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CHAPTER 7

RISK

7.4.3The Duty to provide the Information Necessary to an Informed Decision
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First National and Irish Life were under a duty to disclose all material facts known to them which might be considered likely to affect the decision of my wife and I to enter into an Endowment Mortgage Contract with them. They were also duty bound to provide an adequate explanation of the Endowment Mortgage Contract, the Repayment Mortgage Contract and, most important of all, the Comparison between these Contracts.


First National’s duty to disclose material facts stems from their fiduciary position relative to my wife and I.

Irish Life’s duty to disclose equally stems from a special relationship giving rise to a duty of care to my wife and I. They have taken it upon themselves to give information in the Quotation Comparison (i.e. Case 1 of Appendix 1/2), knowing, and intending, that this information will be passed on to my wife and I, knowing that their tied agent’s advice will be based on that information, and knowing that my wife and I will place reliance on that advice and information.


Irish Life’s duty to disclose also stems from the Utmost Good Faith nature of a Life Assurance Contract. This is specifically manifest in their duty to disclose all facts known to them, regarding the Risks associated with the Endowment Mortgage relative to the Repayment Mortgage, that would reasonably affect the decision process of my wife and I in determining which type of Mortgage we will accept, and under what conditions.


Note ! The situation regarding the individual consumer seeking a Mortgage, who has acted through an ‘independent financial adviser’, will be discussed in the following Chapter.


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First National and Irish Life, who have special knowledge and skill in such matters, and who made representations to my wife and I on such matters, were under a duty to provide and explain the Financial Analysis Data necessary to an informed investment decision. ———————— THEY DID NOT DO SO.

(a)

First National and Irish Life were under a duty to disclose the Expected Return from investing in the Endowment Mortgage. They were also under a duty to explain that this Expected Return was based on their assuming that a growth rate of 10.75% p.a. (9.75% p.a. net of a management charge of 1/12 % per month) would be achieved, and took into account the current tax relief on interest and premiums.

Note!
The Expected Return would be the Internal Rate of Return achieved by investing the in Endowment Mortgage — based on the assumed growth rate being achieved. (See Section 5.3: The Basic Tools of Investment Analysis.)

(b)

First National and Irish Life were under a duty to disclose the Expected Return from investing in the Repayment Mortgage. They were also under a duty to explain that this Expected Return took into account the current tax relief on interest and premiums.

Note!
Again, the Expected Return would be the Internal Rate of Return achieved by investing in the Repayment Mortgage.

(c)

First National and Irish Life were under a duty to disclose the fact that there is Risk associated with investing in the Endowment Mortgage. They were also under a duty to disclose a Measure of that Risk.

IF Irish Life and First National had no objective measure of the Risk associated with investing in the particular Fund pertaining to the Endowment Mortgage (this being the Home-Way Mortgage Fund Series 4, in the case of my wife and I), —— THEN a Risk measure for a comparable fund should have been assumed and explained. (The fact that a particular Fund has only been recently launched and therefore has no Performance History, if anything, constitutes an additional Risk; it certainly does not justify ignoring the Risk which they KNOW to be intrinsic to such Funds.) This silence by the Financial Institutions on the matter of Risk cannot be overemphasised.

IF, for the purposes of representation of the ‘expected’ Benefits flowing from investment in their Endowment Mortgage Fund, First National / Irish Life could assume 9.75% p.a. net as the measure of the reasonably expected growth rate that would be achieved, ———— THEN, to impart a fair datum to that measure and enable a balanced comparison by the representee, a reasonable measure of the expected Risk associated with the investment in their Endowment Mortgage Fund (based on objective market-place data available for a similar Investment Fund) could, and should, also have been assumed.

(d)

First National and Irish Life were under a duty to disclose the fact that there is NO RISK WHATSOEVER associated with the Repayment Mortgage corresponding to the Risk associated with the Endowment Mortgage.

(e)

First National and Irish Life were under a duty to disclose a measure of the Reward for taking Risk (see Section 7.3), i.e. the Risk Premium Return by which the Expected Return to be achieved by investing in the Endowment Mortgage would exceed the Expected Return to be achieved by investing in the Repayment Mortgage, the Repayment Mortgage Return being the benchmark Certainty Return available.

(f)

First National and Irish Life were under a duty to provide and explain a Performance Evaluation Measurement for their Endowment Mortgage Fund, i.e. a measure of the Reward relative to the associated Risk (e.g. the Sharpe Ratio as described in Section 7.3). Again, the Performance Evaluation measure flows from the Risk measure, but, again, it must be stressed that if a growth rate can be assumed for a particular Investment Fund then so too can a measure of the associated Risk be assumed for that particular Fund.

(See Section 2.3.3: Negligent Misrepresentation, and Section 2.3.4 : The Duty to Disclose and Silence as a Misrepresentation. See also Section 2.8.1: The Right to Revoke the Contract, and Section 2.8.3: The Measure of Damages as a result of a successful Action based on the Common Law liability under Negligent Misrepresentation.)


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First National and Irish Life appear to have addressed the matter of the Internal Rate of Return [as itemised in (a) and (b) above] within their positive representations.


Within their Quotation Comparison (see Case 1 of Appendix 1/2), they have represented the Equivalent Monthly Cost (i.e. the Total Net Monthly Outlay) of the Endowment Mortgage as being £345.10 and that of the Repayment Mortgage as being £343.04 (the Equivalent Monthly Cost being times the Equivalent Annual Cost), these figures taking into account the tax relief on interest and premiums.


The Equivalent Annual Cost directly relates to Internal Rate of Return (see Section 5.3 : The Basic Tools of Financial Analysis — Example 5.5), and the positive representation of the comparison of the Equivalent Monthly Cost SHOULD, therefore, have direct equivalence to a comparison of the Internal Rate of Return.


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First National and Irish Life did not disclose any of the information, necessary to an informed decision, on the critical matters of Risk and Reward for Risk taken.


But such non-disclosure transcends negligence. ———— They have, wilfully, shut their eyes to these matters.


The Financial Institutions have, wilfully, abstained from applying their knowledge and skill to presenting a proper and truthful Financial Analysis Data comparison between the Endowment Mortgage and the Repayment Mortgage.



This absolute silence on the matters of Risk and Reward for Risk taken
[as itemised in (c), (d), (e) and (f)] above) totally distorts the positive representations they have made regarding the Endowment Mortgage in their Mortgage Quotation presentations.


By omitting these Risk blemishes from the picture of the Endowment Mortgage they present to the borrower / investor, First National and Irish Life, knowingly and wilfully, give the false impression that the Endowment Mortgage is more attractive than it actually is.



This, failure to paint in the ‘warts’, presents the exact same picture to the borrower / investor as painting over them. 

———— It is equivalent to active concealment.



No reasonable person could, in the circumstances, infer that First National / Irish Life had honest belief that they were representing a true, ‘warts and all’, picture of the Endowment Mortgage.


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But, once again, as with their non-disclosures regarding Benefits and Bonus (as related in Chapter 4), this non-disclosure of the Risk blemishes pertaining to the Endowment Mortgage effects concealment of the attractiveness of the Repayment Mortgage; it effects concealment of the fact that the Repayment Mortgage is without such blemishes.


The borrower / investor is again further deceived, and induced to refrain from choosing the Repayment Mortgage.


(See Section 2.3.2: Fraudulent Misrepresentation. See also Section 2.8.1: The Right to Revoke the Contract, and Section 2.8.2: The Measure of Damages as a result of a successful Action based on the Common Law liability under Fraudulent Misrepresentation.)

 

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