Select Committee on Treasury Fifth Report

7 Conclusions

74. The evidence presented to the Committee in the course of this inquiry suggests that the financial services industry has shown significant failings in the endowment mortgages story.

  • There were failings in the way the product was sold.
  • The way assets were managed did not generate the level of returns for investors which might reasonably have been expected.
  • The industry failed to inform customers about what was happening to their savings as investment returns tumbled and failed to give them adequate advice on what to do about the problem.
  • There were inadequacies in the way the issue of policyholder compensation was addressed, after the industry's other failings had been exposed.

75. Our inquiry has also identified a range of issues which the FSA has had to address and which it needs to continue to address. However, as the table at paragraph 7 above indicates, the vast majority of endowment mortgage mis-selling occurred before the FSA came into being.

  • It has to ensure that measures are in hand to identify those affected by shortfalls. This has included requiring companies to send red, amber, green letters from companies to their customers indicating the extent to which their mortgages would not be covered, as an essential start to addressing the situation. The assessment by individual companies of the number of red and amber letters they need to send out provides as good an estimate of the scale of the number of policies subject to shortfall as is likely to be available. The figures will need to be monitored regularly by the FSA to see how the problem develops in coming years. Any alternative survey would not only have to look at the specifics of hundreds of thousands of cases but would have to forecast the likely state of equities when particular policies mature. For both reasons it would involve a wide range of uncertainty.
  • It has to oversee the process by which individuals are advised on what they should do if faced with a shortfall on their policy. For many, a repayment mortgage may be the appropriate option but alternative solutions may be available to others. It is not the FSA's role to give this advice itself, but to ensure that the companies which sold the products are doing so.
  • It has to ensure that remedies are provided by the companies responsible for mis-selling. The time limits that apply to endowment mortgage complaints have been poorly communicated to policyholders and require urgent review as growing numbers of policyholders pass the third anniversary of receiving their first warning that there was a probable shortfall on their policy.

76. Overall, it is important for the industry, the regulators and the Government all to recognise the size of the problem which has arisen. The problem is likely to worsen as increasing numbers of low-cost endowment mortgage policies mature in the coming decade. There needs to be a constructive engagement by the industry with the problem if difficulties—in some cases serious distress—for a large number of people are to be avoided.

Lessons for the future

77. Given that many of the insurance companies involved in the endowment mortgages problem are among the UK's most significant financial institutions, it is a matter of grave concern to the Committee when a leading independent expert such as Mr Sandler tells us that "a far higher degree of trust is attached to the brands of the large supermarkets than attaches to the large life insurers."[163] There is an overriding need to rebuild public trust and confidence in many of the companies that currently dominate the long-term savings industry.

78. There are some signs of progress. Most in the industry do now at least accept that things have gone badly wrong and the reputation of companies has been damaged. The Association of British Insurers, for example, told us that "the industry recognises that it has many disappointed customers and the [endowment mortgages] episode has tarnished its reputation. Wherever insurers and/or distributors are found to have acted wrongly, policyholders should be compensated for any loss. More generally, there is a need to rebuild trust with customers."[164] Mr Sandler told us that he too detected the first "glimmers of hope that the industry is beginning to acknowledge that it has a reputational problem and is now taking steps to rectify that"[165] but that, like the Committee, he believed there was still a long way to go. In particular, it is far from clear to the Committee that the basic business model that has historically dominated the industry, a focus on commission driven sales rather than longer-term product performance, has changed in a way that will encourage the industry to behave more responsibly toward the consumer in the future. The picture that emerges from our inquiry into endowment mortgages is one of a long-term savings industry wedded to an inappropriate sales and commission led business model which is damaging the reputation of the industry and undermining consumer confidence in long-term savings. In this context, the current regulatory framework is left struggling to tackle the symptoms of that inappropriate business model.

79. Improving the business model and culture that currently dominates the long-term savings industry would deliver benefits that extend well beyond restoring domestic consumer confidence in the UK's savings institutions. Such reforms should deliver world class financial institutions and confirm the UK as a venue of choice for both savers and fund mangers, but Mr Myners warned the Committee that this would only happen "if we are able to show the world that the UK sets best standards in terms of sales process, commissions, charges, reasonableness, equity between the product provider and the customer, full and open disclosure [and] the absence of kick-backs."[166] Many of our witnesses have argued the case for fundamental reform of the way the long-term savings industry conducts its business. Such reform would not just serve to restore domestic consumer confidence, it would deliver world class financial institutions and help the UK claim the position of international venue of choice for savers and fund managers alike.

80. It is important to align the interest of the consumer and the industry more closely. One of the most striking features to emerge from the evidence we have heard on endowment mortgages is that the industry can sell a financial product which, in 80% of cases, fails to meet its clear target in terms of returns. Yet the industry suffers no direct financial loss itself from the endowment shortfalls and can charge the same fees whether the product delivers a satisfactory return or not. This inevitably raises questions about the industry's fees structure. Retail financial services companies have traditionally charged a simple percentage of the funds invested, plus any commission payable. It is notable that the debate surrounding the appropriate charging regime for Sandler products has concentrated on a similar fee structure, based on a percentage of the funds invested, to that underpinning most endowment products. Whatever level the price cap on Sandler products is set at, the fee structure proposed will simply continue to bias the industry towards the aggressive pursuit of sales, since that is what it will be rewarded for. It would be preferable for the fee structure in the long-term savings industry to reward the delivery of superior investment returns and the provision by the industry of the sort of after-sales care for the saver that was spectacularly missing in the case of endowment mortgages.

81. Mr Sandler identified what the Committee believes is the core of the problem, when he told us that "the industry—and I am thinking of the life companies in particular—have clearly defined obligations to their shareholders. Their obligations in terms of duties of care to policyholders are much less well defined, and I think, historically, the industry has operated much more on the basis of how do I secure distribution rather than how do I ensure that my customers are being best served."[167] This view was endorsed by Mr Myners[168] and several other expert witnesses. Urgent action is needed from the Government, the FSA and the industry to alter a culture that has led to the multiple failures seen in the case of endowment mortgages. Central to delivering the needed cultural change is a shift from the current fee structure that rewards an often inappropriate sales process. It is disappointing that a similar fee structure has dominated the industry's thinking on the proposed Sandler suite of products. The challenge, for both the industry and Government, is to develop a fee structure for long-terms savings products that reinforces the industry's duty of care to the saver by directly rewarding good investment returns and client retention rather than simply paying out high rewards for client acquisition.

163   Q 315 Back

164   Ev 9 (HC 275) Back

165   Q 325 Back

166   Q 330 Back

167   Q 333 Back

168   ibid Back

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