Endowed with sense of loss

You have an endowment mortgage and have been told that the insurance policy may not pay off the loan. It's come as a shock because you don't remember any warning from the salesman. In fact, you remember lots of talk about how you'd end up with more than you'd need. You feel cheated and misled. But you have no paperwork to prove what was said by the salesman, and he's probably long since left the building society that sold you the endowment.

This set of circumstances will be familiar to millions of homeowners. Last week these people were told by the watchdog set up to protect their interests that they may have no reason to complain, even though they face unexpected financial outlay to ensure their homeloans are repaid. Bafflingly, they are probably even better off with an endowment, argues the watchdog, than if they had taken out an old-fashioned capital repayment loan.

Announcing plans for a clean-up of the endowment industry, the Financial Services Authority said that potential shortfalls on an endowment were not grounds for compensation and, even where homeowners were not warned that the product may not repay their loans, compensation still may not be payable. The view is spelt out starkly in a leaflet published by the FSA last week: 'Just because you have a valid complaint doesn't mean you have lost out financially. If you haven't lost out financially, you won't be due compensation, even if you were not given suitable advice.'

Six million households are relying on one or more endowment policies to repay their mortgages - there are 11 million policies in total - and around 6 million of these, affecting about 4 million households, are expected to fall short of their mortgage targets.

The reason for this is that returns on the endowment policies are expected to fall. News that 4 million homeowners may not have enough money set aside to repay their loans is shocking in itself. Many will feel that they were not given adequate warning that their endowments were a bomb waiting to explode.

But the FSA has rejected the idea that all past endowment sales should be reviewed by the insurers who sold the plans, on the grounds that such an exercise would be too costly and policyholders would end up paying, through even lower returns than those now forecast. To back its view it has compared the performance of endowments so far, with that of repayments. It gives the example of a 25-year £50,000 mortgage, taken out on 1 August 1990. A unit-linked endowment policy for such a mortgage could be expected to be worth £11,465. If the homeowner had taken out a repayment loan they would have repaid £9,674, so the endowment borrower is £1,791 better off.

Because there has been no loss, says the FSA, no com pensation would be due, even if the homeowner had been given unsuitable advice. The FSA acknowledges that homeowners may need to 'boost their savings' to repay their loans but brushes aside any disappointment with the statement that 'most of those concerned will have benefited from the general reduction in mortgage interest rates'.

However, homeowners unhappy with their endowments should not be deterred from complaining by the FSA's figures. If the Ombudsman were to look at their claims, he would measure the value of their endowment now by looking at the surrender value that the insurer would pay if it were cashed in. This is not the same figure as that used by the FSA to measure the investment growth; this assumes charges are spread across the life of the policy whereas, in reality, they are deducted early in the term.

The FSA's strategy for dealing with endowments was widely criticised.

The consumer panel set up to monitor the FSA said it was 'particularly concerned that companies' inadequate records may have helped some sales people to get away with giving poor advice'.

Sheila McKechnie, director of the Consumers' Association, said the FSA's view was 'simply incomplete'.

McKechnie also points out that the FSA's approach 'places the burden on consumers'. The FSA does acknowledge that mis-selling has gone on, and still goes on, and is investigating certain firms. These firms will be named and possibly fined, and will be asked to contact policyholders who received poor advice.

Customers of other firms are on their own.

Got a shortfall?

If you have no case for redress, the first options to
consider are:

Taking out a repayment loan to pay off the shortfall

Save in an Isa

Surrendering a policy should be a last resort.
Remember that you may need the life insurance in the
endowment.