Abbey Life hit with record £1m fine

City watchdog warns that more insurers face big penalties for mis-selling mortgage endowments

Lloyds TSB was facing a compensation bill of up to £160m after the Financial Services Authority launched a blitz on mortgage endowment mis-selling yesterday by fining the bank's life insurance business a record £1m.

Between 42,000 and 46,000 mortgage endowment customers at Lloyds' Abbey Life will share in the compensation, as will a further 3,000 to 4,000 customers who have suffered loss as a result of failings in Abbey Life's complaints procedures.

The FSA said the size of the fine, which is twice the previous record for mis-selling endowment mortgages, reflected the serious nature of Abbey's failings, which occurred between 1995 and 1999. Its salesmen failed to make sure the customers to whom they were selling mortgage endowments were fully aware of the risks that the investment plan they were buying was not guaranteed to pay off their mortgage.

The regulator also warned yesterday that more insurers were set to face large fines.

Lloyds has now had to shell out more than £1bn for pension and endowment mis-selling in its life insurance divisions. Abbey Life, in which Lloyds took a majority stake in 1988, was responsible for a substantial share of this pensions mis-selling bill. It became a wholly owned subsidiary of Lloyds in 1996 and shareholders have seen about £150m set aside in reserves to cover its guaranteed annuity liabilities. Since 1999, Lloyds has injected at least £176m into Abbey just to keep it above its solvency margins.

The Lloyds group said yesterday that an extra £40m was being set aside for pension compensation across its businesses.

Ned Cazalet, an independent insurance analyst, said: "Lloyds TSB shareholders must be disappointed with its life insurance buys. Banks are waking up to the fact they need to inject capital in to them, rather than throwing up capital for the bank."

The FSA said Abbey Life's breaches were particularly serious given that they occurred over such an extended period of time.

Three visits by compliance officers at the regulator to Abbey Life's offices between 1995 and 1999 found the company had failed to monitor its 1,500 advisers properly or to keep good customer records. The standard of its "Reason Why" letters was also a cause for grave concern. These are the letters advisers must complete for their client when they have recommended a product to justify that it is suitable for them. It is the regulatory lynchpin in the sales process.

Carol Sergeant of the FSA said: "The failings in this case are serious. Weaknesses in Abbey Life's internal controls occurred over an extended period of time and exposed large numbers of consumers, particularly those who purchased mortgage endowments, to the risk of loss."

These led the FSA to conclude there was "a systemic failure in Abbey Life's procedures" and its advisers made "widespread unsuitable recommendations". Many of its endowment customers are facing shortfalls in their investment plans.

The company stopped selling new policies in February 2000 and the salesforce was sold to Allied Dunbar, part of the Zurich group.

The FSA did hold out some praise for Abbey Life, saying it had co-operated fully with the regulators since it began its investigation. "The penalty would have been much higher were it not for the extensive and proactive remedial action taken by Abbey Life, the acceptance of responsibility by its senior management and the degree of openness and co-operation it has shown to the regulator," Ms Sergeant said. Where there has been any doubt over whether consumers may have been mis-sold, Abbey Life has resolved the matter in favour of the customer.

Abbey Life has now voluntarily agreed to review mortgage endowment sales back to 1988 and has also undertaken a wide-ranging review of other products.