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FSMA Tribunal Decision

Released 15:07 18-Jan-05



RNS



The Financial Services and Markets Tribunal has today delivered its judgment in the case between the Financial Services Authority ("FSA") and Legal & General Assurance Society Ltd ("Legal & General").



Legal & General appealed a decision of the Regulatory Decisions Committee ("RDC") of the FSA because it believed that both the decision of the RDC and the process by which it was reached were unfair. The judgment of the Tribunal is that "the RDC was in error in its approach to the mis-selling case and reached conclusions not justified by the material before it". In addition, referring to errors in the Decision Notice and in the way it was reached, the Tribunal stated that "Legal & General were justified in feeling aggrieved by these aspects of the RDC's decision".



On the case made by the FSA against Legal & General's procedures, much of which revolved around the design of the Personal Financial Review ("PFR") form, the Tribunal found that Legal & General had committed rule breaches but said that "these rule breaches need to be seen in context. The text of the PFR form had been reviewed by Legal & General's regulator, PIA, without any adverse comment".



The Tribunal's decision cleared Legal & General of the charge of widespread mis-selling but said that the procedural rule breaches "will have caused or contributed to mis-sales". The Tribunal found that the FSA had proved 8 cases of mis-sales and stated that "except to this limited extent the mis-selling case fails". The Tribunal has stated its provisional view "that there should be a reduction in the penalty imposed by FSA".



David Prosser, Group Chief Executive, said "Legal & General's Board decided to appeal against the RDC decision because we disagreed with the decision and the way it was reached. We are pleased that the case has now been heard by an independent body. The Tribunal has agreed with us that the RDC "reached conclusions not justified by the material before it". The Tribunal's judgment, which is both careful and detailed, should be read in full".



"Legal & General is committed to the fair treatment of all its customers. It should be emphasised that at no stage was this case concerned with the rights or compensation of any customer who felt that they had been mis-sold. A process for dealing with customers in the period covered by the Tribunal has already been agreed with the FSA".

Note 1: The judgment is available on the Tribunal's website http://www.financeandtaxtribunals.gov.uk/decisions/decisions.htm

Note 2: Freshfields Bruckhaus Deringer has summarised the Tribunal decision, a copy of which is set out below.



Enquiries to:



Media:

John Morgan, Head of Public Relations 020 7528 6213

Anthony Carlisle, Citigate Dewe Rogerson 07973 611888



Investors:

Peter Horsman, Head of Investor Relations 020 7528 6362







SUmmary of tribunal decision Outline

1. The Tribunal has criticised the decision of the FSA, made through its Regulatory Decisions Committee (RDC). The FSA erred in its approach to the mis-selling case and reached conclusions not justified by the material before it [218][1].

2. The Tribunal has cleared Legal & General of the charge of widespread mis-selling of which it was accused by the FSA. It has however found that Legal & General's procedures were deficient and that the FSA has proved 8 mis-sales out of 60 alleged mis-sales. However, the Tribunal held that the procedural rule breaches were of limited seriousness, the PIA (FSA's predecessor) having reviewed the relevant procedures and approved them.

3. The Tribunal indicated that its provisional view was that the penalty imposed on Legal & General of £1.1 million should be reduced. A further hearing will be held on this issue.

4. Key quotes from the Tribunal's decision are set out in the Annex to this Summary document.

Background

5. After an investigation lasting more than 3 years, the RDC decided that Legal & General was guilty of widespread mis-selling because it had sold its with-profits endowment (FMP) product to customers who were risk-averse. Specifically, and in reliance upon a past business review conducted by PwC, FSA decided that 60 cases out of a sample of 152 had been mis-sold and that that result was not only unacceptably high (at 39%), but could be extrapolated into sales to with-profits FMP customers generally.

6. Legal & General had argued that the evidence did not support the serious charge of widespread mis-selling, but to no avail. It was faced with a choice: accepting the FSA's decision to impose a £1.1 million disciplinary fine for widespread mis-selling or referring the matter for a fresh hearing before an independent and impartial tribunal, the Financial Services and Markets Tribunal. The Legal & General board unanimously decided to refer the matter to the Tribunal. In an RNS announcement of 21 November 2003, Legal & General stated:

"Legal & General, after careful consideration and on legal advice, disagrees with both the decision reached by the FSA and the process by which it was reached. Accordingly, Legal & General has taken the first opportunity allowed by the FSA's process to have the matter heard independently".

Decision

7. The decision of the Tribunal, published today, demonstrates that Legal & General was right not to accept the FSA's decision. The Tribunal stated:

"In our view the RDC was in error in its approach to the mis-selling case and reached conclusions not justified by the material before it" [218].

8. If proceedings before the Tribunal were in the form of an appeal, that would have been the end of it. Legal & General would have won its appeal. But a reference to the Tribunal does not take the form of an appeal but is a rehearing of the matter and allows both parties to introduce new evidence.

9. FSA called 22 witnesses, both factual and expert, in support of its case and argued that Legal & General's procedures were deficient, that these deficiencies caused or contributed to 60 mis-sales out of a sample of 152 cases and that that result could be extrapolated into the general with-profits FMP population.

10. The Tribunal found that there were flaws in Legal & General's procedures but:

"these rule breaches need to be seen in context. The text of the PFR form had been reviewed by L&G's regulator, PIA, without any adverse comment. The inappropriate use of sample wording had been identified and criticised by PIA in 1999, which had imposed remedial measures on L&G without classifying the matter as particularly serious" [216].

