Guidance issued on compensation for mis-sold endowment mortgages

The guidelines, outlined in a Consultation Paper, explain how firms should put the consumer back in the financial position that he or she would have been in had the mis-selling not occurred. In the majority of cases, compensation will be calculated to reflect the difference in overall cost between the endowment and repayment mortgage. This will take into account the capital repaid on a repayment mortgage, compared with the surrender value on the endowment, and any difference in monthly outgoings.

Christine Farnish, Director of Consumer Relations at the FSA, said:

The guidance we propose to develop demonstrates our full commitment to securing a fair deal for mortgage endowment holders. It will ensure that consumers can get fair compensation where it is due and will help ensure that firms meet their regulatory obligations. We intend that the final guidance should be included in the rulebook for firms.

The guidelines, and subsequent FSA monitoring of firms performance against them, will secure:

• fair compensation where it is due;
• greater consistency in investigation of complaints, assessment of loss and provision of redress; and
• a reduced need for consumers to refer complaints to the Ombudsman, resulting in quicker resolution of their complaints.

The guidance is built around a number of core scenarios which show the broad principles to be applied and will cover a significant proportion of complaints. The scenarios include examples of possible compensation.

It also covers the procedure to be followed in switching from an endowment mortgage to a repayment mortgage, where a consumer has a valid complaint, with the costs usually to be borne by the firm.

The position of post-retirement sales and those cases where the term of the endowment does not match the term of the mortgage is also dealt with in the guidance. Any compensation due in these cases may include the reconstruction of the policy and payments of lump sums to enhance the value of the policy.

Further work on past business

The FSA also reports further progress on other aspects of its 3 October 2000 Progress Report on Mortgage Endowments, relating to concentrations of past business where unsuitable advice is likely to have caused significant consumer loss.

Since October, work has focussed particularly on firms that sold endowment products which were priced in a way which may have been unrealistic and misleading at the time because of the assumptions made about charges or investment growth. This is a complex area. An extensive analysis of various types of mortgage endowment products sold since 1988 is underway to identify any that might fall into this category. This includes detailed actuarial work and reviews of product marketing literature. Where such products are identified, we will look to firms to review their past sales and put matters right for their consumers.

The FSA is in detailed discussion with a number of firms. The exact approach will depend on the particular problems identified at particular firms, but in several cases proactive review by firms looks likely to be an effective way of reaching the consumers concerned. While at this stage it is difficult to be precise, we expect the numbers of consumers affected to number hundreds of thousands rather than millions.

The FSA will make further announcements in this area in due course and will also consider disciplinary action against firms as soon as work is complete.

Notes for editors

1. Responses to the consultation should be sent to Phillip Monks at the FSA, 25 The North Colonnade, Canary Wharf, London E14 5HS by 17 January 2001.

2. The announcement follows the FSAs 3 October Progress Report on Mortgage Endowments which explained that the FSA would be pursuing a focussed approach to instances of endowment mortgage mis-selling. At the same time it also published a factsheet for consumers Endowment Mortgage Complaints, which sets out what they need to do if they think theyve been mis-sold and are considering making a complaint.

3. According to figures from the Association of British Insurers (ABI), 7,031,405 re-projection letters, representing 63.4% of the total endowment policy population, had been issued as at the end of October 2000. Of those, around 49% were green (future annual investment returns need to be no more than 6% to keep the policy on track for the target maturity value), 37% amber (investment growth needs to be above 6% but not more than 8% to meet its target) and 14% red (investment growth needs to be over 8% to meet its target).

4. The ABI puts the number of endowment complaints received by firms since the commencement of the re-projection exercise at 51,523 or approximately 0.7% of the 7 million letters sent as at the end of October.

5. Example scenarios of the standard approach to redress can be found in Section 2.12 of Annex A to the Consultation Paper.

6. Example scenarios of the approach for policies extending beyond retirement age and policy reconstruction can be found in Section 4.13 of Annex A to the Consultation Paper.

7. 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.

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