Your money: After a treasury committee queried the low volume of policyholders filing mis-sold complaints, the fallout is examined by Teresa Hunter. The scale of the endowment mis-selling problem has been seriously underestimated, parliamentary watchdogs at the Treasury Select Committee were told last week. According to figures given to the committee by the chief city watchdogs, the Financial Services Authority, around 3.5 million home owners will be unable to repay their mortgages on maturity. They will typically face a £5500 homeloan shortfall, leaving Britain looking at a £30 billion black hole over the next five or 10 years.
By comparison, MPs heard that the numbers who have claimed for mis- selling is small. The committee was told that, while estimates put at half the number of policies which were potentially mis-sold, insurance companies have typically received complaints of around only 6% of policyholders. This led MPs to question whether customers are being given the right advice to solve their mortgage headaches. This is becoming a crucial issue because time for lodging a complaint is running out. Claims for mis-selling must be made three years and six months after receiving a "red" mortgage letter warning of a serious risk of a shortfall. That deadline will approach later this year for some borrowers. Failing to complain in time will result in complaints being "time-barred" under limitation legislation.
MPs quizzed insurance bosses – including Legal & General’s David Prosser, Aviva’s Richard Harvey, Prudential’s Jonathan Bloomer and Standard Life’s Sandy Crombie – over why no information was given to customers about their right to complain for mis-selling in any literature dispatched by companies. The Consumers’ Association is similarly furious that early information sheets from the Financial Services Authority did not include complaining about mis-selling as one of the options available to home owners. It argues that the FSA deliberately withheld information about the scale of the problem to inhibit policyholders from complaining. In a letter to the CA’s head of campaigns, Louise Hanson, the former FSA chairman Howard Davies said: "Such information could provide an exaggerated incentive to complain, with no greater prospect of that complaint being upheld."
Hanson told the Sunday Herald: "Here we are a few years later discovering that only a tiny number of those with potential legitimate claims have sought the compensation which is their fair due. There is no question of there being any ‘exaggerated incentives’ to complain. Quite the reverse. There has been a cover-up."
The committee chaired by Dumbarton MP John McFall expressed serious concern about the lack of appropriate information which customers receive. McFall said: "We have reached the position where we are facing very substantial and enormous problems on the endowment front. We need firm management now if we are not to face significant problems when these loans mature and homeowners are unable to pay them. "Customers need much more open and honest information about what to do in their best interests than they have been receiving. The so-called red letters warning of serious shortfalls should be just that. They should be in red, so the customer realises something serious is contained in them. "Policyholders should be told they have a right to complain. Customers must be given positive assistance to take steps in their best interests. If they want to switch to a repayment loan for example, the company must help them do this." At Tuesday’s committee hearing, McFall lambasted life industry bosses for the way some customers were misled in the past when they bought a policy, and are continuing to be misinformed. He said: "It is as plain as the nose on your face, surely that you had a duty of care to customers which you failed. "Three-and-a-half million people have a problem. Can you explain to us why there was this herd mentality to push everyone into endowments, when the tax breaks had already disappeared."
The heat under the row about mis-selling was turned up last week, after a former Legal & General salesman claimed the company knew two years before it stopped selling the plans, that they would not achieve the returns claimed. Former salesman Jon Maguire has handed copies of internal memos from the company’s UK actuary, Mike Bolton, admitting that repayment mortgages were the "natural choice" for a consumer. The company strenuously denies mis-selling and says the e-mail was taken out of context. However, L&G is already at odds with the regulator over its mis-selling record. The FSA had intended to discipline the company over this issue, but the insurer has responded by appealing to a tribunal. A hearing is due later this year.
Customers have grounds for a mis-selling complaint if they did not understand they were essentially buying a stock market linked investment when they agreed to an endowment mortgage or that they fully appreciated it could fail to repay the loan on maturity. If these risks were never spelled out to them or if alternatives were never properly discussed, they can claim they were mis-sold because the salesmen did not ensure they picked an appropriate contract from the various ones available. Similarly, if the policyholder was too young to be opting into a long-term contract, or indeed had no need of life assurance, then they may have grounds to complain. Where the contract runs into retirement, it can also be claimed the policy was inappropriate.
However, compensation may not produce a lump sum equal to a customer’s so-called shortfall. It will attempt to put the borrower back in the same position they would have been in had they opted for a repayment from the beginning. This means the cost of separate life insurance, plus the different impact of interest rate movements will be taken into consideration. However, compensation will guarantee that a customer’s loan will be repaid on maturity. Moving house can also impact on the way compensation is calculated. If a contract is simply moved from property to property, then most companies will view this as an ongoing commitment. However, if there is a break between sale and purchase, some insurers argue that the mortgage arrangement was effectively terminated at that point, and therefore redress will be pegged at that deadline.
This article was taken from the Sunday Herald on 1st February 2004
