£1bn bill for endowment mis-selling

'No win, no fee' lawyers target mortgage policy holders Compensation bill is rising fast

Compensation payouts for mis-selling mortgage endowments have already reached £1bn and are rising fast, prompting "no win, no fee" claims companies to circle policyholders, promising higher returns through the courts.

The Financial Services Authority yesterday said that since 2000, almost £1bn has been paid out in compensation to more than 500,000 people for being mis-sold their policies.

After intervention from the FSA, 23 firms have been made to set aside around £700m for compensation to 433,000 customers. On top of that, at least 250,000 people have complained to their insurer off their own back, and around 45 per cent of them have had their complaint upheld. They have been awarded more than £230m.

The Financial Ombudsman Service (FOS), which helps consumers if they are dissatisfied with their insurer's complaints procedure, says it is being flooded with endowment cases. In the year to the end of April, it handled 13,570 complaints, which accounted for 35 per cent of its workload. In the past five months alone, it has been passed more than 10,000 cases and there are no signs of the numbers abating.

The Consumers' Association (CA) is seeing the number of mortgage endowment complaints spiral.

It has been running a campaign since September to help policyholders complain to their insurer. Nearly 550,000 people have visited the endowment section of its website where a draft complaint letter is available for download. It said that more than 45,000 letters have been written using its draft.

Insurers are having to boost their reserves and hundreds of staff are being recruited to deal with customer enquiries. But compensation is largely paid from policyholder funds, meaning policyholders are paying to compensate themselves.

"The number of complaints is just the tip of the iceberg," a spokeswoman for the CA said yesterday. "Insurers should not be allowed to pay compensation from policyholder funds."

With the number of mortgage endowment complaints rocketing, claims companies are now trying to cash in on the thousands of people that are learning the policy they bought is not worth enough to pay off the mortgage it was intended to cover. Policyholders are now being cold-called by salespeople from claims companies with the promise of better compensation awards in the courts.

There are reports that these companies, which operate through a complex web of sub-contracted agencies, are even knocking on doors to hunt out disgruntled policyholders.

Endowment Refund, a Cardiff-based company that offers to pursue compensation claims for endowments that are in shortfall, plans to launch a call centre next month to kickstart a nationwide drive to cold-call potential litigants. It says it has the details of 1,500 people that have a possible claim, but wants to get more leads.

The FOS and the CA have serious concerns about paying third parties to pursue a complaint. The Law Society has also advised endowment policyholders not to use claims companies that promise to be free of charge and the National Solicitors' Network has already rejected one proposal for a system of passing cases on to solicitors through it.

The no-win, no-fee business model is used in the personal-injury market, but it can come unstuck. Claims Direct collapsed last year and The Accident Group has also been put in to administration.