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CHAPTER 2

THE WEAPONS OF LAW

2.5.8The Appalling Vista
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The historical sequence of the course of action taken by the Financial Services Authority on the matter of Endowment Mortgages, following through to the role of the Financial Ombudsman Service, has already been set out in Section 2.5.6The U.K. Regulatory Regime.


A primary stated objective of the FSA’s actions was to address the grievances of consumers and provide redress for wrongs done.


As we have seen in Section 2.5.6, from December 1999 onwards, gargantuan efforts were made by the Financial Services Authority and (subsequently) by the Financial Ombudsman Service to ensure that consumers, whom they would deem to be due compensation as a result of having been mis-sold Endowment Mortgages, were made aware of the fact.

 

However, this, ostensibly pro-consumer, stated objective of the FSA’s actions was very much subordinate to its unstated objectives :

—— to divert focus away from the pervasive and systematic disregard for the Law by the Financial Services Institutions and their Management Personnel, the Law to which the rest of us mere mortals are subject.

—— to prevent incursion by the Legal Profession into the realms of the Financial Services Industry in the matter of pursuing compensation, by way of damages, for wrongs done to consumers.

—— to ensure 'damages limitation' (in the strictest sense) for the offending Financial Services Institutions.

This 'damages limitation' objective was achieved by (a) maintaining control over the costs by keeping legal representation costs - from both sides - out of the process, and by (b) maintaining control over the criteria that would give rise to an award of compensation.


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As already related in Section 2.5.6, the Regulatory Regime practised by LAUTRO, FIMBRA and the PIA was such that, in spite of all the Rules and Regulations, a blatant disregard for the interests of the consumer continued to prevail.


The blanket Whitewash Policy adopted by the Management Personnel of the Financial Services Institutions, by LAUTRO and FIMBRA, and, subsequently, by the PIA, ensured that the nature and substance of exactly ‘just what was going on?’ would never come into the public domain.

By subtle and covert misrepresentations, vast monetary rewards could be accrued by investment intermediaries, and by the Management Personnel of Financial Services Institutions, by inducing consumers to enter into Endowment Mortgage Contracts instead of Repayment Mortgage Contracts.

As was the case with the so-called Personal Pensions Scandal, this personal enrichment of investment intermediaries and the Management Personnel of Financial Services Institutions flowed from inbuilt contractual mechanisms within the Endowment Contract that enabled the Financial Services Institutions to ‘cream off’ part of the consumer’s payments into the Endowment Policy (typically, the entirety of the first year’s payments and a small percentage of subsequent payments being ‘creamed off’).



But, as previously related, from the mid 1990s there had been a persistent clamour of protest in the United Kingdom on the matter of the unfairness of Endowment Mortgage Contracts, with the 'subtle and covert means' (misrepresentations) by which consumers were induced to enter into such contracts being a matter of particular dispute. These injustices were given continual prominence in the printed media by personal finance journalists (most notably in the Sunday Times) and could, therefore, not continue to be ignored.


Finally, in 1999, the FSA was induced to react.



 

As already related in Section 2.5.7, The Whitewash Road, only those parties dealing directly with consumer complaints, i.e. only the Management Personnel of the Financial Services Institutions, LAUTRO and FIMBRA, and, subsequently, the PIA, would have had a full awareness of the exact nature and substance of consumers’ grievances.


Only they would have known that there were pervasive Fraudulent, Negligent and Statutory Misrepresentations being perpetrated to induce consumers to enter into Endowment Mortgage Contracts.


Only they would have known
that the exposure of the Financial Services Institutions to damages, if ‘just what was going on?’ ever came to the knowledge of the Legal Profession, was widespread.


Only they would have known
that, if it were ever to be properly investigated, the exposure of the Management Personnel of those Institutions to criminal prosecution under the Law was equally widespread.



The blanket Whitewash Policy adopted by the Management Personnel of the Financial Services Institutions, by LAUTRO and FIMBRA, and, subsequently, by the PIA, ensured that such knowledge remained suppressed.



But, even though the PIA came under the authority of the FSA in 1997, the PIA still retained control with respect to dealing with consumers’ complaints and with respect to enforcement of the Regulations.


