Endowments escape FSA

A small group of insurers will be "named and shamed" and forced to pay compensation on endowment mortgages, the financial services authority said yesterday. But it stepped back from ordering a full review of the policies held by 11m homebuyers.

Though 6.4m policies might not generate enough cash to repay mortgages, with a serious shortfall on 1.3m, the FSA said most buyers were no worse off than if they had taken out repayment mortgages instead. Endowments had enjoyed good returns and benefited proportionately more from falling interest rates.

Amid widespread dismay that tougher action will not be taken, Christine Farnish, the FSA's director of consumer relations, said: "There has been quite a lot of poor practice, which is deeply regrettable, and a number of people have been badly advised. But it does not mean they have necessarily suffered a loss for which they can claim compensation."

An industry-wide review would cost billions of pounds and probably fail to identify a significant number of cases requiring compensation, she added.

The FSA is to issue a further report before Chistmas naming a small number of companies where "mystery shopping" and enforcement visits identified poor advice and serious breaches of rules. They are thought to number about 10 insurers, rather than building societies, and include some household names.

The FSA says guilty companies are likely to be forced to restore homeowners to the financial position equivalent to having taken out a repayment mortgage, including repaying of the shortfall. They are also likely to be reprimanded, fined and possibly restricted from selling certain types of policy.

The FSA yesterday issued a new factsheet, outlining how policyholders can take cases for compensation firstly to insurers and then to the financial services ombudsman - but not the FSA. Yesterday the ombudsman's office said it had received more than 5,000 complaints and expected more.

The Consumers' Association said the FSA figures proved the scale of the problem was "staggering".

The association's director, Sheila McKechnie, said: "This is a 'no progress' report from the FSA. It is time for the FSA to get tough on behalf of millions of consumers and not let guilty firms get away with bad practice."

The association criticised the methodology used by the FSA to suggest that endowment holders were no worse off. It said: "The FSA calculations are biased in favour of endowments. For example, they have given the value of endowments assuming the charges are spread over 25 years, when everybody knows the charges are stacked up at the front. To say you are no worse off is unrealistic."

Insurance companies - which have paid out £13bn to people missold personal pensions - were relieved to have avoided another review.

The Association of British Insurers criticised scaremongering by the press and said: "Having looked thoroughly at this matter, the FSA has found no evidence to change its view, with which we agree, that on average people have done well with endowment mortgages."

The decision not to force a review may prompt court action against insurers. One legal firm, Joseph Aaron & Co, plans a group action on behalf of 200 policyholders with shortfalls.

Mr Aaron said: "People were sold endowment policies with the specific aim of repaying a mortgage and giving them a lump sum at the end. That was the contract, and that is what they are bound by."