Outlook: Endowment puzzle

ENDOWMENT MORTGAGES have had a bad press, made worse by the scaremongering of ministers, keen to use any weapon to prosecute their "rip-off Britain" campaign. And, indeed, on the face of it, there would appear to be a problem. The Financial Services Authority estimates that as many as one in three endowment mortgages may have been mis-sold.

Peculiarly, however, very few policyholders have suffered as a result. In fact, most have fared at least as well and probably better than they would have done had they taken out a straightforward repayment mortgage instead.

As Howard Davies, the FSA's chairman, puts it, it has been rather like a thief breaking in and leaving the victim money. Fee-hungry commission men may have benefited from the 1980s boom in endowment policies, but so too have the vast majority of policyholders.

This may be a hard message to swallow for the millions of households now receiving letters from their insurance companies advising them to increase their repayments if they want to ensure the endowment is big enough at maturity to pay off the mortgage.

But that is the way the cookie crumbles when inflation and interest rates are low. The same factors which keep mortgage interest payments down are also bound to depress nominal investment returns.

This has been a painful lesson but it is also one that has been learnt. Endowments now make up around a quarter of the mortage market compared with 80 per cent a decade ago.

The FSA has done its sums and is confident enough to calculate that the total sum payable in compensation is unlikely to exceed pounds 5m - the amount it would cost to embark on a full-scale investigation.

Far from launching an investigation into endowment mis-selling, therefore, the FSA's priority is now to re-assure policyholders not to panic and certainly not to cash them in. Since most of the commission charges are paid in the early years, the surrender value will be derisory. Those who lose out in this way will have that nice Stephen Byers at the Department of Trade and Industry to blame , not their local insurance salesman.