Watchdog rules out further action on mortgage mis-selling

Endowments inquiry: Repayment shortfall predicted on majority of 11 million policies but financial authority decides review is unnecessary

Britain's top financial watchdog defended its decision yesterday not to launch a reviewof endowment mortgage mis-selling, despite its own forecasts that 60 per cent (6.6 million) of the 11 million endowment policies still in force are not on track to repay their mortgages.

Britain's top financial watchdog defended its decision yesterday not to launch a reviewof endowment mortgage mis-selling, despite its own forecasts that 60 per cent (6.6 million) of the 11 million endowment policies still in force are not on track to repay their mortgages.

The decision by the Financial Services Authority (FSA) was attacked by its own consumer panel, an independent bodyset up by the authority to keep it informed of customer concerns. The panel said it was "deeply concerned at the slow pace both of the regulatory investigations into mis-selling of endowments and of disciplinary action against firms who broke the rules".

The authority's move was also attacked by the Consumers' Association, whose director, Sheila McKechnie, said: "This is a 'no progress' report from the FSA. The FSA has failed to address the essential problem, which is to identify those firms that have mis-sold endowments to consumers."

The authority insisted it was going to take "tough action" against several mortgage advisers and lenders it was investigating over allegations that they failed to advise customers properly on the risks of endowment mortgages.

Christine Farnish, the authority's director of consumer relations, said it had decided not to launch an industry-wide review because that would cost billions, involve review of all 11 million existing endowment mortgages, and take years, without any guarantee that compensation would be paid.

Ms Farnish said the authority would name those firms to be disciplined before Christmas, if the allegations were found to be true. She refused to say how many firms were being investigated, and she would not be drawn on the suggestion that mortgage advisers were paid far higher commissions by lenders to sell endowment mortgages than the alternative, repayment mortgages.

She said the authority was focusing on the minority of endowment holders who might have had poor guidance from their mortgage advisers. Holders of all 11 million policies will be sent a guide from the authority on how to complain and seek compensation. From now, they will be sent a review of their mortgage every two years.

The authority is urging homeowners not to panic. It has ordered mortgage providers to send all six million endowment holders "re-projections" of how individual policies are performing, and what shortfalls they might face. They are coded green, amber and red. A green letter means nothing to worry about. Amber means the policy has to grow by 6 to 8 per cent a year to pay off the mortgage, a high rate in today's low interest-rate environment. A red letter means the endowment must grow by more than 8 per cent to avoid a shortfall, a very unlikely rate of growth.

Ms Farnish said the 1.3 million people who are to receive a red letter will suffer a shortfall on average of £12 to £18 a month, which was "for many people not too worrying". The consumer panel said it had made its own survey, which suggested "many consumers were not given proper advice when they took out their endowments". It added: "The initial findings are that half of the people who have received reprojection letters say they were told at the point of sale that their endowment 'would definitely' or 'was guaranteed to' pay off their mortgage."

The authority said the only alternative to an endowment was repayment, and that a £50,000 repayment mortgage taken out in 1990 would have performed worse than an endowment by nearly £2,000.

The regulator said worries over endowment shortfalls might prompt people to cash in or sell policies, the worst thing to do, since most of the best performance is in the final stages.

Michael Folger, director of investment business at the FSA, said there had been "no great wave of panic-selling". The Association of British Insurers says there has been a 20 per cent rise in redemptions since 1999. In the past year, the number of firms selling endowment mortgages had halved, and the proportion of first-time buyers taking out endowment mortgages has fallen to 13 per cent from 24 per cent a year earlier.

Ms Farnish rejected a ban on selling endowment mortgages because that would restrict consumer choice. But she added: "The industry has fallen down on pointing out the risk of endowment mortgages to customers. We will be watching the selling of endowments like a hawk."