When it comes to the subject of mortgage endowments, the figures speak plainly enough for themselves. Since 2000, the Financial Services Authority (FSA) and the Financial Ombudsman Service (FOS) have recorded a staggering 1.8 million complaints. £2.7 billion has been paid out in redress and the FSA has taken action against 10 firms.
In its most recent progress report on mortgage endowments published in December 2006, the FSA revealed it was generally happy with the speed and quality of complaint handling, but warned complacency must not be allowed to set in.
The FSA reported 22 firms had been of concern and 10 had been forced to take remedial action. This lead to 100,000 previously rejected complaints being reviewed. At the time of the report, 75 per cent of those cases had been ruled in favour of the consumer, resulting in a further £120 million in compensation. Nevertheless, the FOS noted a fall in the number of overturned complaints from 38 per cent in September 2005, to 24 per cent September 2006.
A thing of the past
What is clear is that mortgage endowment complaints will slowly become a thing of the past as time-barring increasingly kicks in and consumers lose the right to complain, unless they have what is considered to be exceptional circumstances by the FOS. The FSA has ruled consumers must complain within three years of receiving a letter of warning that their policy will not achieve the target amount at maturity. Firms can time bar claims further if the customer received a letter giving at least six months notice of the date of the approaching time bar.
It has to be said that while complaint levels have slowed, they are still very high. In total, there were 469,799 complaints recorded and £669 million in total compensation paid out in 2006/7, based on 90 per cent of firms in the market. This was down from the 767,152 complaints and £945 million compensation seen in 2005/6.
Yet, the regulator states that by the end of 2007, up to two-thirds of live endowment policies could be time-barred by firms where consumers made subsequent complaints. In the 15 months prior to the December 2006 report by the financial services regulator, firms rejected 100,000 endowment complaints as being out of time.
Anticipating a surge?
However, the regulator warns the approaching mass of time bars could see a surge in firm-specific complaints in 2007, with a further potential peak to come around 2013 as policies come to maturity. Despite this, Ray Boulger, senior technical manager at John Charcol, certainly believes the majority of complaints have come and gone. “Most people that would have complained will have done so and the scope to complain is becoming significantly less.
“Also, if people have a with-profits policy, the projections they are getting today will be better than two years ago. The equity market is performing well and property has performed well, so the projected returns will be better than two years ago and it’s unlikely we’ll see people wanting to claim compensation.”
Bill Warren, director of associate members for the Regulatory Alliance of Mortgage Packagers, adds: “For someone 15 to 20 years into their policy, unless the insurers were really rubbish, then the equity built up wouldn’t be that bad. Those 10 years in would be feeling it more.”
Matthew Wyles, group development director for Portman Building Society, comments that many consumers were incited to bring claims, as lenders were forced to issue projection letters warning them of a shortfall. He adds: “Lots of customers needed to be compensated, but others received compensation and thought it was just a bonus. However, there is no doubt a lot of policies were mis-sold and products were used as a cash cow for life companies.”
Not a bad sale
Yet, when it comes to the actual policy itself, Warren argues there ought to be a recognition that it was not a bad sale and there was nothing essentially wrong with it. He explains that products, such as minimum cost endowments policies, were extremely good deals for people. They provided life protection and were the most competitive endowment products sold, giving consumers, especially first-time buyers, a very good deal.
He adds: “Purely insurance companies didn’t anticipate the changes in the market as quickly as they could have done and they have said this themselves. With the downturn in interest rates, the policy was not in a position to bring returns. The problems came more from volume levels than anything being inherently wrong with the policy.”
Boulger points out that those thinking of cashing in their policy today must still carefully consider the cost of losing the included life and critical illness cover. Despite the fall in life cover costs, it would still be more expensive to buy a new policy now that the consumer is that much older and Boulger believes not enough people think about this fact.
Yet, for James Cotton, mortgage specialist for London & Country, removing endowments from the mortgage allows people the flexibility to build up their own fund separately, without having to use an endowment. He adds: “Endowments were taken up a lot, but much of it comes down to how people were advised. A lot of people felt they that the downside wasn’t explained as clearly as it should have been.
“The irony is that a lot of policies have improved because the underlying equities have been doing a lot better over the last few years.”
Not meeting expectations
It is the word ‘expectation’ that everyone appears to have fallen foul of, with complaints relating to the fact the policy has not achieved its forecast returns. With continual high interest rates for the 30 years prior to the 1990s, there was little reason to believe that 15 years later rates of 6 per cent would be considered normal, let alone high. Warren notes that the early 1990s probably saw more endowment policies sold than at any other time, with the double-digit interest rates of the day. It was only in the latter 90s that problems became apparent as interest rates fell.
