Endowment mortgage woes (The Irish Times.com - May 22nd 2010)

AS THE Irish banks struggle to extricate themselves from the disastrous outcome of their reckless lending during the property boom, the problems of a previous era returned to haunt them this week.

A Dublin couple were awarded damages in the Circuit Civil Court as a result of what the court decided was negligence in the advice given to them back in 1991 when they took out an endowment mortgage.

Simply put, Mr Justice Matthew Deery preferred their version of events – that Bank of Ireland had advised the now pensioner couple that an endowment mortgage would deliver better returns and more security than the more traditional annuity (repayment) mortgage.

He said documents failed to support the claim of the local bank manager that he had warned them about the downside of an endowment mortgage.

In an endowment mortgage, a homebuyer invests in a life policy that is designed to meet the capital sum owing at the end of the term. Monthly payments meet the interest bill and the life policy premium. The office of the Financial Regulator has previously told an Oireachtas committee that, between 1989 and 1992, endowment mortgages accounted for more than a third of all homeloans approved in Ireland.

Despite the subsequently expressed misgivings on the efficiency of endowments in meeting their targets, many people held on. Assuming an average 20-year mortgage term prevalent at the time, a large number of these have been maturing since last year. Lawyers in the case before the courts this week estimate that hundreds of similar cases are working their way through the legal system.

Bank of Ireland says it intends to appeal the verdict to the High Court but, given the judge’s comments on the documentation in this case – and the more general recent criticism by the judiciary of bank documentation on loans during the boom years – banks could be facing another sustained period of morale-sapping adverse publicity even if the sums involved are minute by the standards of more recent crises.
 

Client hits out at Scot Prov over with profits bonus
Story by: Maryrose Fison Magazine: FinancialAdviser Published Thursday , May 29, 2008
Customer claims to have received no bonus from firm for up to three years

Scottish Provident, the endowments provider, has been come under attack from an IFA and policyholder claiming to have received no bonus in three years.
Phil Hall, from Wiltshire, who works in the printing industry, said he was less than impressed with the returns he had got on his with profits endowments policy.
Having opened the policy with Scottish Provident - now owned by Pearl - 13 years ago, he said initially bonuses had come annually, but in more recent years they had dried up, making him question the value of having a policy with Scottish Provident at all.
He said: “With Scottish Provident, it would almost have been better to have the money under the mattress. After at least three years with nothing back it feels like all we are doing is financing the company, without any benefit whatsoever to the customers.”
Mr Hall, who opened four other endowments - two of which have now matured - said the Pearl-owned endowments stood in marked contrast to his other policies for performance.
He said: “I have to compare it with the other endowments I have got. Two of them have matured but the other remaining two are showing a bonus. But Scottish Provident is the one company that consistently has not shown bonus at all in the last three years.
"I am pretty sure Scottish Widows had one year without bonus - and that was when the markets went down and everybody lost out - so you can take that as a fact of life, but now three or four years later to have this from Scottish Provident is absurd. All we are doing is just lining its pockets without any concern for customers."
Acknowledging that conditions were challenging, Mr Hall said this was no excuse for its performance. He said: "Times are harder now than they were five, six or ten years ago and we accept lower returns - but zero returns are not acceptable."
Brian Pickering, managing director of Wiltshire-based IFA Heather, Moor and Edgecomb, which advises Mr Hall, said he was not alone. He said: "I have had a number of calls from clients who are dissatisfied with their Scottish Provident endowments and I am equally as disappointed when you consider the early years when the company happily expounded on the worth of their plans."
A spokesman for Scottish Provident said: "To be fair to all policyholders we stopped paying annual bonuses on these policies in order to concentrate on the terminal bonus. We believe that this is fairer to the policyholders."
 

Standard Life endowments brace for shortfall
Story by: Maryrose Fison Magazine: FinancialAdviser Published Thursday , May 22, 2008
Standard Life has revealed that 93 per cent of its endowment policyholders are likely to face a shortfall on maturity

Insurance giant Standard Life has admitted that 93 per cent of its estimated one million endowments face shortfalls upon maturity, but stopped short of giving a total shortfall estimate.
85 per cent of endowment policyholders are classified as red, meaning they face a significant shortfall, and 8 per cent are in the amber, meaning they face a shortfall. Only 7 per cent are in the green, meaning they are on target.
Evelyn Bourke, finance director for UK life and pensions at Standard Life, said the firm had set aside a mortgage endowments reserve which could "potentially pay out £1bn across 500,000 eligible policyholders."
But despite doing individual quotations for endowments, and having been asked for a total estimated value at last year's annual general meeting, Ms Bourke said the firm did not have a total figure for endowment shortfall.
She said: "We don't add up the [individual] projections because it is not a number we need in our financial systems and it is not a number that pops out of any of the financial reporting we do."
To do so, she said, could be misleading.
"There are problems with this kind of projection, in that they don't allow for when a policyholder might benefit from a mortgage endowment reserve promise and don't allow for any share out of residual estate that the policyholder might have," she said.
Of the 80 shareholders to attended the AGM, two raised questions directly about endowments.
Alastair McClelland, a long-standing individual shareholder from Loughborough, asked Sandie Crombie, chief executive, and Gerry Grimstone, chairman, whether they would consider putting to shareholders the option of using a proportion of Standard Life's yearly profits to make up the shortfall for endowment policyholders.
"You could wipe off £1bn off the shortfall by shifting £100m profit a year for the next ten years – what do you think of that suggestion?"
Mr Grimstone responded: "When we demutualised the company, every single penny of the value of the company was made available to shareholders at that time. It went into with-profits fund and into the value of the company. The sad fact is there was not enough money at the time to go around"
But he said policyholders continued to be a key priority.
"We see our with profits policyholders as important as any other customer."
"We have not forgotten about the endowment policyholders. We have approximately 1m with profits policyholders and these are very important to us. We will be doing everything we possibly can"
 

