Pru to compensate customers with their own money

Insurance group Prudential yesterday sparked an outcry after deciding that its policyholders will foot an £11m-plus bill to compensate people mis-sold mortgage endowments.

After Prudential's Scottish Amicable arm was yesterday fined £750,000 for endowment mis-selling, the Consumers' Association claimed the Pru was exploiting a loophole by effectively forcing its customers to pay the costs of their own compensation.

The move comes just weeks after Prudential joined other insurers in cutting the value of customers' investments, reducing annual bonuses and payouts on maturing policies.

The fine was imposed by the financial services authority, which said Scottish Amicable had "exposed a large number of consumers to potential loss".

The FSA said the company's advisers had not done enough to alert customers to the risk that their endowment policy might fail to pay off their mortgage.

Prudential has earmarked £11m for compensation and is reviewing 33,700 policies sold between January 1999 and February 2001 to see how many of these people were victims of mis-selling. However, the final bill could be much higher.

Recently-introduced FSA rules mean insurers can no longer use policyholders' funds to pay fines - they must be met from shareholder funds.

However, companies have not been banned from paying the cost of compensation from their with-profits funds, from which policyholders' benefits are paid. A Scottish Amicable spokesman confirmed that the company would be doing just that.

This prompted an angry response from the Consumers' Association, which said it was "an outrage" that the insurer was using policyholders' hard-earned cash to pay for mis-selling.

Allan Asher, the organisation's director of campaigns, said: "The FSA must put an end to this loophole.

"There will be little incentive for companies to stop mis-selling in the future if they can just transfer the costs straight onto their unsuspecting policyholders."

A spokesman for the company said the Pru's £70bn with-profits fund was "so strong that there will be no material impact on policyholders" as a result of the compensation.

However, the move is unlikely to go down well with the Prudential's 2.1m with-profits policyholders, some of whom will receive thousands of pounds less than they were expecting as a result of last month's payout and bonus cuts.

Ironically, Scottish Amicable endowment policies suffered some of the biggest reductions - the payout on a typical £50-a-month, 25-year mortgage endowment has been cut by 21%.

The FSA rules on fines came into force in November. They were introduced following a row prompted by an earlier Prudential decision to use policyholders' funds to pay a £650,000 fine linked to pensions mis-selling.

Yesterday's fine was the fourth-largest ever imposed by the FSA and indicates that financial penalties against other endowment companies are in train.