04 Jun Journalist heroes 3Read Time: 5 minutes
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Apart from the fundamental changes which have affected the financial advice sector in the last decade or so, it is sometimes easy to forget that there has also been much change in the field of financial products.
Some of this will undoubtedly be due to the greater availability of information to consumers. In addition, a raft of regulatory developments has forced product providers to review their offerings and to focus on those which an increasingly professional advice sector is likely to recommend. Most commentators tend to focus on the increased flexibility and lower cost of products today compared to those of 20 or 30 years ago, developments which are undoubtedly good for the consumer. It also makes it easier for advisers to recommend disposing of a product which no longer meets a client’s needs if doing so would not incur a huge financial penalty.
However, there are also whole classes of product which seem to have disappeared entirely from the landscape because there are simply better alternatives. One such is the non-qualifying savings plan.
Those with long memories may recall that until 1984, it was possible to claim tax relief at half the basic rate of income tax on premiums to what were known as ‘qualifying’ life assurance policies. In exchange for foregoing some flexibility, and when tax rates were rather higher than they are now, these offered certain investors tax benefits which were, if not substantial, at least worth considering. As I noted recently, the tax benefits for most people were more apparent than real but they will have been worthwhile for a minority.
However for those unwilling or unable to accept the flexibility restrictions there was a similar equivalent known as a ‘non-qualifying’ policy. This would often provide access to exactly the same funds but premiums did not need to be paid for as long. The drawback (apart from the similarly high costs, details of which were concealed in the small print), was that the proceeds on surrender were taxed according to the relatively obscure life assurance policy regime. This still applies today although it is more familiar in relation to single premium onshore life assurance bonds.
The most common usage today for the regular premium version is for providing whole of life insurance. This is commonly employed for meeting inheritance tax liabilities as the policy can be maintained until the date of death and it does not expire as long as the premiums continue to be paid.
Since most of the premiums go to pay for the cost of cover, such policies do not normally require much of a surrender value. Any tax liability on surrender is only charged on the difference between the surrender value total premiums paid and as the latter usually exceeds the former, the issue of tax liability does not normally arise. However, back in the 1990s, someone dreamed up a way to overcome this.
I learned about it from a friend at the time who casually asked me one day if I would have a look at the policy which had been set up to pay his mortgage. At the time, just about every man and his dog in the mortgage industry was recommending that homebuyer use endowment policies for this purpose and I fully assumed that this would be what Mike would have. The supposed benefits were life cover for the term of the loan, with a tax-free lump sum at the end which would, in theory, be sufficient to repay the mortgage and if things had gone well, provide a tax-free surplus for the borrower to spend as they wished. I wasn’t a great fan of them myself for the same reasons that I disliked qualifying policies in general but just about anyone who walked into a branch of a bank or building society in those days would have ended up with one.
As I read through the paperwork which he had supplied however, it was clear that Mike’s building society had come up with a slightly different approach. It had of course recommended a life assurance policy to repay the mortgage in the event of his death but the lump sum was to be generated from the surrender value of what turned out to be a whole of life policy. Like most such policies, it was non-qualifying, which could potentially result in a tax liability on surrender. While most individuals were not (and are not) subject to a higher rate tax, Mike was reasonably senior within his company and was fairly close to the higher rate threshold. It therefore seemed that there was a reasonable prospect of him being above that threshold before very long and certainly by the time he came to encash the policy to repay the mortgage.
At this point, Mike would have faced a bit of a problem. Assuming that everything had gone to plan with the policy, at the end of his mortgage term the surrender value would have matched the value of the mortgage. At this point he might therefore reasonably have elected to surrender the policy. As it was assigned to the lender, the proceeds would have been used to repay the mortgage. Unfortunately, Mike would then have received an unwelcome tax bill from the Inland Revenue, the magnitude of which would depend on the difference between the surrender value and what he had contributed over the years.
I suggested to him that this situation would have been entirely avoidable at outset, had he been advised either to opt for a conventional repayment mortgage or even an endowment and that he should complain to the lender which recommended it to him. Perhaps unsurprisingly, this approach did not produce a helpful response, given that using this solution was apparently a standard practice for that particular lender at the time.
Fortunately, a potential solution was at hand in the person of a chap called Paul Cooper, who contributed a column in one of the weekly finance trade papers at the time. Every week, Paul would write up a case in which he had been involved against some sort of poor practice in the world of financial services and from time to time, he would provide updates as to how those cases were resolved, usually in favour of the consumer. I used to read them not only to see what was going on out there but also because sometimes there were insights to improve the way that we did things ourselves.
This sort of case seemed right up Paul’s street so I sent him a summary of the circumstances and where I thought that the advice was systemically flawed. After a brief conversation to clarify the technical aspects, he agreed to take it on and approached the lender himself. Initially, he ran into the same brick wall that Mike had. After all, if a business has its standard solution challenged by some external busybody, it is probably natural for it to defend its actions as entirely reasonable. However, Paul was not giving up that easily and he continued to pursue the matter. By now he was convinced now that this was not simply a case of an incompetent member of staff failing to ascertain the customer’s circumstances before giving advice. Instead it was a systemic issue which extended across the entire branch network.
Within a couple of weeks, his persistence had paid off and the lender offered to compensate Mike fully for the poor advice he had been given. More importantly, it also announced a review of its procedures with regard to the suitability of this particular policy for mortgage repayment and I believe that not long afterwards, its use was either discontinued or scaled back significantly. Certainly it might have been possible for Mike to have achieved the same outcome in relation to his own case. However, I doubt that it would have had the same far-reaching effects which then benefited countless other customers of the society.
There was another thing that impressed me about Paul, something which I only discovered late in the day. During the entire period that he was writing his column about UK consumers being treated poorly by financial institutions, he was also working a more important case for his brother. Roger Cooper had been arrested in Iran in 1985 and was then held in the notorious Evin prison on highly dubious espionage charges. Paul never mentioned this in his column and only once in conversation but I was delighted to learn in 1991 of his brother’s release. No doubt Paul was as dogged in pursuing his brother’s case as he was those of mistreated consumers and many have reason to appreciate his work on their behalf.