Hopes raised on endowment compensation

The banking ombudsman is holding out new compensation hopes to endowment mortgage shortfall victims.

Home loan complaints topped the list of problems in the year to September 30 for ombudsman David Thomas - and almost one in four concerned mortgages. And a large amount centred on endowment policies sold to pay off loans.

Insurance companies have refused to consider compensation for mis-sold policies issued before April 1988 when the Financial Services Act came into force. But the banking ombudsman says he can look at older cases which were sold by a bank. "As the regulatory requirements did not then apply, such cases have to be dealt with according to basic legal principles," he says. The ombudsman has ruled that if a bank offered advice, "it will be material to consider whether the customer was told there was a risk the policy might not produce enough to pay off the mortgage".

He warns that some banks sent out misleading advice. One (unnamed) bank told a customer about to sign up for an endowment that "for a lower repayment you not only have the benefit of full life cover but also the prospect of receiving a substantial tax free lump sum upon maturity of the policy".

But while the accompanying quotation made it clear the tax free lump sum - often the biggest trump card in the seller's hand - was not guaranteed, everything indicated that the policy would at least pay off the original loan.

He also says banks should have taken into account the customer's likely ability to continue paying the policy premium for the full term - many who had uncertain future job prospects were tied into 25 year plans, many of which have little value unless held to maturity.

The ombudsman has also slammed banks over obsolete accounts - the practice of offering new customers higher rates than existing account holders which successions of voluntary banking codes were supposed to outlaw.

"The issue came into sharp focus with Tessas," says Mr Thomas. "At one time we were receiving 8,000 calls a week on the subject." Most cases are still being thrashed out between customer and bank - the ombudsman only becomes involved when the two sides have reached deadlock. Tessa holders should receive interest rate compensation only if the bank did not pay a fair rate, based on interest levels paid on accounts with less onerous rules, and that it failed to tell investors by May 5, 1999 that the money could be moved freely.

Overall, the ombudsman scheme received a record 14,583 written complaints, a 14.7% increase on the previous year and more than eight times the number when the scheme started in 1986. Most are settled by banks without the ombudsman's intervention. Half of those which necessitated an enquiry ended with customer compensation. Last year payments ranged from small sums to £100,000, the maximum allowed under the scheme. The average compensation was £3,453.