First it was duff personal pensions. Now endowment mortgages, another Eighties fad, have come under fire from regulators. By Andrew Verity
HOLDERS OF endowment policies linked to mortgages can receive less than half of their contributions back if they surrender the policies after five years, it emerged this week.

The Personal Investment Authority, the financial watchdog, yesterday published a survey showing more than 30 per cent of policies involved a monthly savings lapse within five years. This comes amid rumours that regulators are poised to launch an investigation into sales of endowments. Some experts suggest that the scale of this probe could rival the recent pensions mis-selling scandal.

In the report's worst-case scenario, a saver who paid pounds 60 a month into a 25-year with-profits endowment from Royal & SunAlliance (RSA), and enjoyed 7.5 per cent investment growth, would get just pounds 1,390 back after five years' payments - after paying in pounds 3,600.

According to the survey, the worst surrender values come, in ascending order, from RSA, Allied Dunbar, Abbey Life, Marine & General, Reliance Mutual, and Axa Sun Life. All of them will pay back less than pounds 2,300 from the pounds 3,600 contributed.

Why are they such poor value? The costs of providing the policy - the biggest element of which is the sales person's commission - are loaded into upfront charges which come out in the early years. If you buy an endowment from an independent financial adviser, the commission alone will eat up at least 90 per cent of the first year's premiums. For successfully persuading one customer to pay pounds 100 a month into a 25-year endowment, the adviser gets over pounds 1,000.

If you buy it from a company rep - usually, the type of adviser that knocks on the door, or phones after getting your name from a customer - the commission is on average pounds 1,284.

But the most expensive sellers of mortgage-linked endowment policies are so-called "appointed representatives" - estate agents, solicitors, banks and building societies.

Because they can bring a large chunk of business to the insurance company issuing the endowment, they can demand higher commissions. For selling you a 25-year, pounds 100-a-month endowment, an estate agent will on average snatch pounds 1,524 of your savings. (Selling a repayment mortgage, on the other hand, will only earn the agent around pounds 200.) It is this upfront cost, plus other charges, which causes the poor surrender value.

Insurers argue that buyers sign up for a 25-year contract and should not expect value for money if they break it. At maturity the policies can pay handsome rewards. By paying pounds 60 a month to RSA for the whole 25 years - a total of pounds 18,000 - the saver can expect pounds 34,000 back.

But surveys have also shown that only a minority of savers actually make it to maturity. Tony Holland, the PIA's ombudsman, has pointed out that the causes of lapsing (most commonly unemployment and divorce) are rarely within the policyholder's control. And consumer groups argue that the third of policyholders who lapse rarely do so because they are feckless: it is usually because they simply cannot afford it.

The suspicion is growing that the sale of endowments too often has more to do with commission than with good advice. Which? this week published the finding of a mystery shopping expedition. It found nine out of 45 firms of financial advisers gave poor advice. And in many cases the advice was to buy an endowment.

In one particularly bad example, a firm of solicitors in Nottinghamshire gave specific advice to an undercover researcher after just a couple of minutes - without conducting a fact-find required by regulators. The recommendation was an unnecessary endowment that would have cost the researcher pounds 1,560 in commission.

Worse, the amount of money generated by endowments is set to fall. Actuaries, the professionals who decide the level of annual bonus paid to holders of endowments, are predicting that payouts will halve over the next 10 years because of the climate of lower inflation and interest rates. For those who bought policies on the basis of rapid investment growth, this could mean they are caught short when the mortgage falls due.

While some companies have, on their own initiative, contacted customers to warn them of this possibility, others have not. Policyholders concerned about the issue should contact their insurer to find out whether they may suffer a shortfall.

In the meantime, the Financial Services Authority, the City's leading regulator, has launched a probe into possible mis-selling of endowments - still sold with a third of all mortgages. So far, it is refusing to say whether it will tell the public its findings.