Advice on dealing with a shortfall
54. The FSA told us that in large part its strategy
for tackling the problem of endowment mortgage shortfalls rests
on ensuring that policyholders are "being warned of a potential
shortfall on their investments
we have taken considerable
steps to ensure that policyholders know the options available
to them and understand the importance of taking appropriate action."
Consumers thus receive warnings of possible shortfalls via the
reprojection letters the FSA requires companies to send out regularly.
Each reprojection mailing has also included a fact sheet produced
by the FSA urging consumers to take action over any projected
shortfalls. In addition, since October 2003 the FSA has launched
its own media campaign to alert consumers to the need to take
action to correct endowment policy shortfalls.
55. The FSA told us that its research had "indicated
that 99% of consumers were aware of concerns about mortgage endowments"
and that its information suggested "that a fifth of policyholders
are very seriously worried about the impact on their financial
Equally, however, the FSA acknowledges that "there is a worry
that not sufficient numbers of consumers are taking steps to address
the shortfall, for example, by converting a part of their mortgage
to a repayment mortgage"
and the ABI told us that its "figures suggest that the number
of people who face a projected shortfall and have not yet made
specific provision to deal with it could be around 700,000."
56. In addition to worries about the number of consumers
not taking any action at all to correct endowment mortgage shortfalls,
consumer groups have expressed worries that the reprojection letters
are implicitly encouraging consumers to take actions which are
often inappropriate. The Financial Services Consumer Panel told
us that one of its "concerns about the reprojection exercise
was that policyholders may think their insurance company was suggesting
an increase in premiums as the best option open to them and our
research revealed some evidence of this. Increasing contributions
to their policy was the most spontaneously mentioned course of
action (46%), and seeking advice from an IFA was second (17%).
However, we were somewhat reassured that, despite this, respondents
in our survey were as likely to take other forms of action such
as changing part of their mortgage to a repayment mortgage as
they were to increase contributions to their existing policy."
The Consumers' Association raised similar concerns, telling us
that "many [reprojection] letters contained additional wording
that would have had the effect of encouraging consumers to increase
the premiums being paid into their endowment policies, even providing
a contact number and in some cases an application form with the
57. Perhaps the sharpest criticism of the communication
process for consumers with endowment shortfalls nevertheless centres
on the failure of anyone to take responsibility for providing
simple, common-sense independent advice. The FSA's strategy of
ensuring that all policyholders receive information on shortfalls
has been a success but, as the Financial Services Consumer Panel
told us, "consumers need help, as well as information."
Citizens Advice raised similar concerns, noting that "there
are particular difficulties for those on low income in accessing
suitable financial advice at a low cost. Distrust of financial
advisers, not knowing how to find a suitable adviser and the cost
of financial advice are significant factors for many consumers
to put off seeking professional independent financial advice."
In addition, the problem for many low income policyholders is
compounded by the fact that "most independent financial advice
seems to be targeted at people with substantial incomes, and financial
advisers are unlikely to have experience of relevant issues for
those on low incomes, such as how the benefits system treats savings
Consumer groups also told us that the advice vacuum for many policyholders
is compounded by the current regulatory restrictions on well trusted
advice bodies such as Citizens Advice Bureaux giving financial
advice to individuals.
58. Companies within the financial services industry
are clearly failing to fill the advice vacuum surrounding endowment
mortgages. As well as the widespread perception of consumer mistrust
of companies noted by several consumer bodies, an FSA survey noted
that 29 % of those customers contacting their insurance company
for further information about their mortgage endowment shortfalls
were unhappy with the service they received, with dissatisfaction
centred on "poor explanations and responses to questions."
Mr Harvey, Group Chief Executive of Aviva plc, told us that he
thought the explanation of this was that "we have been the
bearer of some very disappointing tidings to our customers and
it is entirely understandable that they should be disappointed
(and the bridge between disappointment and dissatisfaction is
a fairly narrow one)."
Advice on endowment policy shortfalls from insurance companies
is both widely distrusted and frequently found to be unsatisfactory
by consumers. Some 'red' letters imply that increased premiums
will be sufficient to restore the product to its previous promises.
Letters should refer to the possibility of contacting the mortgage
lender to discuss ways of addressing the shortfall and to give
advice on the rights of policyholders to make a complaint. Policyholders
without access to an IFA are being left in an advice vacuum, with
no access to any effective advice on what to do about the situation.
Advice on financial services
59. One witness told us, "there are leaflets
galore telling people not to do things without financial advice,
but there is no investment in appropriate financial advice for
the people who need most help and have least experience in using
financial advisers and probably have the least assets to throw
at this problem when it hits them."
Citizens Advice told us that it "sees a significant need
for the Financial Services Authority and Government to develop
a strategy for meeting consumers' needs for ready access to high
quality independent, affordable financial advice. In this context
'affordable' must include free advice and information for consumers
on low incomes who would be unable to afford the costs of advice
provided by the market."
The Financial Services Consumer Panel agreed, but noted that they
"and other consumer groups, have long been calling for the
wider provision of generic advice
. It is clear that non-sales
advice is needed by consumers. Whilst the FSA and the Government
have seemed positive about the idea, there has been little progress."
60. While the provision of a dedicated network for
the provision of basic, generic financial advice to consumers
would be both a lengthy and expensive project, the Committee notes
that there are precedents elsewhere across the public sector,
particularly in the health sector, for authoritative figures such
as the Chief Medical Officer to give clear basic advice to the
public. The issue of endowment mortgage shortfalls has exposed
significant gaps in the advice framework available to consumers
that require urgent corrective action. The Committee endorses
the call of many consumer groups for a mechanism to deliver low
cost or free generic advice to consumers. We welcome the establishment
by the FSA of the Financial Capability Steering Group
and look forward to its findings on the promotion of financial
education. The FSA should play a more active role in encouraging
companies to ensure basic financial advice is available to consumers
on key issues such as how to respond to endowment mortgage shortfalls.
117 Ev 95 paragraph 2 (HC 275) Back
Ev 96 paragraph 13 (HC 275) Back
Q 197 Back
Q 196 Back
Ev 8 (HC 275) Back
Ev 113 paragraph 13 (HC 275) Back
Ev 80 paragraph 21 (HC 275) Back
Ev 118 paragraph 48 (HC 275) Back
Ev 76 paragraph 4.2 (HC 275) Back
Ev 77 paragraph 4.3 (HC 275) Back
ibid paragraph 4.4 Back
Mortgage Endowments: the consumers' view, FSA, December
2002, page 6 Back
Q 413 Back
Q 149 Back
Ev 77 paragraph 4.7 (HC 275) Back
Ev 118 paragraph 50 (HC 275) Back
Towards a national strategy for financial capability FSA
November 2003 Back