Endowment top-up trap

Letters to millions of mortgage endowment victims next month will not be allowed to encourage people with shortfalls to top-up with another endowment policy after a battle between the financial services authority and life insurance companies.

Around 5m people will receive letters from April onwards spelling out any shortfall, with up to 3m policies believed to have fallen behind the target required to repay the mortgage. The letters, which follow a "holding" circular sent out in January, were expected to tell homebuyers how much extra they will have to put up every month to put their policy back on track.

But the financial services authority is so concerned that policyholders will pour more money into the failing policies rather than consider other options - such as taking out an Isa instead - that it has banned endowment sellers from quoting extra premium levels in the letters.

It is believed to have been particularly concerned about life insurance companies and advisers cashing in by selling commission-based "top-up" endowments, carrying the risk that homeowners could lose out a second time.

Instead, policyholders will receive a letter that identifies the total shortfall in a cash amount and then lists five options for action. These include extending the term of the mortgage, paying in a lump sum and changing part of the mortgage to a repayment loan. Homeowners will only be able to obtain a figure for increasing their monthly payments into the endowment by filling in a tear-off strip and sending it to the insurer.

The standardised-format letter follows weeks of wrangling between the FSA and insurers. In a private memo circulated by the Association of British Insurers this week, the ABI warns that members should think "very carefully" about deleting or replacing the wording of the letter, and that members will have to judge the risks of "media criticism and regulatory intervention". .

The memo says that the FSA is finalising a "traffic light" range of letters on a red, amber and green basis.

Although they will not be printed in different colours, the "red" letter will go to those where the insurer considers "there is now a high risk that your plan may not pay out enough".

The "amber" letter is for those where it is considered "possible that your plan may not pay out enough" while the "green" letter is intended to reassure those whose policies are still on target.

However, the regulators have been forced to back down on certain key points. The FSA wanted insurers to include the original projected growth rate used when the endowment was sold, so policyholders could compare it with the 4%-8% levels that will be used in the projection letters. The life companies refused.