FOOL'S EYE VIEW
Were You Mis-sold Your Endowment Policy?

By Jane Mack (TMFJane)
December 5, 2002

Last month we ran a poll to find out how many Fools had an endowment policy. We were a bit astonished by the results as it turns out a whopping 78% of you have got one. Ooops!

Regular readers of The Motley Fool will know that we have never been fans of endowments. They're so complicated that it makes it rather easy to hide the appallingly high charges and vast commissions that they have become renowned for. Unfortunately, rather a lot of financial sales staff took advantage of this in the Eighties and Nineties when the product was a popular one and recommended endowments without always properly explaining the risks involved – namely, that investments can go down as well as up etc.

As we all know the chickens are now coming home to roost and many policyholders – particularly those with mortgage endowments which form about 80% of policies - have received letters telling them that they are highly unlikely to produce the sum assured or that they may face a problem in the future. In other words, the amount of money you'll get when your policy matures probably won't be enough to pay off your mortgage.

It must be a bit sickening when the sweetener often used as a sales tactic was the implication that not only would the mortgage be paid off but that there would be a surplus too, giving you a nice little windfall with which to celebrate.

If you're one of the unlucky ones then you'll have received a red or amber letter warning you of trouble ahead. They're called re-projection letters and according to the Association of British Insurers, a sample selection of those that have been sent out has revealed that 35% were red while 26% were amber. That leaves only 39% that are apparently still on track.

The only way to get compensation for this is if the policy was mis-sold to you in the first place by one of those fine salespeople who may have been more interested in the commission it would generate for themselves rather than your attitude to risk.

The Financial Services Authority has been over-seeing this latest mis-selling scandal and only yesterday imposed a record £1 million fine on the now defunct Abbey Life (owned by Lloyds TSB) for not properly controlling the sale of endowment policies. Up to 50,000 customers may be due compensation thought to be in the region of £160 million. And that's just one company!

The Consumers' Association has been calling for a review of endowment mortgages as they estimate that as many as 5 million people could be affected. But so far the FSA has resisted such calls saying that individuals already have a route to claiming compensation via the relevant company first and then the Financial Ombudsman. Their own research has shown that 99% of policyholders are aware of concerns about endowment mortgages and that 84% of consumers say their policies are either on track to pay the sum assured, or that any shortfall presents little or no financial problem.

Surely that isn't the point though. Just because you can afford to pay off the shortfall doesn't mean that the policy wasn't mis-sold in the first place. It appears that compensation payments are averaging £3,000. It might be small beer in the scheme of things but it's still money you might have lost because of bad practice within the industry. Aren't you owed that money?

The key questions to ask yourself are:

• Was the endowment suitable for you at the time because you indicated you had an appropriate attitude to risk?
• Did the salesperson imply that your policy was guaranteed to pay off the mortgage?

Bear in mind, you cannot claim on the basis that your endowment has performed badly or the fact that you are facing a shortfall – the real question is whether you were or were not aware of the risks when you took out the policy. You also have to have actually lost money, of course, since the compensation is designed simply to put you in the same position as you would be now if you'd taken out a repayment mortgage.

If you're wondering whether to complain then read the FSA's factsheet on how to go about it but the Consumers' Association has also set up a special website called Endowment Action which will help you decide whether you were mis-sold a policy and to formulate a letter of complaint.

One piece of good news is that the FSA wants to relax the deadline by which people must make compensation claims. To date, policyholders have had a time limit of three years from the date of receiving their first re-projection letter to complain but today the FSA published a consultation document advising of a relaxation of the rules. So if you're not sure whether to complain or not, then at least you've got a bit more time to think about it.

More: Frequently Asked Questions about Endowments | Financial Services Authority Endowment Factsheet | Consumers' Association Endowment Action