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 Sandcastles in the air

The first clear sign of the dangers of endowment mortgages came in 1986, when the Association of British Insurers warned that insurance companies were using over-optimistic projections of investment returns. Nearly 18 years later, more than eight million house-buyers are still living with the consequences of a flawed method of financing a house purchase. Eight out of every 10 existing endowment policies will not generate enough investment income to pay off the underlying mortgages. The total shortfall now amounts to £40bn. No wonder that MPs on the Treasury select committee yesterday issued a damning report on the subject, concluding that endowment mortgages have damaged the public's trust in the financial services sector.

Before 1986, only a few overseas banks and some building societies offered endowment mortgages at the same cost as standard repayment mortgages. Then, during the financial deregulation of the Thatcher/Lawson era, the major lenders introduced low-cost endowment mortgages by removing any guarantee to meet the final house price. The change made the new-style endowment mortgages cheaper - but also far riskier.

Banks loved endowment mortgages, because they received fat fees from the insurance companies that handled the investment side. By the end of 1986, the Halifax was recommending endowment mortgages to its new customers, with a take-up rate of 70%. Endowment mortgages looked attractive because lenders were using compounded projections of earnings that were far too optimistic. The projections, supplied by insurance company actuaries, were built on sand. The blunt fact is that investment returns will not outstrip inflation by a large enough amount over the 25-year course of a mortgage. Had these products been properly evaluated, they would never have been sold to the public.

The Financial Services Authority should conduct a full review of endowment mortgages, as it has already done with pension mis-selling, in order to rebuild trust. And thought must be given to restraining the wilder fancies of the actuarial profession, which in recent years has also given the nation the running-sores of the Equitable Life debacle and various "with-profits" scandals.

Ironically, actuaries as a profession are concerned with judging risks. Sir Derek Morris, the head of the Treasury's newly announced review of the actuarial profession, might consider injecting greater risk into this particular workforce, by ending the Institute of Actuaries' cosy powers of self-regulation.


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