FSA acts on mortgage endowment complaints

The FSA acknowledges that changes for the better have taken place in the mortgage endowments market over the last year. And it confirms that, on average, most consumers have done at least as well to date with an endowment mortgage than with a repayment mortgage. The FSA re-affirms its view that a full-scale review of all past sales is therefore not justified.

But the continuing programme of work on mortgage endowments, including mystery shopping exercises through the summer, shows that further improvements in selling standards are necessary. Where mis-selling has occurred and consumers have lost out as a result, they will be entitled to compensation payments.

The FSA confirms that formal investigations are under way into the mortgage endowment selling practices of a number of firms. And the regulator warns that, as part of a new package of measures to deal with consumers concerns, more mortgage endowment providers may face enforcement action unless they quickly improve selling practices.

The FSAs next steps include:

• a new consumer factsheet on mortgage endowments for those who think they have been mis-sold, explaining how to complain, and on what basis compensation is decided;

• consultation shortly on formal regulatory guidance setting out how firms should handle endowment complaints and assess compensation where it is due;

• formal investigation of firms suspected of widespread mis-selling of mortgage endowments in the past, which may lead to enforcement action, including fines and a requirement to compensate the victims;

• continuing work to identify any firm where, from complaints data and other information, there are concentrations of past business where unsuitable advice is likely to have caused significant consumer loss. Consumer redress and discipline of the firms would follow as appropriate;

• on-site inspections of sales made during the last quarter of 2000, structured in the light of feedback from mystery shopping exercises and covering all major endowment providers.

In its Progress Report on Mortgage Endowments, the FSA reveals that, since it first announced action on endowments in December 1999, the number of firms offering mortgage endowments has more than halved, from 44 to 20. In the three months ending 30 June 2000, the proportion of first-time home buyers taking out an endowment dropped to 13% compared with 24% a year earlier. Major firms have also taken steps to improve the charging structure of endowment products, reducing both the upfront and the overall costs.

The developments reflect intense ongoing FSA scrutiny and, in turn, wider media coverage and growing public awareness of the potential risks of endowment mortgages, helped by standard format re-projection letters being sent to 6 million endowment customers. But todays report says mystery shopping exercises undertaken for the FSA have not given us comfort that the necessary marked improvement in selling standards has yet been achieved. In particular, there are too many cases in which the consumers attitudes to investment risk are still not being clearly established.

FSA Chairman Howard Davies said:

Todays report makes it clear that firms still need to do more to improve selling standards. Our message to the endowments industry is it is time to deliver.

Endowments can be the right product for some consumers in the right circumstances. But tax changes and other market developments mean that nowadays endowments are a less attractive option for most people taking out a mortgage.

Historically, not all endowment holders were sold a suitable product. Yet our updated research shows that, on average, even where there is a projected shortfall in future, existing endowment customers have to date fared better than if they had chosen a repayment mortgage. But we are acutely aware of the concerns of millions of consumers with endowment mortgages, some 4 million of whom have received, or will soon be receiving, letters warning they may face a future shortfall.

And we know that many consumers think they were not given proper advice when they took out their endowments: in particular, that they were not made fully aware of the risks involved in an endowment investment product. That is why we are publishing a new factsheet, which explains how people in that position can take their case forward, and how those with valid complaints might seek compensation.

Our message to consumers is, dont make any hasty decisions without proper advice. But if youre unhappy with your endowment, our factsheet shows you what to do next.

We will continue to investigate other areas of concern. In addition, we will be carrying out on-site inspections of those firms continuing to sell endowments. We want to see further improvement in sales practices, and we are determined to identify and correct particular instances of bad practice.

The FSA will report on further findings from its continuing work on endowments before the end of the year.

Detail on the complaints factsheet

The FSAs new factsheet, Endowment Mortgage Complaints explains how endowment holders should take up any complaints with the firm which sold them the endowment, and how to take their case to the Ombudsman if the firms response is unsatisfactory. It also includes information about how consumers can seek compensation if they feel they were in any way misled at the point of sale and may have lost out financially as a result. The factsheet also covers mortgage endowments that extend past the customers expected retirement date, an area of particular concern raised during the FSAs research in the past year.

The FSA understands the Financial Ombudsman Service (FOS) will shortly publish information for firms about its practice in dealing with individual complaints that consumers are unable to resolve with firms. The FSA has been liaising with the independent FOS to ensure that the FSAs industry-wide work on ensuring a fair deal for mortgage endowment consumers takes account of the FOS work on individual complaints.

Notes for editors

1. Todays Progress Report on Mortgage Endowments sets out what measures have been taken on endowments since December 1999, including:
   • Around 6 million households with endowments, holding 11 million policies in total, will receive re-projection letters showing whether they should expect a shortfall on their initial projected endowment. Some 5 million of an expected 11 million of letters have now been sent. So far, nearly 40% of these have warned the recipient that they may face a shortfall, though the FSA estimates the final proportion is more likely to be around 60%;
   • All endowment holders received in January an FSA factsheet, Your endowment mortgage what you need to know, setting out in plain English the customers position and possible future options;
   • Mystery shopping exercises, in which individuals on behalf of the FSA assumed the role of consumers to check the integrity of firms selling practices;
   • On-site inspections by FSA teams conducting detailed scrutiny of firms records and selling practices;
   • Follow-through of FSAs challenge to product providers to justify their current marketing strategies for mortgage endowments.
   • Analysis of particular areas of concern, such as people sold endowments maturing beyond their retirement age.

   The report explains how the FSA will continue to pursue the above measures and, in addition:

   • publish a new, user-friendly consumer factsheet setting out how to make a complaint and how to pursue possible claims for compensation (copy attached). This will be available through the FSA website and leaflet line and through firms and advice agencies;
   • issue guidance to firms on how to deal quickly and efficiently with consumer complaints
   • take enforcement action against firms, involving detailed investigation of firms records, possibly leading to disciplinary action and fines;
   • arrange further on-site inspections during the last quarter of 2000, including re-visits to firms already inspected;

2. Where firms are found to have been engaged in practices in breach of the Rules or Principles, penalties can include an unlimited fine, a public reprimand, or, in particularly serious cases, action to limit a firms business. Fines of up to 900,000 have been imposed by the regulator during the last two years.

3. The following example illustrates how an endowment holder could be better off with a unit linked endowment than with a repayment mortgage.

   Position at 31 July 2000 of a 25-year mortgage for 50,000 taken out on 1st August 1990:

   Endowment Mortgage (unit-linked)
   Accumulated Fund (A)	11,465
   Repayment Mortgage
   Capital repaid (B)	9,674

   Net current advantage of endowment relative to repayment1,791

4. Investment returns over recent years have generally been strong. Over the past seven years balanced managed funds have returned more than 10% a year on average. But, with inflation expected to remain low, it is not sensible to expect that these levels of return will continue in the future. As a result, many people with endowments will find that they need to boost their savings to be confident of building up a sum sufficient to repay their mortgage. Most of those concerned will, however, have benefited from the general reduction in mortgage interest rates.

5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

6. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.

7. Publications, including the new factsheet can be downloaded or hard copies ordered by e-mail from our website.

8. Useful titles available free of charge include: FSA Factsheets Your endowment mortgage what you need to know and Endowment mortgage complaints. FSA Consumer Guides Making a complaint, Financial advice and Repaying your mortgage.

Appended information

The following related papers are available from the publications section of our web site:
Progress Report on Mortgage Endowments. The direct URL is http://www.fsa.gov.uk/pubs/policy/mortgage_endow.pdf.