FSA in feeding frenzy over mortgage mis-selling

'People still believe there is such a thing as a free lunch'

Howard Davies, chairman of the Financial Services Authority (FSA), was on business in Japan when the regulator announced this week that it would not be launching an industry-wide review into the endowment mortgage scandal.

Howard Davies, chairman of the Financial Services Authority (FSA), was on business in Japan when the regulator announced this week that it would not be launching an industry-wide review into the endowment mortgage scandal.

The embattled watchdog could have done with its boss's well-known oratorical skills in explaining its decision. By putting the onus on homeowners to prove that they were mis-sold a complicated financial product, often 10 or 15 years ago, the newly-fledged agency has prompted predictable howls of anguish.

There are a number of different points here. The FSA has separated the issue into two. On the one hand, there are endowment policies which made reasonable sense in the economic environment of the 1980s, but do not in the present landscape of low interest rates and low stock market returns. On the other, it says, there is the mis-selling issue.

The FSA argues that few people foresaw the collapse in inflation and interest rates, which has destroyed the economic justification for endowment mortgages. So no grounds for an industry-wide probe. On the other hand, if homebuyers were not properly advised about the risks of endowments mortgages when they took them out, then these abuses should be investigated by the FSA.

No doubt bruised by the hugely expensive and time-consuming investigation into pensions mis-selling, the FSA has decided to review only those specific mortgage cases where customers can show that they were mis-sold an endowment. The watchdog estimates investigating all 11 million outstanding endowment mortgages would cost £5bn.

The FSA has promised that before Christmas it will have named and shamed a number of offending firms that mis-sold endowments. The problem facing the four million-odd homeowners that now face a shortfall is that most of them took out their mortgages so long ago. What evidence can they produce that they received bad advice?

The overwhelming majority of people have no idea what an endowment mortgage is, have only the haziest memory of who they bought it from, little idea where their policy is - and find the whole subject unutterably boring. By leaving the complaints process up to consumers, the FSA has guaranteed that the insurance industry will end up paying very little in compensation.

The problem goes to the heart of how personal financial products are sold. On the one hand, the products are so complicated that very few people are either willing or able to do the necessary homework in order to master their intricacies. On the other hand, unbiased advice is difficult to get hold of.

The real scandal about endowments is in the way they were sold - by advisers earning commission. Whether these were insurance company salesmen or independent financial advisers, the fees to be earned ran into the thousands for each policy sold. The premiums paid in the first half dozen years or so of each policy go purely to pay off fees and commission.

That people are prepared to make the most important financial commitment of their life based on the advice of someone who is about to earn thousands from flogging an endowment is bizarre. The salesmen have been able to get away with it because the commission is invisible, behind the scenes. However much the salesman may explain to the customer about the level of commission, the homebuyer still doesn't tend to see it as cash coming directly out of his or her pocket.

The sensible alternative would be for mortgage borrowers to seek qualified advice from impartial financial advisers, in return for a fee. This is the way lawyers and accountants have always operated. But the great British public remains steadfastly opposed to paying for advice. The belief continues that you don't need to pay for advice - that there is such a thing as a free lunch.

There are two ways to make sure that you don't buy the wrong product. One is by doing so much homework that you become an expert on mortgages, pensions, life assurance or whatever. The only other alternative is to pay for advice. The vast majority of people I have spoken to have no intention of doing either. That is why financial "scandals" will always be with us, just like death and taxes.

However, there is one thing the FSA could do. Ban commissions on personal financial products. That might at least delay the next disaster.

* The writer is Personal Finance Editor of The Independent

* j.willcock@independent.co.uk