Select Committee on Treasury Fifth Report


Endowment mortgages
Low-cost endowment mortgages became popular in the 1980s and 1990s, taking over 80% of the mortgage market at their peak. There are still around 8.5 million policies in force. These mortgages carry with them the risk that the endowment policy might not repay the mortgage. As inflation and interest rates collapsed through the 1990s it became clear that actual investment returns were likely to be much lower than those originally assumed, implying that many policies would indeed fail to pay off the associated mortgage. The industry nevertheless responded slowly to the changing investment climate until regulators stepped in. This slow response raises questions about the role of appointed actuaries within insurance companies. It is important that the FSA's proposed reforms of the actuarial process within insurance companies succeed in delivering more proactive and independently minded actuarial advice.

Endowment mortgage mis-selling

The industry was also slow to respond to intense regulatory pressure to improve the marketing of low-cost endowment mortgages. The regulator initially warned in late 1999 that the standard of endowment mortgage marketing was inadequate. Continued problems surfaced in summer 2000 and the FSA had to take further action in the autumn of 2000. So far, five firms have been fined £5.2 million and over £670 million has been paid out in compensation to endowment policyholders.

The available evidence suggests that between 50% and 60% of all policyholders believe their policies were mis-sold, which if correct would be a significantly high figure. The scale and persistence of mis-selling in the financial services industry suggests a need to reinforce the current regulatory approach. To break the cycle of mis-selling which currently dogs the industry action is also needed to align consumer and product provider interests more closely. The current commission structure rewards potentially inappropriate and short-term sales practices and pays no heed to the investment performance of the product.


The insurance industry has a poor track record for asset allocation and generally failed to cut back its equity exposure as the equity bubble inflated. The industry has thus been caught out by the recent fall in equity markets, forcing many companies to switch into low risk, low growth portfolios dominated by bonds. The result is that around 80% of endowment policies are now unlikely meet their target of repaying the original mortgage, with an average shortfall across policies of £5,500. The shortfall on policies is likely to grow over time, but the current figures nevertheless suggest a collective shortfall across the endowment mortgage market that is already approaching £40 billion.

The industry initially failed to give policyholders adequate information about the shortfalls emerging across the endowment mortgages market, a failure that has added considerably to the difficulties many people now face. The FSA has now instigated a system of warning letters to policyholders, although these letters could be made clearer in many cases.

Advice to consumers

Consumers need reliable advice on what to do about their shortfalls. Given the track record of the industry in selling endowment mortgages in the first place, the industry is not widely trusted as a source of advice and many policyholders are now being left in an advice vacuum. Mechanisms need to be developed for delivering low cost, trusted financial advice.

Complaints and compensation

If policyholders received unsuitable advice when buying their endowment policy and are worse off than they would have been taking out a repayment mortgage they are entitled to compensation. Fewer than 6% of policyholders have so far claimed compensation, suggesting that urgent action is needed to ensure that the complaints process is better understood and more accessible to policyholders. The FSA should ensure that clear information on how to make a complaint is enclosed with the letters warning policyholders about shortfalls. There are also currently strict time limits on policyholders' rights to claim for compensation, but theses limits have not been clearly explained to many policyholders. The time limits should be extended while the rules are spelt out explicitly to all policyholders.

Many companies have not handled complaints fairly and the FSA has intervened repeatedly on this issue. Even so, for some companies the Financial Ombudsman Service, the appeals body for consumer complaints, is finding in favour of the consumer in over 50% of cases. This suggests that much of the industry is still locked into an unacceptable culture that focuses upon short term sales rather than long term customer care.

While there are some concerns within the industry, the evidence we received suggests that the Financial Ombudsman Service process is working acceptably as an appeals body for endowment mortgage complaints. There are significant problems, however, in relation to endowment policies sold via IFAs prior to 1988. Consideration should be given to means of helping such consumers establish fair redress.

Lessons for the future

Endowment mortgages have damaged public trust in the financial services industry. Many large retailers now have a higher level of public trust than some of the UK's largest financial institutions and there is an overriding need to rebuild public trust and confidence in the long term savings industry. Reforming the way the long term savings industry conducts its business should also help defend the UK's position as a major financial services centre.

Central to rebuilding trust is reforming the business model used by much of the industry. The debate on the Sandler price cap illustrates a continued focus on commission and sales that is unlikely to benefit the consumer. The challenge for both the industry and Government is to develop a fee structure that rewards good investment returns and client retention rather then simply paying out high rewards for client acquisition.

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Prepared 11 March 2004