'Disgraceful' endowment mis-selling faces test case Financial advisory firm is aiming to prove professional negligence by solicitors

Governing body the Law Society of Scotland continues to stress that it is powerless to act, effectively because it does not have the power to order a solicitor to make good the shortfall in an endowment misselling case. The society can only award compensation for inadequate professional service up to a maximum of pounds-1000 in cases dating from 1991 until April 1 this year. On that date the compensation threshold was increased to pounds-5000 for new business.

However, Macarthur Denton alleges that the society's regulatory independence is, in any case, compromised. To the consternation of one Macarthur client, it emerged that the same individual defending her legal adviser against mis-selling allegations is himself a society functionary.

Endowment mis-selling cases are disproportionately numerous in Scotland. The nation's house buying system, where solicitors often act as estate agents, means thousands of home owners bought endowments from them rather than financial advisers.

Regulator of last resort, the Scottish Legal Services ombudsman, increased her investigation team from four to six individuals earlier this year, specifically to cope with a f lood of complaints about the law society's handling of complaints concerning alleged endowment policy mis-selling by solicitors. The chances of seeing a complaint upheld are slim, however, even when measured against the narrow criteria of service standards.

The law society received 113 complaints about alleged endowment policy mis-selling in the first nine months of 2004. Just one was upheld, triggering a compensation payment of pounds-250. Forty-six complaints were abandoned.

In the year to May 31, 2005, meanwhile, the ombudsman received 111 complaints to her own office about the way the society handled complaints about endowment mis-selling.

Macarthur Denton's Ken Nicholas said the asset manager had become deeply frustrated with its inability to obtain compensation from law firms, in sharp contrast with its experience in dealing with financial institutions.

He said: "In the last 18 months reviewing clients' mortgage arrangements we have encountered close to 100 individuals who, based on the information imparted to us, appear to have been mis-sold endowment policies by solicitors in Scotland. Despite pursuing complaints on their behalf through the approved process, including eventual referral to the Law Society of Scotland, not one case has been upheld, nor has a single penny of compensation been forthcoming.

"In comparison, under identical circumstances where advice was provided through a bank, building society, or directly by a life assurer, the success rate for our firm in obtaining compensation exceeds 80-per cent."

Nicholas is savage in his assessment of the professionalism with which Scottish lawyers handle mis-selling complaints. He added: "In many cases, the legal firms in question simply ignore or fail to adequately address the issues put to them in complaint letters, and on occasion have displayed an extremely patronising and often overtly aggressive stance when we have the temerity to ask them to respond.

"Our firm is currently seeking legal counsel in respect of the viability and client cost of taking a test case to the Court of Session with the aim of proving professional negligence, which now appears to be the only way in which justice will prevail. The law society and legal services ombudsman appear, respectively, to be either unwilling or unable to obtain justice for the public in these circumstances.

"The whole issue is the most disgraceful example imaginable of so-called professional practitioners failing not only in their duty to clients but in their willingness to own up and accept responsibility for their actions.

Having happily accepted generous commission payments from the insurance companies in question, they are now prepared to shrug their collective shoulders when called to account, and should hang their heads in shame."

Macarthur believes a test case could cost as much as pounds-20,000. The law firm's defenders will be well aware that the intention is to set a precedent, and one can expect expert witnesses to be called. However, Nicholas has discussed the possibility of a joint funding effort, reasoning that once a precedent has been set, a lengthy queue of complainers will be well-placed to benefit.

Nicholas is seeking help from the Pursuers Panel for Professional Negligence Claims against Solicitors, though there is some irony in the fact that this body is run by the society.

The density of the regulatory thicket confronting those seeking redress is familiar to Gail McEwan, of Johnstone, Renfrewshire. McEwan, director of a voluntary organisation, first complained to Glasgow law firm Bishops in April 2003 about a Scottish Provident endowment policy allegedly mis-sold by predecessor firm Bishop and Robertson Chalmers.

McEwan took out the pounds-42,000 policy to buy a pounds-65,000 house in 1997, in tandem with a separate Woolwich policy worth pounds-21,000.

The handling of McEwan's complaint was marked by an extraordinary degree of inertia from the outset.

The file is several inches thick and difficult to digest, let alone summarise. But it is possible to give a flavour of the bureaucratic imbroglio into which she stepped.

Bishops partner John Welsh replied in May 2000, nearly a month after her first letter, apologising for the delay in responding. He asked for Scottish Provident documentation indicating the projected endowment shortfall. She sent that information in June but did not receive a reply for another two months, when Welsh again apologised for his tardy response, without giving an explanation.

