New hope for thousands of homeowners denied justice

A landmark case will make it harder for lenders to reject endowment cases. David Prosser reports

Teresa Fritz, head of research at Which?, says the consumer group is now considering its own legal challenge, following the success of other campaigners. "If more people realise you can challenge the judgments laid down by regulators, the floodgates could open," Ms Fritz says.

Lenders and insurers had hoped the three-year time bars that now apply to all complaints about endowments (see story below) would soon enable them finally to put the scandal behind them. However, a landmark legal ruling may have ruined their plans. Vincent Cunningham, a BT engineer from London, won the right to have his mis-selling complaint heard by his endowment provider, Friends Provident, even though he was out of time under the FSA's rules.

The court ruled that Friends was not entitled to rely on time bars because the red letter it had sent Cunningham in 2000 did not specifically make it clear the clock had started. Consumer groups have seized on the case because it was only in 2004 that the FSA began requiring endowment providers' red letters to include a warning about time bars.

In theory, that means anyone who received his or her red letter before 2004 may still be entitled to make a claim, even if it looks at first sight as if they have run out of time. Fritz says: "This man is a hero because this case could have huge implications for many borrowers who have been told they cannot claim mis-selling compensation."

Cunningham's challenge is not the only legal threat to the FSA's complaints system. Brunel Franklin, a specialist firm that, for a fee, handles endowment claims on behalf of borrowers, last month wrote to the regulator warning that it intends to launch a court action over the legality of time bars unless the rules are changed. It has given the FSA until Monday to respond.

Its argument resembles the issues at stake in the Friends Provident case. Ian Allison, the company's claims director, says none of the red letters sent out by endowment providers specifically advise borrowers that they may have a mis-selling claim to bring.

"Advising of a shortfall is not the same as advising policyholders that they have a right to claim redress for mis-selling," argues Allison. "Policyholders have been precluded from having valid claims for mis-selling considered, as the FSA deems that they would have known that they could lodge a complaint for mis-selling once they had received the red letter advising of a policy shortfall."

The FSA claims it is not worried about the growing legal threat to its complaints process. David Whitely, a spokesman for the regulator, says the Friends Provident case does not necessarily set a precedent. "Every case is different and will be judged on its merits," he says. As for Brunel Franklin's challenge, the regulator will only say that it has received the company's legal letter and this it will respond in due course.

In the absence of a change of policy from the FSA, out-of-time endowment customers will have to take legal action individually in order to overturn the time bars they face.

However, doing so may be worthwhile if you are in a similar position to Cunningham, in that you received a red letter that did not mention the three-year deadline. Alternatively, if Brunel Franklin forces the FSA to change its rules, or eventually wins legal action against the regulator, endowment providers could be forced to reopen time-barred cases.

How the endowment complaints system works

* Until now, the FSA has argued that the complaints system is straightforward for borrowers who believe that they were never warned there was a risk that an endowment policy might not be able to pay off their mortgage in full. Borrowers who think they may have been mis-sold an endowment must first complain to the company that sold it to them. If they're not happy with the response, they can then make a claim to the independent Financial Ombudsman Service.

* Crucially, this process is subject to strict deadlines. Once your endowment provider has sent you a "red" letter - a warning that your policy may not hit the targets originally hoped for - it is entitled to insist that you make any complaint within three years. Policyholders who try to claim more than three years after receiving a red letter can be time-barred.

* All the major endowment providers now impose time bars, with the FSA's blessing. Prudential and Nationwide, until recently the only two providers that had agreed to waive their right to time bar, last month announced they had finally decided to start applying the deadlines.

* About one million borrowers potentially facing a shortfall on their endowment-backed mortgages have already been time-barred. Of a further two million borrowers who have still to make a complaint about the scandal, several thousand pass their individual deadlines every week.