It could therefore be contended that, at this point in time, the FSA,
as a party that was not dealing directly with the substance of consumers’ complaints regarding Endowment Mortgages, could claim some ignorance with respect to ‘just what was going on?


However, such contention must be seen in light the relentless clamour (for years) by those protesting the blatant inaction of the Regulatory Regime, and in light of the FSA’s previous experiences with those responsible for the Personal Pensions Scandal.


For certain, when, during the summer and autumn of 1999, the FSA undertook a series of targeted supervisory visits to participants in the mortgage endowment market, it could no longer claim ignorance of ‘just what was going on?’.



 

Consider now the following extracts that have been taken from the PIA Regulatory Update (December 1999), and from FSA Progress Report on Mortgage Endowments (October 2000). (This Report is available at this link: www.fsa.gov.uk/pubs/policy/mortgage_endow.pdf )

Consider, particularly, the wishy-washy nature of the language used.

Note! Bold print, italics, etc. have been applied, for emphasis, on the extract elements that have import to the subject matter of this website-book.

‘During the summer and autumn of 1999, the FSA undertook a series of targeted supervisory visits to participants in the mortgage endowment market - both product providers and independent financial advisers. The findings of those visits were disappointing.’


‘Because of inadequate record keeping, it was not clear for many of the files reviewed whether the advice that had been given was suitable or not.’


‘In other cases, the information on file raised questions that suggested that the sale of an endowment might not be appropriate, and there was no evidence that these questions had been properly resolved or explored with the consumer. Only a minority of the files showed clearly suitable advice that had been properly recorded.’

(From Section 2.24 of FSA October 2000 Progress Report)




In December 1999
the PIA and the FSA issued a ‘Public Warning’, stating that:

‘The general standards of selling practices and record keeping revealed by the themed supervision visits were inadequate. Such poor practices are unacceptable …….’

(From PIA Regulatory Update December 1999)


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It was at this time, i.e. in December 1999, that the FSA also announced that it had considered whether, in light of the findings following from its themed supervision visits, the nature and scale of the problems it had found warranted an industry-wide review, and ———— it (the FSA) concluded that it would not be in consumers' best interests.

(Ref. Section 2.25 of FSA October 2000 Progress Report)


But, this decision, not to carry out an industry-wide review, was made by the FSA before any of the millions of consumers who had been induced to enter into Endowment Mortgage Contracts had even been contacted.


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The language used in the Progress Report on Mortgage Endowments issued by the FSA in October 2000 was, once again, the language of Whitewash.


Once again, the Whitewash of Law intrinsic to the concept of Mis-selling was employed. (See 'What is Mis-selling?' in Section 2.5.7, The Whitewash Road.)


Once again, the Legal Profession was neutralized.




Following from its 1999 targeted supervisory visits, the Financial Services Authority had become fully aware of ‘just what was going on?’


The FSA now knew that there were pervasive Fraudulent, Negligent and Statutory Misrepresentations being perpetrated by investment intermediaries and by Financial Services Institutions ——— with the consent or connivance of, or attributable to the neglect of the Management Personnel of those Financial Services Institutions ——— to induce consumers to enter into Endowment Mortgage Contracts.


Remember
that, by this time, the FSA had become fully aware of the practices the Management Personnel of Financial Services Institutions and the investment intermediaries were capable of employing to mislead consumers; the FSA had just spent the previous years dealing with the Personal Pensions Scandal !


The FSA was now aware
of just how exposed to litigation the U.K. Financial Services Industry would be if the full truth of ‘just what was going on?’, the systematic Fraudulent, Negligent and Statutory Misrepresentation of investment products to consumers, ever came to the knowledge of the Legal Profession; it now knew just how exposed to damages, and to the legal representation costs involved in the pursuit of those damages, the U.K. Financial Services Institutions would be.



But, remember also
that in 1999, when the FSA carried out its targeted supervisory visits, the U.K. Financial Services Act 1986 was still in force!


A person guilty of a fraudulent misrepresentation offence under Section 47 (which relates to ‘investment business’) or under Section 133 (which relates to ‘insurance business’) of the U.K. Financial Services Act 1986 is liable to imprisonment for up to seven years, or to a fine, or to both.