McEwan wrote back reiterating the reasons behind her claim for compensation, to be tersely informed by Welsh on September 5 that he was referring the matter to the firm's professional indemnity insurers - again without any guidance or explanation.

McEwan wrote to Welsh again, after several more weeks had passed, saying she had heard nothing from the insurers. She accused Bishops of "wasting time unnecessarily", warning him that she would refer the case to the Financial Services Authority (FSA) were she to get no satisfaction.

Welsh surely knew the FSA had no jurisdiction. Yet he did not mention this in his reply of October 17, 2003, when he said the firm's indemnity insurers had told Bishops that they had referred the matter back to the firm because the sum at issue - a few thousand pounds - would be less than the firm's self-insured amount. Why, in that case, Welsh referred the case to the PI insurers in the first place is unclear.

Welsh then told her Bishops had instructed an external solicitor, Derek Allan of Brechin Tindal Oatts, to deal with the claim on the firm's behalf "without any conf lict of interest". McEwan accused Bishops of "bully-boy tactics" designed to intimidate her into backing down, something Bishops has vehemently denied.

It was only when McEwan complained to the law society months later that she discovered that Allan acts as a nominated panel solicitor under the society's master policy for their insurers in defending claims made against solicitors for alleged breach of contract or negligence. He also conducts society seminars.

For McEwan, this demolished the entire credibility of the complaints process. In letters to her MSP in April 2004, she observed: "I am beginning to feel like my story reads like a chapter from a John Grisham novel . . . all the parties involved obviously have a variety of interests in common and know each other particularly well.

For someone who is a layperson within the legal world, what chance do you have?"

Welsh's dealings with BTO's Allan were even less expeditious. Allan told her on October 28, 2003 that he would confirm details of Bishops' position as soon as possible. He already had the file but did not write to her again for more than eight months. McEwan later tried to complain to the law society, but the society refused to countenance that complaint - of poor service - because she was not Allan's client.

When Allan did write back, on July 2, 2004, his explanation exonerated the Bishops predecessor firm for mis-selling, apparently on the basis of little more than Bishops' word that the IFA involved had not told her that the Scottish Provident Policy was guaranteed to pay off her mortgage. McEwan pointed out that Allan was not in a position to say what the IFA had told her, since he was not present at those meetings.

She was also angry at not being asked for her own comments, especially since Allan's explanation was, she alleges, riddled with factual errors about the circumstances of the case - even in respect of such fundamental matters as the ownership of properties and mortgages involved.

In a letter to Allan on July 6, 2004 she declared: "As any investigator worth their salt knows, the reason for collecting evidence from all the relevant parties is to ensure all known aspects of the case are clearly and factually explored before any conclusion is drawn."

A further six weeks elapsed before Allan replied, apologising for any "erroneous assumptions", but stressing this did not affect or change his opinion.

Allan declined to comment on his involvement in the case.

The saga continued when McEwan complained about Bishops' handling of her complaint. In short, the matterwent through three case managers - two left the society during the course of the investigation - and months of further delay before McEwan was eventually awarded pounds-500 in compensation for Bishops' failing to advise her adequately on its complaints procedure.

Bishops told The Herald it accepted that finding and revised its procedures. However, McEwan, no nearer recouping the pounds-8000 she is out of pocket, is not placated and has now complained to the ombudsman.

"There must be a couple of thousand people in Scotland in the same situation as me but many give up because of the process you are put through when you complain, " she said.

"To my mind it is all designed to put you off."

There was a glimmer of hope earlier this year, when it appeared the society might indeed have the power to order solicitors to make good the shortfall or potential shortfall on endowment policies. The ombudsman, Linda Costelloe Baker, had asked the society to consider whether its power to order solicitors to rectify any "deficiency" in the service provided allows it to use the same approach as the Financial Services Authority.

If an endowment policy has been mis-sold by an adviser regulated by the FSA, compensation is based on comparing the current financial position, taking the endowment policy into account, with what the position would now be if the client had taken out a repayment mortgage at the outset. To get compensation, this comparison has to show that the client is now worse off financially, as a result of following unsuitable advice to take out the mortgage endowment.

The society did take advice.

However, a spokesperson said it was told that so-called "rectification" cannot include financial compensation, only putting right a mistake. She added:

"The society cannot order the solicitor to pay direct compensation for any financial loss to the clients - the clients would need to go through the courts."

So that appears to be that.

The only hope for victims of alleged mis-selling is a court case, assuming Macarthur Denton can raise the cash.

Perhaps. The ombudsman was somewhat inscrutable on the subject. Costelloe Baker said she believed the counsel's advice on "rectification" to the society was reasonable, but added: "It is something I am keeping a very close eye on to see what else might be possible."