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Winning a mortgage endowment mis-selling claim is tough. And when life insurer Abbey Life told Jobs & Money reader Alan Featherstone it was wrong to have persuaded him to take out a home loan-linked plan in March 1988, he was overjoyed.
But when Mr Featherstone, 46, asked Abbey how the compensation was calculated, the life company withdrew its offer - even though it had already sent him a formal acceptance document to sign.
"They told me the decision not to pay was final and they refused to enter into any further negotiations with me. Besides taking away money I'd already been promised, what did this say about Abbey Life's integrity?" he wonders.
Mr Featherstone, a police superintendent from Northamptonshire, complained about mis-selling because Abbey Life told him in 1988 that he was getting "a savings policy that would produce £10,000 to £20,000 more than the £40,995 to settle the loan."
"We had no money to save at that time and I knew little of financial services companies. I believed everything it said. There was never any indication of a potential shortfall in what we were told," he says. In June this year, Abbey Life admitted it "had insufficient evidence to support the sale and we are therefore upholding your complaint."
It offered £4,477 in compensation and wanted his signature "as full and final settlement". "I was glad to get that. But I did not understand how they came to the amount and whether I could negotiate for more. So I asked for further details," he says.
Abbey Life, a Lloyds TSB subsidiary which is closed to new business, sent him pages of printout. This indicated, month by month since the mortgage was taken out in March 1988, what the position would have been had he opted for a repayment loan.
This showed the interest rate on repayments, interest paid, tax relief (until March 2000 when the tax rules changed), and the outstanding balance.
"Abbey Life compared my position with the endowment. It then deduced I was £4,477 worse off as a result of their mis-selling," he says.
While discussing this with Abbey Life, he discovered the amount had been worked out after deducting a life insurance cover premium each month. "They claimed I had the benefit of life protection as the policy would have paid out in the event of death and that had to be costed.
"But I questioned whether I really needed that cover as I had plenty of life insurance at the time of sale as I was (and still am) in the police scheme which has a generous death in service payout," he says. To his surprise, Abbey Life agreed the life cover was superfluous and offered to increase the compensation by around £1,900 in late July.
Mr Featherstone, who heads Northamptonshire Professional Standards Department, which deals with complaints from the public about the police, expected to receive a new full and final settlement form.
Instead, Abbey Life told him they had withdrawn the offer and he would receive nothing. Abbey said this was because it had "already investigated the complaint in 2001. The records indicate we could not find for you, and that the ombudsman subsequently rejected the complaint."
Abbey said it "did not believe the case required re-investigation, and as such the company should not have made an offer to you." It refused to go into further details or discuss the matter.
Mr Featherstone was horrified. "The previous investigation was when my then estranged and now ex-wife complained. I acquired the policies as a result of the divorce settlement, so this was my first complaint.
"But Abbey Life knew about her complaint all the time so why did they only discover it as they were about to pay out? And how can they reject one claim but accept a second based on the same evidence? This is laughable," he says.
Mr Featherstone complained to Jobs & Money. We asked specialist financial services solicitors Stuart Brothers & Co in Newport, Gwent for general advice.
Partner Tim James says: "As a general rule where a potential defendant (such as an insurer) makes an open offer in settlement which a potential claimant then accepts I would regard that as a concluded agreement to make payment.
"Neither party can resile [back out] from it except in exceptional circumstances, eg fraudulent basis of claim, misrepresentation or genuine mistake. Obviously the position may be different if the offer is put 'without prejudice'. A party which refuses to honour a properly concluded agreement to settle can expect to face court proceedings and application for summary judgment."
We put these points to Scottish Widows, the Lloyds TSB subsidiary which now handles Abbey Life affairs. It could not explain Abbey Life's decisions or comment on how the same complaint could be rejected and then accepted.
But it said: "This is an administrative error on our part. We recognise we have made a complete mess of this and that we would have little chance in a court of law. We shall reinstate the offer."
