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My PFS - Technical news - 09/05/17

Publication date:

11 May 2017

Last updated:

22 September 2017


Technical Connection

Personal Finance Society news update from 26th April to 9th May 2017.

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Deciding claims disputes on a fair and reasonable basis

(AF4, FA7, LP2, RO2)

This is the case which has been described under the heading "morality can trump law" and as such has caused some consternation in legal circles.  The case is that of R (Aviva Life and Pensions) v Financial Ombudsman Service (2017) EWHC 352 and it concerned Aviva declining a terminal illness claim on the grounds of non-disclosure.

The facts of the case were as follows.  On 12th November 2013 Mr McCulloch took out a single life policy with terminal illness benefit with Aviva.  In his application he did not disclose that he had been consulting his GP about possible mental health issues since September that year and that he had been referred to a consultant psychiatrist and for a CT scan because of his family's concerns about changes in his personality.  Sadly, Mr McCulloch's condition was diagnosed as terminal following the CT scan and by December 2013 he was in a hospice at which point his family made a claim under the policy.  Aviva declined the claim on the grounds of misrepresentation and avoided the policy. 

A complaint was submitted to the Financial Ombudsman Service (FOS).  The FOS accepted that, if the case went to court, Aviva would have been entitled to avoid the policy on the grounds of misrepresentation; nevertheless it made an award in Mr McCulloch's favour on the basis that, given the illness which he was suffering, he could not have been expected to make the same disclosures that a reasonable person would be expected to make.

Unsurprisingly, Aviva sought judicial review and an order to quash the FOS's decision.  It is known that the FOS makes decisions on what is a fair and reasonable basis. Aviva argued that in making a decision on this basis the FOS should still have taken account of relevant laws, regulations, codes of practice and industry standards.  The Judge agreed that the FOS should have taken account of all the laws and regulations.  However, he still found that the FOS was entitled to depart from those legal guidelines, provided it gave reasons why. 

Aviva also argued that the FOS decision was irrational and outrageous and that no sensible person could have arrived at it but the Judge disagreed with this on the grounds of the unusual circumstances of the case. However, the Judge decided that, while the decision itself may not have been unreasonable, the problem was that it was not supported by careful reasoning. For this reason the FOS decision was quashed and the case was remitted back to the FOS for a fresh determination.  We await this new determination with interest.

It seems quite extraordinary that the Judge has determined that the FOS is not bound to follow the law and regulations when deciding what is fair and reasonable, as long as it provides detailed reasons for any departure from the said law and regulations.  Clearly we have not reached the end of this case yet but life offices must be concerned about the ease with which the Ombudsman apparently discarded the well-established legal principles concerning disclosure and misrepresentation in favour of what he considered to be fair.


Collective funds march 2017 IA statistics

(AF4, FA7, LP2, RO2)

The Investment Association has just published its monthly statistics for March 2017. Like the February numbers, the March net sales reflect a renewed appetite among retail investors after a disappointing 2016. Net retail sales have been positive since last August after a three-month run of Brexit-inspired outflows. This month's highlights include:

  • Net retail sales for the month were £4,036m, up (a revised) £1,796m on February. Gross retail sales were up £6,196m on February's figure, at £22,475m, but redemptions also rose significantly - from £14,483m to £18,439m, probably a reflection of year-end CGT planning. For the first quarter net retail sales were £6,646m, the highest quarterly level since the first three months of 2014.
  • Net institutional sales for March rose from £1,711m to £3,569m. A year ago, there was an outflow of £86m.
  • The net inflows helped lift total funds under management (FUM) to £1,087.9bn, the fourth consecutive month a new record has been set. Across the year, the FUM increase amounted to 16.7%, mainly due to market movements.
  • Equity was the best-selling asset class, with net retail sales of £1,739m, the second highest level ever recorded. Mixed asset came in second, with net sales of £818m. Fixed income completed the top three with net retail sales of £720m. Even the least popular asset class, property, drew in a net £52m.
  • The most popular sector in terms of monthly net retail sales was UK All Companies. Yes, the mega-sector which so often attracts the biggest net redemption figure produced £650m of net inflow, the first time it has topped the sector charts since December 2013. It is quite a reversal: in March 2016, UK All Companies suffered net retail redemptions of £824m. Targeted Absolute Return took second place (£381m), Global was third, £ Strategic Bond was fourth and UK Equity Income, fifth.
  • ISA net flows were £343m, reversing last month's £143m outflow. It was only the second month of positive numbers in the last twelve. However, April is likely to also show a net inflow.
  • The total value of tracker funds rose 3.9% to £148.9bn, meaning that they now account for 13.7% of the industry total. The corresponding figure for March 2016 was 11.2%.  Tracker fund net retail sales amounted to £1,720m - 43% of all net retail sales.

The turn of the tax year often produces good net retail sales figures and 2017 was no exception.


PPF to increase fraud compensation levy 2017/18

(AF3, FA2, JO5, RO4, RO8)

In a press release the PPF confirms plans to raise Fraud Compensation Levy in 2017/18 for the first time in 5 years.

The PPF, which runs the Fraud Compensation Fund (FCF), has been notified of a number of possible claims which may come to the FCF in the next few years. Therefore, with forward planning in mind and to smooth the impact to schemes over time, the PPF is raising a levy of 25p per member - the same as in 2012/13. The levy is expected to raise around £5 million in total.

Delay of spa announcement

(AF3, FA2, JO5, RO4, RO8)

Section 27 of the Pensions Act 2014 reads as follows:

"(1) The Secretary of State must from time to time-

(a) review whether the rules about pensionable age are appropriate, having regard

to life expectancy and other factors that the Secretary of State considers

relevant, and

(b) prepare and publish a report on the outcome of the review.

(2) The first report must be published before 7 May 2017."

You might think that sounds quite categorical - the word "must" occurs twice - but reports, including from the BBC, say that the government will not meet the deadline. There is no indication of this on the DWP website, but "sources" are claiming that pre-election 'purdah' rules prevent any announcement from being made.

A somewhat similar argument was thrown out by the High Court last week. In that case, the government argued that purdah prevented it from publishing draft air pollution plans, even though the High Court had ruled last November that DEFRA should publish its plans by 24 April 2017. In giving his decision, Mr Justice Graham said that the government could not simply use purdah as a "defence...not to comply with court orders…It is not a trump card to be deployed at will by one litigant". While purdah is an established practice, it has no specific legislation behind it.

Given the controversy already surrounding the future of the pensions "triple lock", it is understandable that the government wants to divert attention away from state pension issues. Bringing forward the increase in state pension age to 68 by seven years, as was proposed by the final Cridland Report, is not an obvious vote winner.

The High Court refused the government right to appeal in last week's case, although the government could still go directly to the Court of Appeal. The DWP may be awaiting the next steps in the DEFRA case before making any (non-) announcements about state pension age.

Finance bill amendments

(AF3, FA2, JO5, RO4, RO8)

In view of the impending election, the government has backed off from reducing the money purchase annual allowance (MPAA) from £10,000 to £4,000 from this April. 

While this change was included in the government's Finance (No 2) Bill 2017, in the latest government amendments this clause has been left out.

The clause, which would have cut the tax-free dividend allowance from £5,000 to £2,000 from April 2018, has also been left out.

This document is believed to be accurate but is not intended as a basis of knowledge upon which advice can be given. Neither the author (personal or corporate), the CII group, local institute or Society, or any of the officers or employees of those organisations accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of the data or opinions included in this material. Opinions expressed are those of the author or authors and not necessarily those of the CII group, local institutes, or Societies.