11. However, the Tribunal rejected the key allegation of widespread mis-selling made by FSA:

"We do not... accept FSA's claims about the extent of mis-sales. FSA have proved 8 mis-sales to the required standard from the 13 cases about which we heard evidence. It would not be just for us to find any mis-sales in the other 47 cases for the reasons set out elsewhere... We do not accept FSA's case that the conclusions of the sales review and our findings on individual cases can be taken to reflect the pattern of mis-sales generally" [217].

12. The FSA decided that 60 out of 152 sample cases were mis-sales and that this result could be extrapolated to the wider population. The Tribunal held that only 8 out of the 152 cases were mis-sales (although they acknowledged that there was possible mis-selling in another 14 cases) and that the FSA cannot extrapolate from this figure to make any wider conclusions. Thus, despite the fact that the FSA's investigation lasted more than four years and the FSA had the ability to introduce new and additional evidence in the Tribunal proceedings, it only succeeded in establishing that 8 cases were mis-sales and it failed to persuade the Tribunal that it was possible to extrapolate. As the Tribunal made clear:

"Except to this limited extent the mis-selling case fails" [205].

13. Legal & General did not believe that it was guilty of widespread mis-selling and is delighted that it has been vindicated by the decision of the Tribunal after this lengthy process. The Tribunal in its decision states that common sense dictates that there will have been a fair number of mis-sales in the general population beyond the 8 established. Legal & General accepts that in a large national sales force some advisers would have made errors. Legal & General have never suggested that there are no mis-sales within the with-profits FMP population. Legal & General remains committed to treating its customers fairly and paying compensation when its complaints handling procedure shows that a customer has been mis-sold a policy.

Conclusion

14. This case was referred by Legal & General to the Tribunal because it disagreed with the decision that the FSA, through the RDC, had reached. The Tribunal was established under the Financial Services and Markets Act 2000 to be an effective check and balance on the FSA's enforcement process. By this decision, the Tribunal has demonstrated that it fulfils that function effectively.



Quotations from Judgment

The Tribunal's views on the RDC decision

"FSA has not sought to justify its references in the Decision Notice to the PwC Report which were worded in stronger terms than PwC itself adopted. If, as we assume it to be, this was an oversight it was unfortunate. It suggests a lack of accuracy and may have been part of what led the members of the RDC to conclude that the 60 sales were unsuitable" (para 210).



"As we see it there is no indication in the Decision Notice that, on the question of mis-selling, the RDC relied on anything other than PwC's report. Indeed there are indications that the report was the entirety upon which the RDC relied ("FSA has concluded that this evidence is substantiated" - 4.18). The RDC appears to have found L&G guilty of mis-selling by adopting the PwC report which PwC readily accepts did not of itself establish guilt or claim to do so. This appears to have been a significant error" (para 211).



"In our view L&G were justified in feeling aggrieved by these aspects of the RDC's Decision" (para 214).



"In our view the RDC was in error in its approach to the mis-selling case and reached

conclusions not justified by the material before it" (para 218).



The Tribunal's views on the procedures case



"These rule breaches need to be seen in context. The text of the PFR form had been reviewed by L&G's regulator, PIA, without any adverse comment. The inappropriate use of sample wording had been identified and criticised by PIA in 1999, which had imposed remedial measures on L&G without classifying the matter as particularly serious" (para 216).



"L&G submit that PIA's attitude to the procedures and to the alleged shortcomings on earlier ocasions is relevant to the seiousness with which we should view them now. We disagree with FSA that these events are irrelevant" (para 132).



"We therefore conclude from the documents that the PFR was examined by PIA and that it did not criticise either the risk definitions in section 16 or the form and structure of the PFR as a whole. FSA has not suggested that the scrutiny in 1995 and 1996 was incorrect or inefficient. L&G invite us to draw the inference that the revised PFR in 1996 did properly reflect what PIA required. It is correct to draw that inference but we bear in mind that PIA scrutiny was of the form alone, not of how it was to be completed and used in practice" (para 134).



The Tribunal's views on the mis-selling case



"These procedural defects will have caused or contributed to mis-sales. We do not however accept FSA's claims about the extent of mis-sales. FSA have proved 8 mis-sales to the required standard from the 13 cases about which we heard evidence. We do not accept FSA's case that the conclusions of the sales review and our findings on individual cases can be taken to reflect the pattern of mis-sales generally" (para 217).



"We do not accept FSA's submission that we should place weight on the judgments on each case reached by PwC in their report of 7th March 2003" (para 196).

"FSA has not convinced us that the sample size is statistically valid to extrapolate the results into the wider population of FMPs, for the purposes of a disciplinary case" (para. 192).

"If more evidence was needed FSA should have obtained it" (para 212).



"FSA's case to the Tribunal is that there were 60 mis-sales out of the 250 cases in the ESR and that this pattern can be taken as representative of sales of FMPs to low risk customers generally. We find that there were 8 mis-sales with potentially 14 more. We find 25 cases too unclear to decide. We find 4 cases not to be mis-sales with 9 more potentially in the same category. We do not consider that this pattern in the 60 can be taken as representative of sales to low risk customers generally. Common sense suggests that the defects in procedures will have caused mis-sales beyond the 8 established. Except to this limited extent the mis-selling case fails" (para 205).



18 January 2005



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[1] References to square brackets are to the numbered paragraphs of the Tribunal's decision.

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