Mortgaging our Future

Issue section: 
Issue: 
(270)

Just like the great pensions mis-selling scandals that rocked the UK during the last decade and brought misery to millions, along comes another personal finance disgrace that could swallow up the savings of hundreds of thousands of people.

According to figures recently released by UK insurers, 60 percent of the UK's outstanding 10 million endowment mortgages are forecast to fall short of the amount needed to repay the original loan. Across the country more than 6 million people have endowment mortgages. In the last two years, some 500,000 endowment holders have been sent letters coded 'red'--warning that their policies will be worth too little to pay off their mortgages. A further 2.5 million households have received 'amber' letters warning them that their policies are in danger of falling short. And these figures are set to rise further as more customers than ever before are likely to receive 'red' warnings, due largely--but not entirely--to falling equity prices on the world's stockmarkets.

There are now hundreds of thousands of workers facing the predicament of how best to recoup the money that they invested in such policies. The same financial 'experts' that advised millions of people to invest in endowment policies 15 years ago are now warning people to steer clear of either increasing their payments on an existing endowment or buying a new one, saying that it is a case of 'throwing good money after bad'. As a result, many people are now being forced to change their mortgage into a part-repayment loan, which means that in addition to paying off the mortgage interest each month, people have to make extra payments to start paying off the underlying mortgage debt.

The insurer Friends Provident told customers last year that a payout on a 25-year endowment policy maturing for 2002 would fall to £77,096--compared to £93,145 had it matured the year before. Even the City's watchdog, the Financial Services Authority (FSA), has had to sit up and wave a big stick at lenders to try to calm policy holders. On 4 December the regulator imposed a record £1 million penalty on Lloyds TSB for mis-selling endowment mortgages and made clear that more big fines were in the pipeline.

The UK's third largest bank was forced to set aside provisions of £165 million to compensate between 42,000 and 46,000 policy holders, which breaks down to an average payout of around £4,000 per policyholder--one quarter of the loss pointed out in Friends Provident's example. These policy holders were mis-sold endowment mortgages between 1995 and 1999 by the Abbey Life arm of Lloyds TSB. The FSA has so far identified 20 life assurers as having potentially mis-sold mortgage endowments, though not all will necessarily be fined. They have collectively set aside £448 million for 266,000 customers.

These claims for mis-selling mostly affect life offices that had their own salesforces. To date, the FSA has named only three: Lloyds TSB; Winterthur Life, which was fined £500,000 last year for mis-selling; and Royal Scottish Assurance, fined £2 million two years ago for mispricing endowments. According to analysts, other likely candidates included Axa, Allied Dunbar, Lincoln, Sun Life Canada and Royal & Sun Alliance.

In spite of this tough stance, the regulator has so far resolutely resisted pressure to launch a wholesale review of endowment mortgages such as was ordered for pensions mis-selling. Sir Howard Davies, FSA executive chairman, has said the administrative cost of such a probe would be about £5 billion, and that it would be wrong to foster a regime that compensated for investments not performing as people would like. The Consumers' Association estimates that up to 5 million people were mis-sold endowments. But it has now been largely acknowledged that buyers of endowments could never have hoped to achieve the payouts promised anyway. This is not just because of falling stockmarkets--the excuse peddled by endowment companies--but because the amount the companies took in charges were far higher than they told customers at the time.

During the period when millions of endowment policies were sold, at the peak of the late 1980s property boom, insurance companies routinely projected forward the benefits of the endowments, assuming that only 0.3 percent a year would be lost in charges. But the real amounts were often four or five times higher. Remarkably, the persistent underestimation of charges--and overestimation of future returns--came with the blessing of the industry's regulator at the time, Lautro. It was only in 1995 that Lautro capitulated and since then insurance companies have had to reveal their real charges, though the details of how these charges are calculated are usually in small print and obscured by legal and financial jargon that very few customers can actually understand.