or borrowing more in the anticipation that surrender values will rise. This means the investor has cut the equity in their investment and increased their risk if bonuses and surrender values fall and borrowing costs rise. There is also a risk that if the ratio of loan to confirmed surrender value becomes too high, the lender may withdraw or reduce the loan facility, or require an additional injection of capital or security.
It seems the FSA has responded to the growth in popularity of these products as they now have a programme focused on the geared traded endowment policy market. They have stated their intent to take “further appropriate action to deal with the examples of bad practice that we uncovered in other firms” Final notices are in the form of PDF files available from the FSA’s website for Derek Hales Financial Planning and Knowlden Titlow Financial
