FSA investigates charges of endowment mis-selling

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THE FINANCIAL Services Authority, the City's lead regulator, has begun an investigation into the possible mis-selling of endowment policies amid concerns that hundreds of thousands of homeowners will not be able to pay off their mortgages.

The FSA has confirmed that it is carrying out a series of special inspections at life insurance companies with the aim of checking for signs of mis- selling. If the firms are found guilty of mis-selling, a fresh round of fines and discipline is likely.

A spokeswoman for the regulator said: "We are conducting visits about the issue in response to information we have had, including a high level of complaints and comments from the industry and the media. We are looking at the way they were sold and their performance.

"If we find in our initial visits that there is a wider problem, then we may extend the visits to a wider number of firms." She declined to comment further.

It is estimated that nearly 10 million endowment policies are held by investors, with millions of them designed to pay off mortgages when they mature.

Mark Egerton, head of Compliance Consultants, the regulation experts, said: "If the regulators find mis-selling then this is potentially even bigger than the personal pensions review. The number of people affected by the problem could be much larger."

The investigation was prompted by a sharp rise in the number of complaints about endowments to the Personal Investment Authority ombudsman - the official body that is the first port of call for victims of mis-selling.

In his last report, Tony Holland, the PIA ombudsman, received over 2,000 cases concerning endowments, or 30 per cent of his caseload - only a few hundred fewer than he received over the scandal-ridden issue of personal pensions.

A second factor was a finding by the Personal Investment Authority, a division of the FSA, that a quarter of endowment policies are lapsing within four years, often causing serious loss to the investor.

Firms that have seen the biggest rate of lapsing policies include Lincoln, United Friendly (now part of United Assurance), Britannic Assurance, Canada Life, London & Manchester and Abbey Life.

The investigation comes amid a growing chorus of concern that the policies will charge more in fees and pay out less when they mature than investors expected when they bought them.

PricewaterhouseCoopers, the accountants, has warned that policyholders who bought the policies in the late 1980s and early 1990s are being charged twice as much as was suggested when they bought them.

Industry experts fear that sales people sold the policies on the basis of high investment growth, allowing investors to contribute only small premiums in order to reach their target for repaying the mortgage.

Several life insurers, including Royal&SunAlliance, Pearl Assurance, Scottish Widows and Eagle Star, have written to policyholders warning them that they may need to pay more into policies to avoid a shortfall when the mortgage matures.

The companies have contacted an average of 10 to 15 per cent of their endowment holders to alert them to the problem. If that pattern is repeated across the industry, over a million policyholders may be affected by a shortfall.

Holders of endowments maturing now have experienced exceptionally high investment returns, giving them lump sums twice or even three times the amount needed to pay off their mortgages. An investor who began a 25-year endowment in 1973, paying in a total of pounds 15,000, has made an average of 13 per cent a year in investment gains, yielding a lump sum approaching pounds 100,000.

But the Institute of Actuaries warns that returns in future will be closer to 5 per cent a year.