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DAILY EXPRESS - 22 August 2001
“SAVERS GET HELP FROM WATCHDOG”

Customers looking to surrender endowment policies back to their insurers will now be told of a potentially more lucrative way to get rid of them – by selling them.The Financial Services Authority yesterday set out rules which will force life insurers to tell endowment customers they may be better off selling endowments to other investors.

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THE DAILY TELEGRAPH – 3rd February 2001
“SELL THAT ENDOWMENT POLICY – WITH PROFIT”

Warnings about possible shortfalls on with-profits endowment mortgages have caused thousands of homebuyers to cash them in prematurely. Many have received thousands of pounds less than they might have obtained because they did not know they could sell their policies on to other investors. Instead, they have simply surrendered them to the life assurance Company. Now pressure is growing for all life assurance companies to give customers information about their options when they ask about the value of their endowments and are planning to surrender them. Already many of the leading insurers are providing this information but some of the smaller companies are still dragging their feet. The Financial Services Authority recently asked the Personal Investment Authority to look into the situation and it is thought a change in the official guidelines will be made in March. Policy market makers sell endowments on to companies running investment funds based on them, pension fund managers and private investors. Sometimes they are auctioned to the highest bidder. The Association of Policy Market Makers claims that, on average, its members pay 15% more than the surrender value – sometimes more than a third. Life companies counter that the reason they offer less is because it is not in the interest of other policyholders for them to match the higher prices.

EVENING STANDARD – March 1999
"A POLICY THAT COULD REALLY PAY"

Divorcees, the unemployed and the retired are missing out on a pot of gold worth £77m. As many as 100,000 people a year who cash in a with-profits endowment life insurance policy - many facing an urgent need for cash - could pick up an average of £1,300 each by selling endowments instead of surrendering them to the insurance company which first sold them. It means large numbers of endowment holders, mostly borrowers, are being milked twice by insurance companies, first in commissions and then in derisory surrender values. Lee Portnoi, chairman of the Association of Policy Market Makers, the trade body for professional traders in endowments, is working hard to educate the punters, but it is an uphill task. Less than a third of the £1 billion policies surrendered every year, which could be traded, are actually sold.

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The Mirror.

Standard Life cuts policy payouts
30/10/2008

Another big insurer has slashed its policy payouts because of stock market falls.
Standard Life has cut the payment on a typical £50-amonth, 25-year mortgage endowment policy from £37,800 in January to just under £33,000.
That will hit 62,000 homebuyers whose mortgages fall due in the coming year.
In February, the firm estimated an 87 per cent of policies could fall short of the amount needed to clear loans.
Standard Life said: "We don't have an up-to-date figure, but the size of the shortfalls will have increased since then."

 

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FSA fines firms over traded endowment policy failings
by Gary Shepherd Thursday 9th October 2008: 14:02
The FSA has issued combined fines totalling £45,500 to two firms for failures relating to the sale of geared traded endowment policies.


Knowlden Titlow Financial Services has been fined £35,000 for failing to ensure that all of its advisers fully understood the policies and their risks before recommending them to customers. It also failed to gather enough information about its customers to support and ensure the suitability of its recommendations; nor did it adequately explain the risks associated with geared traded endowment polices.

In addition to the fine, Knowlden Titlow has agreed to stop selling geared traded endowment policies and to contact all customers sold potentially unsuitable policies, offering redress where appropriate.

Elsewhere, Derrick Hales Financial Planning must pay £10,500 for failing to gather enough information about its customers. It was also found to have failed to communicate clearly to customers the characteristics and risks associated with geared traded endowment polices. In addition, it failed to ensure advisers properly understood the products they were selling and did not properly review sales.

The FSA has also cancelled the permission of both Derrick Hales and Kathleen Hales to perform the role of compliance officer and the role of partner, respectively, as they both failed to act with due care and diligence in ensuring that their firm complied with FSA rules and principles.

Derrick Hales Financial Planning has also agreed to stop selling these polices, undertake a past business review to identify the extent to which customers may have been given unsuitable advice and, where applicable, assess and make good any loss suffered and to provide further training and compliance support to staff.

Jonathan Phelan, FSA head of retail enforcement, said: "Geared traded endowment policies are complex investments. We found with both firms that their advisers did not understand how these products work, nor could they show us they had a clear grasp of the risks involved. This made it impossible for them to properly advise customers whether the policies were suitable for them.

"These two cases are the first to arise from a recent programme of work we have done into the geared traded endowment policy market, and we will be taking further appropriate action to deal with the examples of bad practice that we uncovered in other firms."

 

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