The £50bn time bomb

Mortgage endowment policyholders who are being told that they are no longer eligible to claim compensation for mis-selling could still claim payments worth billions of pounds by going through the courts.

This summer millions of homeowners - facing shortfalls of up to £50 billion between them - will be told that they have just months left to claim through a scheme set up between the insurers and regulators.

But the industry is reluctant to remind people that they have rights to sue. Lawyer Adam Samuel, formerly the Personal Investment Authority Ombudsman, says: 'If anyone took one of these cases to court, the consumer would very probably win. The industry is terrified of this.'

A few court cases have been started, but insurers have always moved quickly to offer a settlement, possibly because they are loath to allow a legal precedent to be set that could cost billions.

Under the current arrangement between insurers and the Financial Services Authority and Financial Ombudsman Service, homeowners are told they have six years from the date the policy started or three years after they first got a 'red warning letter' in which to file a claim for compensation. Which?, the consumers' association, estimates that 5 million people are due compensation, but says that only a minority have so far made a claim. By next year, most will become time-barred under this arrangement.

Very little publicity has been given to the broader rights people have to sue in the courts. Samuel says: 'If an independent or company financial adviser said to someone "This policy is guaranteed to pay off the mortgage," then people would have six years [under Section 5 of the Limitations Act] from the maturing of the contract in which to start proceedings.'

Such cases would be messy, he says, and probably involve conflicting memories of what exactly was said. If advisers and sales people had detailed notes suggesting they did not guarantee that the endowment would pay off the mortgage, they would be on strong ground. But if notes were missing or vague, the advisers would be in a weak position. The onus is on them to provide proof of what they said. In addition, most consumers appear to have genuinely believed that they were not taking a risk and the only issue was how big their surplus would be.

There is another court rule that allows people, in most cases, to sue within 15 years of the start of the policy.

The best advice remains that people should get their claim in before they are time-barred. They should complain first to the adviser or company that sold them the policy and then, if not satisfied, to the Financial Ombudsman. Some commentators have suggested that homeowners with shortfalls could move to a smaller home or remortgage - but many will be in their fifties and reluctant or unable to do so.

The issue will come to real prominence in 2012, when the first huge waves of maturing endowment mortgages, sold at the end of the 1980s and start of the 1990s, start to come through. Independent insurance expert Ned Cazalet predicts that the shortfalls will amount to 'tens of billions... it could easily be £50 billion'.

More people will have cause for concern this summer when they receive their letters. Returns on endowment policies have been below zero over the past five years, when tax and charges are taken off the investment returns.

Typical sums being ordered in compensation by the Ombudsman are now about £6,000 for policies that still have several years to run. Law firm Class Law says it is keeping an 'open mind' over the possibility of action.

Evidence presented to the Treasury Select Committee suggests that 60 per cent of people thought they had been given a guarantee that their endowment would pay off the mortgage. 'If that were true and a substantial proportion of these customers complained successfully, that would probably bankrupt the industry,' says Samuel.

A spokesman for the Association of British Insurers says: 'We would hope that complaints could be resolved amicably without recourse to the legal system - although, quite obviously, that system exists for consumers.'

Iain Glen, director of regulatory services at Norwich Union, says: 'It's inevitable that some aspects of time-barring will be challenged in the courts. There's still a lot of water to go under a lot of bridges as to what is or isn't a time-bar.'