18th Jan 2005 15:07
Legal & General Group PLC18 January 2005 RNS The Financial Services and Markets Tribunal has today delivered its judgment inthe case between the Financial Services Authority ("FSA") and Legal & GeneralAssurance 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 theprocess by which it was reached were unfair. The judgment of the Tribunal isthat "the RDC was in error in its approach to the mis-selling case and reachedconclusions not justified by the material before it". In addition, referring toerrors in the Decision Notice and in the way it was reached, the Tribunal statedthat "Legal & General were justified in feeling aggrieved by these aspects ofthe RDC's decision". On the case made by the FSA against Legal & General's procedures, much of whichrevolved around the design of the Personal Financial Review ("PFR") form, theTribunal 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 hadbeen reviewed by Legal & General's regulator, PIA, without any adverse comment". The Tribunal's decision cleared Legal & General of the charge of widespreadmis-selling but said that the procedural rule breaches "will have caused orcontributed to mis-sales". The Tribunal found that the FSA had proved 8 casesof mis-sales and stated that "except to this limited extent the mis-selling casefails". The Tribunal has stated its provisional view "that there should be areduction in the penalty imposed by FSA". David Prosser, Group Chief Executive, said "Legal & General's Board decided toappeal against the RDC decision because we disagreed with the decision and theway it was reached. We are pleased that the case has now been heard by anindependent body. The Tribunal has agreed with us that the RDC "reachedconclusions 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. Itshould be emphasised that at no stage was this case concerned with the rights orcompensation of any customer who felt that they had been mis-sold. A processfor dealing with customers in the period covered by the Tribunal has alreadybeen 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, acopy of which is set out below. Enquiries to: Media: John Morgan, Head of Public Relations 020 7528 6213Anthony 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 itsRegulatory Decisions Committee (RDC). The FSA erred in its approach to themis-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 widespreadmis-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-salesout of 60 alleged mis-sales. However, the Tribunal held that the procedural rulebreaches were of limited seriousness, the PIA (FSA's predecessor) havingreviewed the relevant procedures and approved them. 3. The Tribunal indicated that its provisional view was that the penaltyimposed on Legal & General of £1.1 million should be reduced. A further hearingwill be held on this issue. 4. Key quotes from the Tribunal's decision are set out in the Annex to thisSummary document. Background 5. After an investigation lasting more than 3 years, the RDC decided thatLegal & General was guilty of widespread mis-selling because it had sold itswith-profits endowment (FMP) product to customers who were risk-averse.Specifically, and in reliance upon a past business review conducted by PwC, FSAdecided that 60 cases out of a sample of 152 had been mis-sold and that thatresult was not only unacceptably high (at 39%), but could be extrapolated intosales to with-profits FMP customers generally. 6. Legal & General had argued that the evidence did not support the seriouscharge 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 forwidespread mis-selling or referring the matter for a fresh hearing before anindependent and impartial tribunal, the Financial Services and Markets Tribunal. The Legal & General board unanimously decided to refer the matter to theTribunal. In an RNS announcement of 21 November 2003, Legal & General stated: "Legal & General, after careful consideration and on legal advice, disagreeswith both the decision reached by the FSA and the process by which it wasreached. Accordingly, Legal & General has taken the first opportunity allowedby 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 andreached conclusions not justified by the material before it" (218). 8. If proceedings before the Tribunal were in the form of an appeal, thatwould have been the end of it. Legal & General would have won its appeal. But areference to the Tribunal does not take the form of an appeal but is a rehearingof the matter and allows both parties to introduce new evidence. 9. FSA called 22 witnesses, both factual and expert, in support of its caseand argued that Legal & General's procedures were deficient, that thesedeficiencies caused or contributed to 60 mis-sales out of a sample of 152 casesand that that result could be extrapolated into the general with-profits FMPpopulation. 10. The Tribunal found that there were flaws in Legal & General's proceduresbut: "these rule breaches need to be seen in context. The text of the PFR form hadbeen reviewed by L&G's regulator, PIA, without any adverse comment. Theinappropriate use of sample wording had been identified and criticised by PIA in1999, which had imposed remedial measures on L&G without classifying the matteras particularly serious" (216). 