Only one in five homebuyers taking out an endowment mortgage can be certain they have been correctly advised of the risks and benefits of the controversial product, the FSA said yesterday. But it ruled out a wholesale review of existing policies, despite widespread concern that many may have been mis-sold.
Spot-checks on half the endowment mortgages sold in recent months uncovered evidence that almost one in three may have been mis-sold, while in half the cases the mortgage firm's paperwork was so bad the FSA could not tell.
Undercover agents will go "mystery shopping" for endowments in the New Year and firms could face disciplinary action if they do not properly explain that an endowment is a stock market investment that might not pay off the mortgage. They must also fully check that the product is appropriate for the homebuyer.
The poor quality of advice is at the centre of public concern over endowment mortgages, with an estimated 500,000 people now being told that their endowment policy may not fully pay off their mortgage. Everyone who has an endowment mortgage will receive a letter in the spring detailing whether they need to make top-up payments.
The FSA says large numbers of homeowners are cashing in policies instead of increasing premiums or converting the remainder into a repayment mortgage - even though abandoning them is likely to be a disastrous financial move.
Christine Farnish, director of consumer relations, said the FSA helpline had been deluged with worried callers, and the majority had suspended their endowment policies, incurring huge redemption penalties.
In response, the FSA is setting up hurdles to dissuade people from abandoning the policies, making sure mortgage lenders pass on the regulator's information packs urging customers to think again. It has also launched a campaign to argue that the millions of endowments taken out in the Eighties have, on average, proved a better way of paying for the house than traditional repayment mortgages.
Insiders at the FSA are angry that Stephen Byers, the Secretary of State for Trade and Industry, stoked panic in the autumn by saying endowment mortgages should only be sold in exceptional circumstances.
FSA chairman Howard Davies spent much of yesterday stressing that, in fact, the average endowment mortgage had been a good buy. Endowments have become tarnished because, in an era of low interest rates, they are no longer forecast to grow at the rate projected in the late Eighties. But Mr Davies said that while low rates meant endowment policy holders may need to pay more in premiums, they were paying less interest, and most victims of mis-selling are likely to have ended up better off. "This is a bit like someone breaking into your bedroom and leaving you money," he said. Mr Davies also said it would be up to individuals to pursue compensation claims if they believed they were misled into buying an endowment that turned to their disadvantage.
But he did confirm the FSA would continue to probe areas where mis-selling may have been a particular problem. This is likely to focus on "churning", where people moving house were wrongly advised to cash in an old endowment and take out a new policy, incurring redemption penalties and further charges. People who have been mis-sold endowments lasting less than 15 years may also be entitled to compensation.
The continued investigation was welcomed by the Consumers' Association. Neil Walkling, of Which? magazine, saidmisleading advice in favour of endowments had been driven by greed. Companies earn seven times more commission from endowments than from life insurance sold with repayment mortgages, he said. "We don't think the industry should get away with these disgraceful practices," he added.
"Endowments are inflexible, risky, and old-fashioned products ... We are pleased to see that some large lenders are, at last, recognising this and have stopped selling them. However, the final piece in the jigsaw is for the Government to introduce statutory regulation which should help ensure that advice on whether to have a repayment or endowment mortgage is covered properly."
Responsibility for the regulation of mortgages is split between two government departments, two regulators and the Council of Mortgage Lenders. The FSA is poised to take on overall control, with the Government due to make a New Year pronouncement on whether it will add mortgages to theproducts and services already regulated by the authority.
Meanwhile, ministers have been leading the charge against what they see as sharp practice. The DTI is hosting a series of "mortgage summits" on ways to improve the consumers' lot, and last Friday Mr Byers announced he will ban companies from tying compulsory insurance to mortgage products.
The Council of Mortgage Lenders wants home loan regulation on a statutory footing, and its director general, Michael Coogan, said the Government is putting the cart before the horse with piecemeal announcements on legislation. "The bigger question of how mortgages are to be regulated remains unconfirmed by the Government, but it is a move that in the long run will be much more significant in terms of delivering ongoing consumer protection."