Mis-selling: right may be on your side but time isn't

Thousands of people with endowment policies must move fast to lodge their claims for compensation

If "sort out endowment complaint" is on your New Year's resolution list, you would do well to push it to the very top.

Over the next few months, consumers thinking of making a mis-selling complaint could run into an obstacle: a time bar that prevents them from trying to get compensation.

The tail end of February will, for thousands of borrowers with a Scottish Widows endowment, mark an important anniversary - of the day they were sent a "red" warning letter by their insurer. This told them their policy was at "high risk" of falling short of the value needed to pay off the mortgage at the end of the term.

From this point, they had three years to claim. So for those who think they have a valid complaint but have yet to make it, time is running out.

In June, tens of thousands of people who have endowments with Norwich Union and Standard Life face the same deadline. Only two insurers - Prudential and Legal & General - have not imposed any time limit.

According to the Association of British Insurers, at least 700,000 people have already missed deadlines.

Many policyholders appear to have dragged their heels in claiming, concedes consumer group Which?, but this is partly because the initial warning letters from their endowment pro- viders did not state clearly enough that there was a three-year deadline, and that the clock had officially started.

In June 2004, City regulator the Financial Services Authority (FSA) stepped in. It ruled that, from this point, the red letters should explicitly state the date of the complaint deadline. It also insisted that companies remind their customers of the deadline at least six months before it arrived.

But in spite of the reform, Which? argues that a number of firms have tried to wriggle out of paying compensation. "Some insurers have been trying to start the three-year clock ticking from the wrong letter," warns Tereza Fritz, principal researcher at the consumer group.

In other words, the 2004 revision has been ignored by some of the companies that sent out unclear letters. As a result, adds Ms Fritz, the policyholders affected may have a case for an extension.

Try the Financial Ombudsman Service (FOS) if you have got nowhere with the endowment provider so far.

In the tax year from April 2004 to 2005, the FOS resolved some 90,000 endowment mis-selling complaints. In this financial year, says spokeswoman Emma Par-ker: "We expect a record number of cases to come forward."

Part of this is likely to be due to homeowners waking up to the time bar.

The most up-to-date FSA figures on endowment shortfall sizes are from last summer. At this point, there were around two million borrowers facing an average deficit of £7,200 - mainly because of the poor performance of the stock markets in which their policies were invested.

Today, this figure is thought to be lower, but while the markets have surged ahead in recent months, many endowment funds have switched into lower-risk investment assets such as bonds. That means they won't have climbed high enough in value to wipe out policy shortfalls.

Ray Boulger of mortgage broker John Charcol believes time barring is a reasonable way of drawing a line under mis-selling.

"Without some kind of time limit, people can simply watch the stock markets. If they're not happy with their policy's performance in five years, they'll just make a claim then."

The critical question that defines mis-selling is "Did I understand the policy when it was sold to me?", not "Is my policy underperforming?", he stresses.

If you think you may have been mis-sold an endowment, act now. Claims should start with a letter to the insurer, broker or independent financial adviser (IFA) that sold you the policy.

FSA rules now require an acknowledgment letter to be returned within five working days and a decision to be reached in eight weeks. Customers unsatisfied with the outcome can then take their claim to the FOS.

You can also take matters into your own hands by switching out of an endowment and interest-only mortgage and into a repayment loan, says Melanie Bien of broker Savills Private Finance. "If you can't afford the cost of a full repayment mortgage, it's possible to convert just part of your interest-only loan. This will at least mean some of the mortgage is guaranteed to be paid off by the end of the term."

After the nerves, a claim victory

Pat Rowley, 59, an education welfare officer from Wolverhampton, recently won £23,843 in compensation from Legal & General for a £12,000 endowment shortfall - though it took her a long time to pluck up the courage to make the claim.

"I first received a red warning letter about three years ago," she says. "I was then sent several more, each telling me the shortfall was growing."

She finally claimed in January last year, through the endowment compensation specialist Brunel Franklin.

She won her case and was paid the funds - minus Brunel Franklin's 25 per cent fee.

"L&G paid me the sum I would have cleared on my mortgage had I taken a repayment plan not an endowment back in 1993," she says.

"It's good to hear that L&G will not impose time bars on claims. I think it's the wrong thing to do, as a lot of people in my position - and probably my age - might also feel bewildered and nervous about making a claim."

FROM HYPE TO GRIPE

Endowment mortgages surged in popularity in the 1980s and early 1990s. All manner of advisers - from IFAs to the lenders' own sales forces - sold them with interest-only mortgages on the basis that the endowment would have generated enough money to repay the original capital loan by the time the policy matured - usually after 25 years.

The sales patter in those days often included a line to the effect that there would be a cash surplus at the end of the mortgage.

While many consumers thought they had been given a guarantee, the returns predicted then failed to materialise in millions of cases.