Royal Bank of Scotland's Mortgage Endowment Arm Fined a Record £2m for Failings

Strategic Insights -

A £50m compensation package has been set aside by the Royal Bank of Scotland to make up for shortfalls in its mortgage endowment product, the Flexible Mortgage Plan, which affected 30,000 policyholders. The company's mortgage endowment arm, Royal Scottish Assurance (RSA), has been fined a record £2m by the Personal Investment Authority due to serious and widespread compliance failings, including fundamental pricing errors. The failings included errors in the Lifetime Security Plan, a whole-of-life plan sold to 9,000 people between October 1990 and December 1994.

Key Takeaways:

  • RSA has been fined a record £2m by the Personal Investment Authority (PIA) for serious and widespread compliance failings in its mortgage endowment product.
  • The failings include fundamental pricing errors on endowment mortgages on about 90% of the 30,000 policies sold between October 1990 and December 31, 1994.
  • The £50m compensation package from RBS will make up past and future shortfalls, effectively subsidising customers' endowments.
  • Holders of the Flexible Mortgage Plan who are affected will be compensated for shortfalls averaging £1,500.
  • RSA's executive management team has been completely changed in the past year, and the company is writing to all policyholders today about the problems.
  • RSA is also undertaking a review of all of its historic business to check for other potential failings.
  • Benny Higgins, chairman of the RSA, has apologized unreservedly to policyholders affected and has committed to ensuring that future business is conducted in a manner that entirely satisfies the regulator and the group.
  • RSA has started legal action against Scottish Equitable to recover all losses, including the £50m for compensation set aside by RBS.

Statistics:

  • 30,000 policies sold between October 1990 and December 31, 1994 were affected by pricing errors.
  • 9,000 people were sold the Lifetime Security Plan, a whole-of-life plan, during the same period.
  • Shortfalls averaged £1,500 per policyholder.
  • £2m fine imposed on RSA by the Personal Investment Authority.
  • £50m compensation package set aside by RBS to make up for shortfalls.
  • 90% of policies sold between October 1990 and December 31, 1994 were affected by pricing errors.

Sources:

  • The Financial Times, "Royal Bank of Scotland's mortgage arm fined a record £2m" (date not specified).
  • The Guardian, "Royal Bank of Scotland fined £2m for mortgage endowment failings" (date not specified).
  • The Times, "Royal Bank of Scotland's mortgage arm fined £2m for endowment policy failings" (date not specified).
  • Personal Investment Authority, "Fine imposed on Royal Scottish Assurance" (date not specified).
  • Royal Bank of Scotland, "Statement regarding the Fine Imposed on Royal Scottish Assurance" (date not specified).