Death of the endowment

The market continues to suffer as watchdog refuses to call for a review

Mis-selling is an ongoing concern in financial services, particularly for endowment policies. After months of speculation over whether a formal review is required, the Financial Services Authority (FSA), the industry watchdog, last week announced there were no grounds for holding one.

Mis-selling is an ongoing concern in financial services, particularly for endowment policies. After months of speculation over whether a formal review is required, the Financial Services Authority (FSA), the industry watchdog, last week announced there were no grounds for holding one.

At the same time, it added that there may be "particular problem categories of business" - in other words, some people may be victims of endowment mis-selling but not enough to warrant a full-scale industry-wide review. The FSA says it will try to make it easier for victims of mis-selling to make a complaint.

As we reported in previous issues, some policyholders have felt they were mis-sold endowments because the risks weren't pointed out to them when they took out the policy.

Walter Merricks, the Chief Ombudsman, agrees there are many displeased buyers: "We have seen a substantial increase in complaints about mortgage endowments over the past year, and we are taking a number of steps to help all those involved," he says.

While many commentators are furious at the decision not to launch an industry-wide review, it is a sensible one. In most cases, endowment policy holders have enjoyed returns that are at least as good as a repayment mortgage.

Homeowners chose endowment policies because monthly payments were generally lower than with repayment mortgages, while the prospect of a bonus at the end of the endowment term was attractive.

Because expected future investment returns have fallen in money terms in recent years, the expected returns on endowments are lower than many actuaries forecast when the policies were first taken out. It is the fall in inflation, rather than mis-selling, which has caused the shortfall.

Some six million people with endowments could face a shortfall. If you are one of these, you will need to save more each month to be confident of building up a sum sufficient to repay your mortgage. This is best done by other investments, such as individual savings accounts (ISAs), rather than topping up endowments. Then, if the worst comes to the worst and you need to make up a shortfall, you will have some cash available.

By the end of August, 3.8 million endowment policy holders had already received re-projection letters, colour-coded according to how urgent the problem is. Green means: on track to meet the target amount to repay the mortgage if average annual investment returns are 4-6 per cent until maturity; amber - on track if returns are 6-8 per cent until maturity; red - will only meet the target amount if returns are over 8 per cent until maturity.

The Association of British Insurers (ABI) says that more than half of these letters were green, nearly 30 per cent were amber and 10 per cent red.

Most companies are sending letters first to those people whose policies are nearest maturity as they will have less time to address any shortfall.

A red letter doesn't necessarily mean you have been mis-sold a policy. The FSA says it depends on the advice given to you at the time you bought it. Nor does a red letter mean your endowment will definitely not meet the target amount to pay off your mortgage, but on current projections it isn't likely to - so you should think about saving more.

Whether you face a shortfall or not, this is the latest nail in the coffin for future endowment policy sales. Philip Cartwright at mortgage broker London & Country says: "Around 80 per cent of mortgages were endowments back in the late 1980s, but this is down to 25-30 per cent now.

"We are now seeing some companies guaranteeing a certain level of return rather than endure all the aggravations associated with counter-claims from policyholders."

Standard Life has guaranteed its endowment policies but only if it achieves a return of at least 6 per cent on its investments, while Liverpool Victoria offers a blanket guarantee and Wesleyan is guaranteeing to meet the mortgage cost for any borrower whose policy falls due between now and 2007.

If you have a complaint, contact the firm or adviser who sold you the policy. The FSA requires it to have a proper complaints procedure that it must tell you how to use. If you are not happy, you can take your complaint to the Financial Ombudsman Service. The firm you complain against is obliged to tell you how to do this.

* Factsheets from the FSA, 25 The North Colonnade, Canary Wharf, London E14 5HS; Tel: 020 7676 1000; website, www.fsa.gov.uk.