Select Committee on Treasury Fifth Report

5 Advice to consumers

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."[117] 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"[118] and that its information suggested "that a fifth of policyholders are very seriously worried about the impact on their financial position."[119] 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"[120] 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."[121]

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."[122] 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 reprojection letter."[123]

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."[124] 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."[125] 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 products."[126] 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.[127]

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."[128] 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)."[129] 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 generally

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."[130] 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."[131] 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."[132]

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[133] 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

118   Ev 96 paragraph 13 (HC 275) Back

119   Q 197 Back

120   Q 196  Back

121   Ev 8 (HC 275)  Back

122   Ev 113 paragraph 13 (HC 275) Back

123   Ev 80 paragraph 21 (HC 275) Back

124   Ev 118 paragraph 48 (HC 275) Back

125   Ev 76 paragraph 4.2 (HC 275) Back

126   Ev 77 paragraph 4.3 (HC 275) Back

127   ibid paragraph 4.4 Back

128   Mortgage Endowments: the consumers' view, FSA, December 2002, page 6 Back

129   Q 413  Back

130   Q 149 Back

131   Ev 77 paragraph 4.7 (HC 275) Back

132   Ev 118 paragraph 50 (HC 275) Back

133   Towards a national strategy for financial capability FSA November 2003 Back

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