1 Introduction
1. There are around 8.5 million endowment mortgages.
These were generally taken out in the 1980s and 1990s. Endowment
mortgage holders have a mortgage which does not reduce over a
period of years but which has to be paid off in one go at the
end of its term, using the proceeds of a separate low-cost 'endowment'
with-profits insurance policy intended to cover at least
the amount of the mortgage. But 80% of endowment mortgage policies
are now unlikely to pay enough to cover the amount of the mortgage
they were originally linked to. The average shortfall on such
policies is currently around £5,500, implying that endowment
mortgages are already a near £40 billion problem, but the
shortfalls are likely to grow and the problems could intensify
until 2013, the peak year for endowment policies reaching maturity.
2. Some policyholders will have other funds with
which to repay the mortgage or will have made plans to cope with
the shortfall in other ways. 4.5 million policyholders, with between
them 6.8 million separate policies, are nevertheless still relying
on their endowment policies to repay their mortgage. A large number
of these policyholders—and many have written to the Committee
and to other members of the House—face the possibility of
serious financial difficulty. In extreme cases, they may even
have to sell their home.
3. This situation has to some extent been brought
about by the recent poor investment climate, in particular the
stock market falls of 2000-2003, which have depressed the investment
performance of endowment policies. But in many ways this masks
underlying problems for which the life insurance industry must
take the blame. These problems include:
- questions about the basic design
of endowment mortgages
- asset allocation policy
- issues over mis-selling of policies
- inadequate communication with customers (policyholders)
- inadequate handling of complaints.
4. This Report has arisen as part of our wider inquiry
into Restoring confidence in long-term savings. This wider
inquiry was announced in November 2003 and we stated at the time
the inquiry would include an examination of the problems relating
to endowment mortgages. Although questioning touching on endowment
mortgages was included in our early evidence sessions in the wider
inquiry, we decided to devote three early evidence sessions specifically
to this issue. These were with:—
- a range of consumer groups
(Consumers' Association, Citizens Advice,[1]
Financial Services Consumer Panel) (2 December 2003)
- the Financial Services Authority and the Financial
Ombudsman Service (2 December 2003), and
- Chief Executives of five leading endowment mortgage
provider companies (Aviva,[2]
Legal and General, Prudential, Royal & Sun Alliance, and Standard
Life) (27 January 2004).
Following these sessions, we decided that it would
be appropriate to produce a separate Report on the endowment mortgage
issue alone, ahead of the main Report on long-term savings.[3]
Not only do we feel that the issue is both important and urgent,
we feel that there are important lessons from this issue which
help to inform the wider Inquiry.
5. In this Report we look first at the concept of
endowment mortgages and some of the problems associated with them.
We then follow through the issues as they have developed, covering
the mis-selling of endowment mortgages and then the current state
of play on the shortfalls being faced by policy holders and the
advice being given to them. We also look at the complaints and
compensation process for those who may have been mis-sold policies
and who are facing a shortfall as a result. Finally, we draw some
broad conclusions as to possible lessons for the future.
1 National Association of Citizens Advice Bureaux Back
2
Aviva's life insurance business trades in the UK as Norwich Union. Back
3
The oral and written evidence received on endowment mortgages
is not readily separable from the evidence received for the wider
long-term savings inquiry as a whole. The oral evidence
taken so far is available in one volume as HC (2003-04) 71: this
incorporates HC (2002-03) 1274-i (evidence of 11 November 2003)
and HC (2003-04) 71-i,-ii,-iii (evidence of 2 December 2003, 22
January 2004 and 27 January 2004). The written evidence taken
so far is published in one volume as HC (2003-04) 275 Back
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