Endowment Misselling

The traded endowment policy market could double in the next two to three years, according to the Association of Policy Market Makers.
Demand from Germany has meant that the level of purchases increased sharply in 2006. The Association of Policy Market Makers (APMM) said that its six members were reporting increases in demand.

Brian Goldstein, chairman of the APMM, said: “The TEP market has never been so busy, as German institutions clamour to buy policies for their funds with the big houses back for a second round of funds.

“For these investors TEPs are so attractive because they have a minimum guarantee, which increases over time, a set purchase price and the potential to make significant gains.”

Mr Goldstein said that German investment houses that had originally invested in UK TEP funds two years ago were now so confident that they have invested into a second fund. He said UK names were favoured for their reputation for stability.

He said: “Endowment policyholders who are considering disposing of their policy are now likely to receive more money for their endowment than before.

“Our members are paying out an average of 15% more than surrender value and sometimes up to 30% more.”

WESLEYAN Assurance Society has trimmed payouts to long-term with-profits savers, but increased bonus payments to customers with 10-year policies.

The mutual has two with-profits funds, one of which was closed to new business in 1997. Today's mid-year announcement relates to the fund that is still open.

On life policies, the average payout on maturing policies is almost unchanged when compared with May 2005, and the payout on 10-year policies is up slightly. On pension policies, the average reduction is 1.6%.

The payout on a typical 25-year endowment mortgage maturing on 1 January 2006 is cut from Ł69,380 in May to Ł68,574. Wesleyan says: 'Long-term policies are still providing competitive returns after inflation, with a 25-year endowment returning 10.8% a year after tax - a real return of 7.2% a year. Shorter-term policies have been affected by the poor equity market returns since 1999, but still show positive growth.'

And it adds: 'Mortgage endowment policies in the open fund continue to benefit from the 100% cast-iron guarantee that the maturity payout will repay the original mortgage amount.'

The payouts

Wesleyan's endowment examples assume a payment of Ł50 a month investment over the life of the policy. The pension examples are for a male paying Ł200 per month, and retiring at age 65.

The Financial Services Authority (FSA) is to embark on a multi-media national and regional advertising campaign this week in a bid to widen awareness of the need to act on endowment mortgage shortfalls. The campaign will include advertisements in the tabloid press, a poster campaign in libraries and citizens' advice bureaux, and the distribution of hundreds of thousands of leaflets to doctors' surgeries. Insurers and banks are bracing themselves for a sharp rise in the number of complaints expected to follow in the wake of the campaign. Some insurers are expecting the number of complaints to double as a result. The unprecedented FSA campaign is deliberately targeting alternative venues and media in order to reach people who may not have seen its consumer factsheets and have not read about the endowment crisis in the press. It is believed that almost 3 million of the 6m people with mortgage endowment policies are facing a shortfall. While most are believed to be aware of the problem and to have made provisions, a number are still thought to be unprepared for the possibility of a mortgage shortfall. An FSA spokeswoman said: "Most people have now either taken action or think they don't need to worry. But there is still a pocket of people who haven't done anything about their shortfalls. And we'd encourage them to act now." Several insurance companies are approaching the end of the period in which the FSA allowed them to spend 16 weeks processing complaints rather than the usual eight weeks. A renewed surge in complaints would leave those insurers in need of further extensions, and may result in applications from other insurers for similar concessions. David Riddington, a senior actuary at Norwich Union, said: "When you bring up the endowment issue, there's always a danger that we'll have even more calls to deal with. "I think the FSA's intention is okay, but whether the outcome will be as satisfactory remains to be seen."

Making up the average endowment mortgage shortfall will cost homebuyers more than £100 a month, according to the first detailed independent analysis of the crisis. Leading life insurance analyst Cazalet Consulting reckons that the bill for mortgage shortfalls caused by poorly performing endowment policies will be £70bn to £100bn. The cost, which company founder Ned Cazalet expects to be borne chiefly by homeowners, will peak in a decade, when the majority of mortgages linked to endowments are due to be paid. The number of shortfalls will escalate rapidly from 2003, when fewer than 50,000 policyholders will be hit, to 2012 or 2013 when the number could top a million a year. Cazalet warns that too little is being done and that the shortfalls will have massive repercussions that lenders, insurers and the Government have yet to grasp. 'Whatever the final level of total shortfall, it is simply too big a number to slip unnoticed through the digestive tract of the UK economy,' he said.

Consumers’ Association voice disappointment over FSA’s continued apathy on endowment mis-selling

Louise Hanson, Head of Campaigns, Consumers’ Association, said:
"While it is good to see the FSA giving guidance to consumers about endowment shortfalls, bearing in mind that up to five million people may have been mis-sold an endowment mortgage, it is disappointing that the FSA is not providing similar details about how to complain about mis-selling.

