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Cynicism or ineptitude? Either way, RSA will pay...

The sternest critics argue that it was caused by blind pursuit of profit, leading to monthly premiums being set too low. Kinder observers put it down to a lack of competence nothing short of ineptitude. Either way, Royal Scottish Assurance is to be hit hard where it hurts most, and made to pay for the blunders that led to thousands of mortgage buyers being sold endowment policies that were to prove insuffient to meet their mortgage repayment needs.

The firm has been fined £2 million by the PIA, the arm of the financial services watchdog responsible for overseeing this area of personal finance business. This is the largest fine it has ever handed out.

But this fine is peanuts compared to the bill it is likely to face from customers who will be eligible for compensation under the ruling. Around 30,000 customers will receive money from Royal Scottish Assurance, with the total bill set to top £50 million.

Although some quarters proclaimed this as fresh hope for the remaining millions trapped with endowment policies which may not pay their mortgage, the FSA moved quickly to scotch anticipation of widespread payouts, saying that the number of homeowners likely to benefit from future rulings that are currently in discussion would be thousands rather than the millions once expected.

RSA insists that the disastrously low premiums on the flexible mortgage plan resulted from a fault in the way its calculations had been done. Chairman Benny Higgins added a much-needed does of humility by issuing a statement in which he stated "I apologise unreservedly to policyholders affected."

The PIA cited serious and widespread compliance failings, together with failings in how it has carried out its pension review. It's findings cited the following breacvhes of PIA and FSA regulations:

Mortgage Endowments

The firm failed to act with due skill, care and diligence in calculating the premiums for its endowment policy, the "Flexible Mortgage Plan", between 1990 and 1994. In particular:-

• The firm made fundamental pricing errors when calculating premiums for the Flexible Mortgage Plans, leading to premiums being set at such a level that those policies would not re-pay the outstanding mortgage debt at the policy's maturity on the basis of growth assumptions used by RSA. As a result, approximately 30,000 Flexible Mortgage Plans, sold between October 1990 and 31 December 1994, were affected by the premium errors.
  
  
• On one occasion, the firm displayed a lack of high standards, integrity and fair dealing.
  
  
• In September 1996 the firm sent a letter to 300 Flexible Mortgage Plan investors suggesting that they should increase their premiums in order to achieve the sum required at maturity. This letter misleadingly explained that the increase was necessary because of reductions in projected rates of return. In reality, the main reason was to address the shortfall that would arise as a result of the firm's undisclosed policy pricing errors.
  
  
• The firm failed to give its customers the information necessary to enable them to make a balanced and informed decision.
  
  
• The letters sent to the 300 customers in September 1996 materially misrepresented the facts relating to the potential failure of their plans to meet the anticipated target sum. As a result customers were not placed in a position where they could make a balanced and informed decision about their policies and any redress that might be available.

Firm's relationship with PIA

• The firm failed to promptly notify the PIA that it had identified serious problems concerning the pricing of the Flexible Mortgage Plan, having identified the problem during 1996 and not notifying PIA until June 1997.

Firm's organisation and control of its internal affairs

• The firm failed to organise and control its internal affairs in a responsible manner, which led to its inability to secure compliance with regulatory requirements across its product range and in respect of its sales process. This has led the firm to conduct comprehensive reviews of its historic business and product integrity.
  
  
• The firm failed to establish adequate procedures for setting premiums for the Flexible Mortgage Plan.
  
  
• The firm failed to establish systems for monitoring and testing its pricing of the Flexible Mortgage Plan and Lifetime Security Plan.
  
  
• The firm failed to apply adequate resources to its actuarial and compliance arrangements.
  
  
• The firm failed to take adequate steps to investigate concerns about the pricing of the Flexible Mortgage Plan in a timely manner, when concerns first arose.

Training and Competence

• The firm failed to establish and implement an appropriate Training and Competence Scheme that ensured that its staff carried out functions in a way that met with the requirements of the PIA.

Reviewing of Business

• The firm failed to take all reasonable steps to carry out its pension review. In particular: The firm failed to properly identify its starting population; incorrectly excluded cases from its starting population; failed to progress its review in a timely manner; failed to properly carry out mailings to investors; and to trace investors and failed to adequately resource and train staff to carry out its pension review.