Remember that the Endowment Policy relating to an Endowment Mortgage Contract constitutes both ‘investment business’ and ‘insurance business’ within the scope of the Act ! (See Section 2.5.1.)


However, under Section 201 of the U.K. Financial Services Act 1986, the issuance of proceedings against those guilty of offences under Section 133 did NOT come within the ambit of the functions of the Designated Agency (i.e. the Financial Services Authority or, formerly, the Securities and Investments Board); proceedings could only be issued by or with the consent of a Crown Prosecutor.


Also, while, under Section 201 of the U.K. Financial Services Act 1986, the Designated Agency was empowered to issue proceedings against those guilty of offences under Section 47 of the Act, this was a qualified transfer of function by the Secretary of State. This transfer of function to issue proceedings was subject to a reservation that it is to be exercisable by the Secretary of State concurrently with the Designated Agency.


The FSA now knew that, if the full truth of ‘just what was going on?’ was ever properly investigated, the Management Personnel of the Financial Services Institutions would be subject to criminal prosecution.



 

And so, the syndrome of the ‘appalling vista’, once again, presented itself to the Financial Services Authority.

And, once again, the Whitewash Policy was put into effect.


Once again, the fraudulent misrepresentation provisions of the U.K. Financial Services Act 1986 were not invoked.


Once again, the absence of honest belief
, on the part of the Management Personnel of Financial Services Institutions and investment intermediaries, in the truth of what was being represented to consumers was not exposed.


Once again, the truth was stifled.



The Whitewash Policy adopted by the FSA ensured that the truth of ‘just what was going on?’ would never come to the knowledge of the Crown Prosecution Authorities empowered to institute proceedings for criminal offences under the U.K. Financial Services Act 1986.


Once again, the course of action taken by the FSA was such that the protection of the Management Personnel of the Financial Services Institutions was put before the pursuit of Justice and the betterment of the interests of society.


Once again, the FSA chose not to bring Justice to bear on the Management Personnel of the Financial Services Institutions, the people whose moral fibre should have been seriously called into question, the people with whose consent or connivance, or as a result of whose neglect, millions of consumers had been abused.

In fact, they chose to leave those abusers in place, in positions of absolute trust, a decision that was very much to the detriment of society.


MARK THIS WELL !

Having already taken the Whitewash Road, in choosing not to subject the Management Personnel of the Financial Services Institutions to prosecution for fraudulent misrepresentation offences under the U.K. Financial Services Act 1986, the FSA could hardly then change its Policy, when, under Section 401 of the successor U.K. Financial Services and Markets Act 2000 (which came into force on 1st December 2001), it was fully empowered to institute proceedings for such offences.




 

The Code for Crown Prosecutors sets in context the Policy adopted by the FSA not to subject the Management Personnel of the Financial Services Institutions to criminal proceedings where the fraudulent misrepresentation offences set out in the respective Acts were perpetrated against customers / consumers. Again, the qualified nature of the FSA’s power to prosecute under the U.K. Financial Services Act 1986 should be noted.


Under the Code for Crown Prosecutors, in deciding whether to bring criminal proceedings, the FSA must consider both ‘the evidential test’ and ‘the public interest test’.


The Evidential Test
requires that the Prosecutor be satisfied that a jury or bench of magistrates, properly directed in accordance with the Law, is more likely than not to convict the defendant of the charge alleged.


Note!
On the matter of a judge giving direction to a jury, it is worth noting the direction given by Judge Lawton in the case of The Crown v Feely (U.K. 1973) on the matter of who is to decide what is and what is not dishonest. (See Section 2.3.6: Fraud and the Conman —— U.K. Law and Irish Law.)


The Public Interest Test
sets down some common public interest factors in favour of and against prosecution. A prosecution will usually take place unless there are public interest factors tending against prosecution which clearly outweigh those tending in favour. The more serious the offence, the more likely it is that a prosecution will be needed in the public interest.


Some of the common public interest factors set down in the Code for Crown Prosecutors in favour of prosecution are:

—— the defendant was in a position of authority or trust;

—— there is evidence that the offence was premeditated;

—— there is evidence that the offence was carried out by a group;

—— there are grounds for believing that the offence is likely to be continued or repeated, for example, by a history of recurring conduct;

—— the offence, although not serious in itself, is widespread in the area where it was committed.