As Wyles explains, people tend to forget that they were sold policies at a very different time economically and have failed to adjust their expectations accordingly. He says: “I think endowments are a much maligned product. People have had the benefit of low interest rates, but are still expecting endowments to have double-digit returns. They want to have their cake and eat it.”
Yet, Wyles believes products were too opaque, making it very difficult to manage policy holders’ expectations, as it was hard to get a true valuation of the policy. “Policy holders have not had their experiences handled well. People continue to expect endowments to deliver the returns of when interest rates were 10 per cent. Customers don’t have a clear sense of what they will get as a return until it matures.
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“Because endowments are opaque it’s possible for firms to hide taking massive charges out of the funds and delivered appalling investment returns. But if customers were with, say Norwich Union, from 15 years ago it would be a very different picture. You can’t paint all endowments with the same brush and there are a lot of sweeping statements made.
“The advice that’s decried as bad today is doing so with 20/20 hindsight. Life companies didn’t envisage sterling interest rates would permanently fall to the levels of today. Advice was often given in good faith with the levels of knowledge at that time.”
Boulger agrees that as the performance of endowments and mortgages have gone in two opposing directions, people continue to want it both ways. “It is absolutely true that expectations have not been fulfilled. But were they reasonable or not? At the time they were. Endowments have performed less well compared with how much people have saved on their mortgage interest rates and people will have saved more money in interest than they have lost in endowments. People overlook the part of the transaction that has served them well and look at the part that has performed less well. If borrowers had kept their interest rate payments at the original level, they would have been making significant overpayments, meaning the endowment would have been enough to pay off the mortgage.”
Still a valid option
As to the possible future of endowments, no one can see a time when they will reappear in the market as a valid option consumers would choose. Boulger notes that the 80s in particular had a tax system that positively encouraged people to take out endowment policies and we are unlikely to return to those days. He explains: “It’s difficult to see endowments having remotely as big a share in the future as in the 80s, because in the 80s you got tax relief on the first £30,000 of your property price and, until 1984, you got tax relief on endowments. It made sense to take out an endowment policy. It’s unlikely those two tax reliefs will come back and it’s hard to see endowments coming back unless the tax system is radically altered.”
However, Wyles states that the essential problem with endowments is that it has been terminally damaged. He says: “The with profit endowment is hopelessly discredited, but there remains a big appetite in the customer base for a long-term, low-risk, stable policy that gives clients exposure to a wide range of asset classes. We also need a policy that is transparent. The product that does come along will look very much like endowments, but it will be called something else.”
Boulger also highlights the need for lenders to sharpen up the terminology they persist on using in mortgage offers. He sees lenders’ insistence in an interest only mortgage offer that a borrower has a ‘repayment vehicle’ is nonsense in today’s market. He explains: “A repayment vehicle for most people means an ISA or investments and there are few advisers that will recommend that, unless the client is willing to take a high-risk strategy. Paying off a mortgage with an investment vehicle is the highest risk way of doing it.
“Lenders are so sloppy with terminology. They should recommend that customers have a repayment plan, which can include investments, but would also allow them to make overpayments when they can, such as when they receive bonuses or commission. Whatever method people choose, a repayment vehicle is not the right advice and it is not up to lenders to give that advice. Lenders should change the terminology in offers. They either haven’t got round to it or are just covering themselves. A repayment plan accepts there are lots of other perfectly acceptable ways of repaying a mortgage.”
Wyles is adamant that it is a big mistake to mix up investments with mortgages. He states: “The best way of repaying a mortgage is with lump sums from bonuses or with regular payments. Mixing up equity investments with mortgage repayments was always too complex and we should not go back to that.”
The twilight years of the endowment mortgage as it stands are upon us. The FSA has said it will end its special reporting requirements by the end of 2008 and firms will return to being monitored as part of its standard supervisory activity.
Whether a product returns to the mortgage market that resembles endowments, remains to be seen, but it will not be for some time. Any whisper of a product being likened to endowments, certainly within earshot of consumers, will cause people aware of past problems to avoid it like the plague. With the FSA winding down its proactive work with endowments and encompassing it into its regular rather than thematic work, it seems that endowments and its great mis-selling scandal are destined to drift into history. Sooner rather than later, endowments will likely be just a bi-word for scandal that many will remember with a shudder rather than having to live with the consequences.
