A glimmer of hope for policyholders barred from compensation fund

In the great endowment misselling scandal, those who bought policies before the deadline and face shortfalls have just a faint hope of recompense

Dave Thomas, of Exeter in Devon, was sold an endowment by a local firm called Gerald Probert, Estate Agent, in May 1988. Mr Thomas says the policy was inappropriate because of his low income and the failure to tell him endowments were risky, share-based products. "I was led to believe payments to the endowment provider, Legal & General, were payments into some sort of fund to provide me with a sum of money at retirement," Mr Thomas says. "I was never told this money would be used to pay off the mortgage."

He is among thousands of savers left in the cold because present legislation protects only those who have bought endowment policies since 28 August, 1988. The Independent has received a stream of letters from anguished readers who suddenly find themselves out of pocket. Insurers are being pressed to compensate victims of endowment misselling before then by financial intermediaries, the Liberal Democrats and the Consumers' Association urging the industry to create an emergency fund for those policyholders.

Many of the pre-1988 policies mature this year, and their holders are being paid much less than the balance owed on their mortgages. Although their first thought may be to seek compensation for mis-selling, this is proving almost impossible.

Endowments directly sold by insurers are subject to compensation by the providers when there has been misselling. Policies missold by independent financial advisers from 28 August 1988 are subject to mis-selling compensation from the IFA, or the Financial Services Compensation Scheme if the IFA is no longer trading. But endowments sold by brokers, who preceded the creation of IFAs, before then fall outside the compensation safety net.

Mr Thomas says his lack of knowledge was demonstrated because he cancelled his payments to Legal & General and continued regular payments to his lender, Birmingham Midshires, paying only the interest on the mortgage. "It wasn't until December 2001, after I sought details from Birmingham Midshires of how my endowment was performing, that I was told there was nothing on the policy," he says.

Peter Timberlake, a spokesman for Legal & General, says: "This was an IFA sale. It is not one we can investigate. It was not a tied sale, so it is not our responsibility." And Birmingham Midshires wrote to Mr Thomas pointing out it had no liability for a policy sold by an intermediary.

Gerald Probert also refuses to accept responsibility or liability. He says that the firm Gerald Probert, Estate Agent became bankrupt in January 1996. The new firm, Proberts, also an estate agency, has no liability for the previous business's debts, Mr Probert says.

"This was business conducted under a previous business," he adds. "That business folded and all records were taken with it. I can't get involved." He told us he was the principal of the previous business, but says any alleged mis-selling was "nothing to do with me". He says that although the new firm bears his name, he is just an employee. He suggests Mr Thomas should lodge a complaint with the insurer.

A reader from Wells, Somerset, who has asked not to be named, has had problems with two endowments she claims were mis-sold in 1985 and 1986, which left her with a potential shortfall on her mortgage of £4,400. She says: "The adviser who sold the policies did not explain that endowments were risky, otherwise I would not have bought them. I was a first-time buyer and a single parent."

The reader says the policies mature only when she reaches 65, although her scheduled retirement age was 60. An endowment which matures after scheduled retirement age is normally recognised as mis-sold, unless there is evidence that the policyholder was warned of this and had sufficient means to continue repayment after retirement.

The policies were issued by the Life Association of Scotland, now owned by Alba Life, part of Britannic Assurance. Alba says it has no responsibility for the sale, which was by an intermediary. But the firm which Alba and the reader name as having made the sale denies responsibility, saying it merely processed the application on a split-commission basis, with the advice and sale made by a self-employed individual who has died. As a result of The Independent's intervention the reader has now been promised compensation by the named firm of £4,400 on a "no responsibility" basis, in return for her not pursuing the allegation.

Louise Hanson, of the Consumers' Association, says: "It is almost impossible to get redress in these cases. There are no real answers to help you because a lot of the intermediaries are not in business today." But she believes aggrieved consumers should continue to try for compensation. "IFAs still in business may want to take it seriously," she says.

The Consumers' Association recommends that policyholders affected should speak to a solicitor, preferably one who offers free initial consultations. But there is usually little prospect of success. The Financial Ombudsman Service and insurers will take cases within six years of a contract being signed, or within three years of the consumer being aware of serious problems.

Dr Vincent Cable MP, the Liberal Democrats' trade and industry spokesman, also believes the insurance industry should pick up the bill. "I have had several cases from my constituents," he says. Too often, he suggests, brokers helped clients to obtain a mortgage only if they took out an endowment, while others failed to inform clients of the risk-based nature of endowments.

"There should be some sort of fall-back scheme provided by the industry, to help people who have fallen outside the compensation system," says Dr Cable. He has written to the industry to suggest this, but is awaiting a response.

The Conservatives also say compensation for victims of endowment misselling by intermediaries should be considered. Their financial services spokesman, Howard Flight MP, says: "I would put the initiative back to the FSA. They should inform the Treasury whether there is anything that can be done. That means looking at the compensation scheme rules again." But the insurance industry, which pays for the existing compensation system for post-August 1988 claims, has ruled out extending this. Emma Grainge, a spokeswoman for the Association of British Insurers, says: "Independent financial advisers are separately regulated; they are agents of the customer not the company. They are responsible to their client, not to the companies whose products they sell." Nor does the Financial Services Authority offer grounds for optimism, although sympathetic to those outside the compensation scheme. A spokeswoman says: "It would be extremely unusual for governments to introduce retroactive legislation [to require insurers to accept liability for past deeds of intermediaries]. But issues of this nature are really a matter for Parliament." The Treasury failed to respond to requests for a comment.

The situation looks bleak for thousands of affected borrowers if insurers refuse to pay compensation. But our Wells reader's compensation may at least give hope to some.