That the FSA should want to keep the Legal Profession out of the process of its Complaints Procedures is wholly understandable.
On the face of it, in terms of providing redress for hundreds of thousands (if not millions) of consumers, it would be reasonable to contend that legal representation costs involved for both sides would be a complete waste of money.


On the face of it, therefore, the FSA’s contention, in Section 4.17 of its October 2000 Progress Report, that ‘the existing complaints process is the quickest way of ensuring redress for those consumers who have lost out as a result of mis-selling’, is true.


But, as already highlighted above, channelling consumers’ grievances towards this existing complaints process meant continuance with the existing Whitewash Policy;
it ensured that the Management Personnel of the Financial Services Institutions, whose questionable integrity should have been publicly challenged, would never be exposed.


People need to know the moral fibre of those in whom they must repose their trust !


A complaints process that employs quasi-judicial procedures, following which, people, whose moral fibre is very much in question, are covertly protected and allowed to continue in positions of the utmost good faith, must be seen to be inherently contrary to the interests of society.







But, by keeping the Legal Profession out of the process, the Regulatory Regime also ensured that the criteria, that gave rise to an award of compensation to wronged consumers and by which the extent of such award was determined, could be controlled.


Diligent inquiry by the Legal Profession into exactly ‘what was going on?’ would have elicited the justifiable damages following from Fraudulent, Negligent and Statutory Misrepresentation. (See Section 2.8: Damages for Misrepresentation.)


Diligent inquiry by the Legal Profession would have brought to light the fact that the deliberate commission of a breach of duty, on the part of the Financial Services Institutions’ Management Personnel and their intermediaries, constitutes deliberate concealment of the facts involved in that breach of duty.


Diligent inquiry by the Legal Profession would have brought to light the fact that, in respect of the time limit within which a legal action must be taken, the Section 32 postponement provisions of the U.K. Limitation Act 1980, in the case of fraud or concealment, should be applied, and NOT the Section 14A latent damage provision, in the case of negligence.  (See Section 2.9: The Time Limit for Legal Action.)

Diligent inquiry by the Legal Profession would have ensured that truly independent ‘Financial and Actuarial Expertise’ would have been brought to bear on the analysis of ‘just what was going on?


Diligent inquiry by the Legal Profession would have exposed the fact that the Regulatory Regime has, through all its phases, from the Self Regulatory phases under LAUTRO, FIMBRA and the PIA, through to the FSA and Financial Ombudsman Service phase, exerted its control over the determinant criteria that give rise to compensation for the consumer in a manner that is contrary to the applicable principles of Common Law and Statute Law, and to the proclaimed overriding maxim of the Regulatory Regime itself:

‘The consumer has the right to expect and to be given all the relevant information necessary to enable him to come to an informed decision.’


Diligent inquiry by the Legal Profession
(informed by independent ‘financial and actuarial’ expertise) would have exposed the fact that, throughout all its phases, the Regulatory Regime has, deliberately, chosen not to address the fact that the Financial Services Institutions have NEVER brought the most critical financial analysis information necessary to a informed decision to accept the Risk associated with an Endowment Mortgage to the knowledge of the consumer. (This matter will be exposed, in detail, in Chapter 7: Risk.)


Diligent inquiry by the Legal Profession (informed by independent ‘financial and actuarial’ analysis of known facts) would have exposed the fact that, the mechanisms of the Endowment Mortgage Contract were such as to place the burden of a major, actuarially contrived, Risk on the consumer with (a) absolutely no Reward accruing to the consumer for taking on that Risk, and (b) a deliberate silence being maintained, by all parties owing a duty of care to the consumer, with respect to the existence of this Risk. (This matter will be exposed, in detail, in Chapter 10: The Gravy Train.)


By maintaining control over the complaints process and diverting the attentions of the Legal Profession and the Crown Prosecuting Authorities  ———  all this relevant information could be suppressed.



Note! Under the present Regulatory Regime, while the complaints process is operated by the Financial Ombudsman Service, it is the FSA (now the Financial Conduct Authority) that sets down the determinant criteria, these being the Guidance Parameters, that gave rise to an award of compensation to wronged consumers and by which the extent of such award is determined.

 

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