11. However, the Tribunal rejected the key allegation of widespread mis-sellingmade by FSA: "We do not... accept FSA's claims about the extent of mis-sales. FSA haveproved 8 mis-sales to the required standard from the 13 cases about which weheard evidence. It would not be just for us to find any mis-sales in the other47 cases for the reasons set out elsewhere... We do not accept FSA's case thatthe conclusions of the sales review and our findings on individual cases can betaken to reflect the pattern of mis-sales generally" (217). 12. The FSA decided that 60 out of 152 sample cases were mis-sales and thatthis result could be extrapolated to the wider population. The Tribunal heldthat only 8 out of the 152 cases were mis-sales (although they acknowledged thatthere was possible mis-selling in another 14 cases) and that the FSA cannotextrapolate from this figure to make any wider conclusions. Thus, despite thefact that the FSA's investigation lasted more than four years and the FSA hadthe ability to introduce new and additional evidence in the Tribunalproceedings, it only succeeded in establishing that 8 cases were mis-sales andit failed to persuade the Tribunal that it was possible to extrapolate. As theTribunal made clear: "Except to this limited extent the mis-selling case fails" (205). 13. Legal & General did not believe that it was guilty of widespreadmis-selling and is delighted that it has been vindicated by the decision of theTribunal after this lengthy process. The Tribunal in its decision states thatcommon sense dictates that there will have been a fair number of mis-sales inthe general population beyond the 8 established. Legal & General accepts thatin 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-profitsFMP population. Legal & General remains committed to treating its customersfairly and paying compensation when its complaints handling procedure shows thata customer has been mis-sold a policy. Conclusion 14. This case was referred by Legal & General to the Tribunal because itdisagreed with the decision that the FSA, through the RDC, had reached. TheTribunal was established under the Financial Services and Markets Act 2000 to bean effective check and balance on the FSA's enforcement process. By thisdecision, the Tribunal has demonstrated that it fulfils that functioneffectively. 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 PwCReport which were worded in stronger terms than PwC itself adopted. If, as weassume it to be, this was an oversight it was unfortunate. It suggests a lackof accuracy and may have been part of what led the members of the RDC toconclude that the 60 sales were unsuitable" (para 210). "As we see it there is no indication in the Decision Notice that, on thequestion 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 RDCrelied ("FSA has concluded that this evidence is substantiated" - 4.18). TheRDC appears to have found L&G guilty of mis-selling by adopting the PwC reportwhich 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 theRDC's Decision" (para 214). "In our view the RDC was in error in its approach to the mis-selling case andreached 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 hadbeen reviewed by L&G's regulator, PIA, without any adverse comment. Theinappropriate use of sample wording had been identified and criticised by PIA in1999, which had imposed remedial measures on L&G without classifying the matteras particularly serious" (para 216). "L&G submit that PIA's attitude to the procedures and to the allegedshortcomings on earlier ocasions is relevant to the seiousness with which weshould 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 andthat it did not criticise either the risk definitions in section 16 or the formand structure of the PFR as a whole. FSA has not suggested that the scrutiny in1995 and 1996 was incorrect or inefficient. L&G invite us to draw the inferencethat the revised PFR in 1996 did properly reflect what PIA required. It iscorrect to draw that inference but we bear in mind that PIA scrutiny was of theform 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 donot however accept FSA's claims about the extent of mis-sales. FSA have proved8 mis-sales to the required standard from the 13 cases about which we heardevidence. We do not accept FSA's case that the conclusions of the sales reviewand our findings on individual cases can be taken to reflect the pattern ofmis-sales generally" (para 217). "We do not accept FSA's submission that we should place weight on the judgmentson 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 toextrapolate the results into the wider population of FMPs, for the purposes of adisciplinary 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 casesin the ESR and that this pattern can be taken as representative of sales of FMPsto low risk customers generally. We find that there were 8 mis-sales withpotentially 14 more. We find 25 cases too unclear to decide. We find 4 casesnot to be mis-sales with 9 more potentially in the same category. We do notconsider that this pattern in the 60 can be taken as representative of sales tolow risk customers generally. Common sense suggests that the defects inprocedures will have caused mis-sales beyond the 8 established. Except to thislimited extent the mis-selling case fails" (para 205). 18 January 2005 -------------------------- (1) References to square brackets are to the numbered paragraphs of the Tribunal's decision. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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