Guide to Endowment Mortgages
Many people have complained about the potential shortfalls in the performance of their endowment. Initially you should always complain to your endowment company who will look into your complaint for you, provided that you purchased it after 29th April 1988. If you are still unhappy you can refer your complaint to the Financial Ombudsman Service.
- You may wish us to become involved on your behalf if;
- Your claim exceeds £100,000 (which is over the FOS limit).
- You purchased the policy before 29 April 1988.
- The adviser is no longer regulated by the Financial Services Authority.
- You are unhappy with the Ombudsman's decision.
- Your complaint is taking too long to resolve.
If you want to take Court action you must act quickly. In most cases you will have only six years from the date you were sold the policy, or three years from when you were first told about the potential shortfall. If you were sold your policy more than fifteen years ago your case may be out of time in any event.
What is a mortgage endowment?
A mortgage endowment is a mortgage loan combined with a separate savings scheme in the form of an endowment policy. The loan is interest-only.
The endowment policy is set up to grow enough to repay the amount borrowed at the end of the mortgage term, based on projection. The policy is linked to investment market growth so is not guaranteed to pay off the mortgage at the end of the term, although if investment performance is strong it may pay out considerably more.
The policy will also include a life assurance element which provides life cover for the total amount of the loan.
Comparison with a repayment mortgage
A repayment mortgage covers the interest on the loan and also gradually repays the whole of the mortgage loan by the end of the term. Provided the payments agreed with the lender are made, it is a mathematical certainty that the loan will be repaid at the end of the term.
The certainty provided by the repayment mortgage means that it is generally much more suitable for low risk policy holders than an endowment policy.
However for many years endowments represented good value for money as the projected investment growth was high, especially in the late 1980's. In addition financial advisors received much higher commission rates for selling endowment policies than they did for selling repayment mortgages.
The low inflation environment since the mid 1990's has meant that investment growth has been much lower than projected.
In July 1999 the Personal Investment Authority reduced the projected annual growth figures from 5%, 7.5% and 10% to 4%, 5.9% and 8%. They have since been reduced again.
On the re-projected figures many endowment policies will not make target, especially younger policies which were not in existence during the high growth rates in the 1980's and early 1990's.
Facts and figures
- There are currently about 10.7 million endowment policies owned by approximately 6 million UK policy holders (many people bought "top up" policies when moving house).
- 55% of policies are still on track to pay off the loan.
- 31% of the policies need to sustain growth above 6%.
- 14% require growth at over 8% to meet the loan (although for instance 50% of Lloyds TSB's 270,000 policies are in this category).
- 100% of endowment policy holders should have been contacted by their endowment company by now with individual (re)projections.
- It is estimated by the Financial Services Authority (FSA) that approximately 30% of policy holders have responded to the re-projection letter, although the Financial Ombudsman Service (FOS) record that they received only 3,135 complaints in the year to March 2000, rising to 9,067 for the year to March 2001. That figure continues to rise.
- The Ombudsman finds in favour of the policy holder in approximately 50% of cases.
- The estimated cost to the industry is currently put at £38m with the average pay-out for mis-selling at £3,331.
The industry's reaction
In December 1999 the Financial Services Authority ruled out a review of all endowment selling transactions (unlike the review of transfers out of occupational pension schemes between April 1988 and June 1994). Instead the endowment companies agreed to write to all policy holders with the re-projections and advice on how to complain.
Both the FSA and the FOS have released substantial guidance to both policy holders and financial advice providers as to how complaints should be handled, what information is required to consider a claim and how loss calculations are to be carried out.
The scope of the Ombudsman scheme
The Ombudsman can only become involved after a policy holder has complained to the provider of his or her mortgage endowment policy and failed to receive satisfaction.
Thus complaints must first be made to the insurance company, financial adviser, bank or building society responsible for the sale of the policy. In some cases, the original seller may be an appointed representative of the product provider. In that case, the product provider should deal with the complaint unless alternative arrangements have been made.
If a complaint is found to be justified, the Ombudsman has the power to order a firm to pay compensation. The maximum amount that can be awarded is £100,000.
Policy holders may want to seek legal advice, and take proceedings for a variety or reasons, including, but not limited to;
- Their claim may exceed £100,000.
- It may concern advice given before 29 April 1988.
- The advisor may no longer be regulated.
- They may be unhappy with the Ombudsman's decision.
- Limitation may be an issue.
Firms which are regulated have no option but to accept to the Ombudsman's decision, provided that the policy holder accepts it. Endowment and insurance companies may wish to co-ordinate responses to the Ombudsman, and seek to use the "test case" procedure to clarify issues.
Grounds for complaint
The fact of a projected shortfall alone does not give the policy holder a ground for complaint. Instead, as would be expected, the policy holder is required to show that the advice given at the point of sale was in some way deficient.
The FOS has listed 30 categories of complaint;
- Mortgage repayment vehicle not required.
- Life cover not required.
- Policy not consistent with attitude to risk.
- Fund choice not consistent with attitude to risk.
- Policy holder not made aware of possible alternative arrangements.
- Policy not affordable.
- Policy term not consistent with term of mortgage.
- Policy term extends beyond normal retirement date.
- Guaranteed death benefit not consistent with mortgage loan amount.
- Targeted maturity value not consistent with mortgage loan amount.
- Policy not written on the correct lives.
- Policy holder advised to increase premiums in the past without due consideration of the alternatives.
- Policy holder advised to amend the policy inappropriately.
- Churning of an existing policy.
- Pressurised selling by the adviser.
- Forward sale of the policy.
- Taxation of policy not properly explained.
- Surrender penalties or other charges not explained.
- Policy holder led to believe that the endowment policy was guaranteed to pay off the mortgage loan, or the lack of guarantee/risk was not explained.
- Policy holder led to believe incorrectly that he had to take out an endowment in order to secure the mortgage loan.
- Policy holder led to believe that the policy was guaranteed to produce a lump sum in excess of the loan amount.
- Policy holder led to believe that the policy was guaranteed to pay off the mortgage early.
- Low start policy recommended without necessity.
- Mistake in the original quotation/illustration other than in the charges or growth rates used.
- Inappropriate charges used in setting the premium.
- Misrepresentation of policy benefits or conditions other than in connection with the taxation of the policy, policy charges or the size of the lump sum.
- Forgery of policy holder's signatures or initials, not for financial gain.
- Fraud committed by the adviser for financial gain.
- Poor service or administration.
- Poor performance only.