Legal avenue that may help

That endowment mortgages were the great homebuying con of the 80s and early 90s seems finally to have been rumbled with the announcement that around 60% of holders may not receive the sum needed to pay off their mortgage.

The news will however be little surprise to customers of some insurance companies, who have been admitting as much for several years.

The situation will be devastating to many homeowners but also has the potential to destroy many of the leading providers of such policies. Some customers, particularly those that were sold policies directly by insurance companies after 1988, may get compensation after taking their cases to the Financial Ombudsman Service (FOS).

But many may not be aware that they could have a contractual right to receive the entire mortgage sum despite the fund falling short and despite the fact that the person who sold them the policy was a broker.

When buying my first flat I was lured into the endowment trap, by a short-lived mortgage brokerage in Holborn, London. I had feared that my rudimentary self-employed accounts would not qualify me for any mortgage, or at best I would have to pay a substantial fee to get one.

However the saleswoman assured me she could get me a mortgage with a mainstream lender, and not only would there be no fee but also she would throw in a case of wine. The attached endowment, I was told, would repay the mortgage after 25 years and there might be a bit extra paid to me then. Nothing was said about possible shortfalls.

My policy is likely to fall at least £10,000 short of the promised £35,000. That was the position when the stock market was at its peak in 1999. Now that markets have fallen, the shortfall will be greater. The company, Axa Equity & Law, even had the chutzpah to suggest I pay it more money in the hope it would be better at managing that and put the fund back "on track".

I told Axa that a more satisfactory solution was to accept that a binding contract had been made that I would be paid £35,000. My broker was acting as the company's agent, so it should be bound by that promise.

Although it is a line of argument that should be fairly obvious to any lawyer, it is not one the insurance industry will encourage. Most companies will not have the funds to meet all the claims that arise in this way. It took several letters from me before the insurance company would accept that I was looking to it for compensation rather than the broker.

I turned to the FOS, but its literature does not deal with the basic point that insurers are bound by the promises of their agents, upon which hundreds of thousands of claims could turn.

This was reflected in my initial response from the FOS. Like my insurer, it ignored the real issue and rejected my claim on the basis that the brokers were not members of the scheme. I sent it back, explaining the issue.

A team manager had a go at answering. He told me the claim would fail because the brokers were not tied representatives of the insurer. While that has some relevance it is not conclusive: the brokers could become agents in lots of other ways. I tried again.

Only then were the facts properly analysed. The Ombudsman accepted that it was essential to look at all the facts to decide if the brokers were the insurers' agents. Although he said the case was difficult, he decided the material I presented was not sufficient to prove the agency relationship.

This isn't the place to argue whether the right decision was made in my case. Had it been reached in that way initially I would have had no qualms about how the FOS works. However there are going to be complaints presented to the FOS where the evidence of agency is stronger than it was in mine.

If those who initially determine complaints reject them by sweeping the real issue under the carpet, it may save financial institutions billions but destroy the Ombudsman's credibility.

Richard Colbey is a barrister