Mr Featherstone will now receive a cheque for £6,364. "I think this whole episode says volumes about the financial services world and its integrity," he says.
The key questions
I've just won an endowment mis-selling claim. The insurance company has made me a compensation offer. How do they calculate it? This is one of the most frequent enquiries to our Capital Letters page.
So, is the figure just plucked out of thin air? No. All compensation is based on putting the complainant back in financial position they would have been had they never heard of endowments but had a repayment mortgage instead. Both the Financial Services Authority and the Financial Ombudsman service have issued substantial documents telling insurers how to do their sums.
How crucial is the projected shortfall? A forthcoming shortfall is not a ground for a mis-selling claim unless you can prove you were guaranteed a set amount on the policy's maturity. Shortfalls may turn out to be greater or less than the estimated figure. All compensation is based on the position here and now.
What's the starting point? Life companies have to work out your financial position as an endowment holder. This starts with the surrender value of the plan. The surrender value should be compared with the sum that would have been repaid under a repayment loan. If the surrender value is lower, the gap will form part of the redress paid.
Is it that simple? What about my premiums? The calculations have to take in the comparative costs of each method. This contrasts endowment premiums and the costs of an interest only loan against the repayment package where each month takes in capital and interest. Interest rates on endowment loans were often higher in the 1980s. On a simple model, your outgoings on the two rival methods are compared. If the endowment method is higher, there will be redress.
What happens if the surrender value is higher than the capital that would have been repaid? Here your policy has a "profit". But you can get compensation if the endowment outgoings are higher. So if your "profit" is £1,000 but your extra costs are £2,000, you get £1,000.
I have incurred extra costs as a result of the mis-selling. Can I claim? The calculation will generally include any fees for moving to a repayment loan. It can be difficult to claim for consequential losses such as incurring penalties for arrears because the endowment was more expensive. You cannot claim for the cost of claiming.
When I questioned the calculation, the insurer said I had to pay DTA life cover. What's that? This stands for decreasing term assurance. It's a policy that would pay off the loan if you die. Insurers say you have had this benefit with an endowment and you would have otherwise had to buy a standalone DTA policy. So they "reconstruct" the premiums using industry average figures. But you can get them to deduct DTA life cover from the calculation if you can show you had sufficient life cover in force from other sources or you had no need because you had no dependants.
Do I have to surrender the policy? No. You can maintain it as a savings plan with life cover.
My endowment was mis-sold but I have received nothing. How can this be? No matter how guilty the seller may be, compensation is intended to restore you to the position you would have been in had you not been sold an endowment. It is not a punishment for advisers. Unless you have a demonstrable loss, there is no redress. In this case, you are financially better off with the endowment at this time. It is up to you whether you now swap to a repayment loan. Here's how it works ...
Loan: £50,000 - 25 year policy at £75 per month
Established facts (after 5 years)
Surrender value: £3,200
Capital repayment under equivalent loan: £4,200
LOSS: £1,000
COST of converting loan to repayment: £200
Outgoings on Repayment (capital + interest + life cover) £21,950 Outgoings on Endowment (premiums + interest): £22,250
Extra COST: £300
Add the loss, the cost of loan conversion and the extra costs together = £1,500 Offer + £1,500
With-profits worries
Holders of with-profits plans - the basis of most mortgage endowments - are set for a nightmare ride.
"With-profits is in terminal decline. Companies can hide behind a veil of secrecy, paying out whatever they like to policyholders," writes former Office of Fair Trading director John Chapman in September's issue of Money Management.
He calculates that stock markets would have to rise 20% a year before with-profits gains return to previous levels - an unrealistic assumption at any time.
"Many holders are in funds closed to new business where they face the choice between low or no bonuses and a high escape penalty," he says.
Closed companies include Scottish Mutual, Royal & SunAlliance, Britannic, Pearl, NPI, Sun Life of Canada, Alba Life and Equitable.
(Source: Financial Ombudsman Service)
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