"A year after the launch of endowment action well over half a million people have flooded to our website to get information on endowment mis-selling and yet still the FSA will not acknowledge that consumers need help or that mis-selling was widespread.

"Our own online research showed that 72 per cent of consumers surveyed who rejected compensation did not then take their complaint to the Financial Ombudsman Service. Consumers just aren’t aware of the redress options open to them around endowments mis-selling and the FSA needs to take its head out of the sand once and for all and help the millions of victims of corporate malpractice. "

The Financial Services Authority said it would be targeting 6,000 doctors' surgeries in an attempt to reach those policyholders who have yet to take action - as revealed by the Guardian a week ago.

It said that "a small but significant number of people" have yet to face up to the fact that a shortfall now could lead to financial difficulties later.

It has already been estimated that more than half of Britain's 9m endowments have little chance of reaching their target.

Thousands of investors have received letters from insurers warning that their endowments were unlikely to produce the cash they needed. Deep cuts to policy bonuses and final payouts have exacerbated the situation, leaving many homeowners facing shortfalls on their mortgages.

The FSA said it would be targeting thousands of the busiest GPs' surgeries with information sheets as part of the latest phase of its mortgage endowment campaign.

"We decided to find some more unusual channels to try to get our message across," said Anna Bradley, the director of the regulator's consumer division.

As well as doctors' surgeries, libraries, citizens' advice bureaux and local authority offices will be targeted. There will also be advertising in the national tabloid press.

"The message urges policyholders who have yet to do so to take the first step and 'find out where you stand'," said the FSA.

The options open to people who have a projected shortfall include converting part or all of their mortgage into a repayment loan or setting up another savings scheme.

The Consumers' Association said while the guidance was welcome, it was disappointed the FSA was not providing similar details regarding how to complain about endowment mis-selling. The group has claimed up to five million people may have been mis-sold an endowment mortgage.

The organisation said that a year after the launch of its "endowment action" campaign, more than 500,000 people had visited its dedicated website.

The insurance industry is in danger of being overwhelmed by the number of people complaining they have been mis-sold a mortgage linked to an endowment.

More than a dozen insurance companies have been given extensions to the time they can take to resolve complaints.

They include some of the biggest names in the industry such as Abbey Life, Barclays, Norwich Union, Allied Dunbar, Eagle Star and Legal & General.

Rules set down by the Financial Services Authority state that complaints have to be resolved within eight weeks, or the customer can refer their case directly to the Financial Ombudsman Service who can order compensation.

But the FSA has now extended that period for at least a dozen insurers, in some cases doubling it to 16 weeks.

One Legal & General customer contacted the BBC's Money Box programme after seeing her complaint still stuck in the system after more than 10 months.

Caroline Hayton from Surrey was frustrated with delays at Legal & General so went to the Ombudsman, where her case still languishes.

"I initially complained to Legal & General in December, almost a year ago. And having had several responses saying they were going to deal with it, I still had not heard anything more.

"So in May I took my complaint to the Ombudsman. Here I am now in late October with no resolution. I do feel very frustrated.

"After having gone through all the procedures one is required to and still not to have any outcome, where does one go? There does not seem to be any recourse."

Compensation

Legal & General has admitted there are delays and has apologised to people in Caroline's position.

The Association of British Insurers also admits it is taking longer to deal with complaints. Its Deputy Director General Stephen Sklaroff told Money Box:

"We know that some customers are having to wait longer than they would like and we regret that.

"We are doing everything we can to speed the process up. It does not help and can cause delay later if a case has not been worked through effectively and properly.

"The important thing is to get it as right as possible, to get all the information marshalled to get the thing in a good state to be dealt with quickly and efficiently."

The industry has dealt with 295,000 complaints, of which 60% have been upheld and received compensation of £307 million.

Many of the rejected complaints end up with the Ombudsman.

Walter Merricks, the Chief Financial Ombudsman said his service was not being overwhelmed, but admitted there were some delays.

"We have certainly got a great deal more complaints than we had projected at the beginning of the year.

"At that time we thought we would get about 20,000 complaints about mortgage endowments and it looks as if we will get about 50,000.

"These complaints do have to be dealt with carefully, and we have taken on a lot more staff.

"We hope people will be prepared to be patient so we can make sure they can be dealt with appropriately."

The Financial Ombudsman has already more than doubled its staff to 680 and expects to employ 760 by April 2004.

BBC Radio 4's Money Box was broadcast on Saturday, 18 October, 2003 at 12:04 BST.

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