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ombudsman news

issue 8

August 2001

case studies - mortgage endowments

illustrating the range of complaints about mortgage endowment policies that we have dealt with in recent months

08/01

Mr and Mrs A complained when they discovered that their mortgage endowment policy did not mature until four years after they retired, and might not produce the amount they needed to repay the mortgage.

The firm was unable to provide a copy of the ‘fact find' completed at the time of the sale. It was therefore unable to demonstrate that the representative had established Mr and Mrs A's attitude to risk, or discussed with them whether they would still be able to afford the policy after they retired.

We concluded that it was unlikely Mr and Mrs A would have accepted the degree of risk associated with the endowment policy, if it had been made clear to them. We also concluded that they would have been able to afford a mortgage with a shorter term than the one sold to them. We therefore suggested that compensation should be calculated on the basis that they should have been sold a repayment mortgage over 21 rather than 25 years. Both parties agreed to this proposal.

08/02

Miss W complained about the endowment policy she had been sold in 1993. She claimed she had been told it was guaranteed to repay her mortgage loan and said that if she had been aware that there was any risk, she would have arranged her mortgage on a repayment basis.

The firm rejected her complaint on the basis that, when she took out the policy, she would have been given the standard documentation and an illustration showing that the maturity value of the policy could not be guaranteed.

However, the firm was unable to provide any documentation from the time the policy was sold and could not establish that its representative had made the risks clear to Miss W. We therefore awarded redress according to the guidelines set out in the FSA's Regulatory Update 89.

08/03

Mr and Mrs T claimed that when they applied for a 20-year repayment mortgage, the mortgage lender they approached turned down their application because of their ages. The adviser suggested instead that they should take out an endowment mortgage over 25 years. This would reach the end of its term five years after Mr T retired. Mr and Mrs T said they were never told the investment might not reach the sum assured of £39,950 and they said they had felt pressured into taking out this type of mortgage.

At the time of the sale, Mr and Mrs T had no investment experience and their previous mortgages had all been on a repayment basis. Neither they nor the firm were able to produce any documents containing warnings that the policy was not guaranteed to repay the mortgage when it matured, apart from the post-sale schedule.

There was no evidence that the representative had discussed with them whether they would be able to afford the policy after Mr T had retired. Moreover, it was clear from the information the couple provided about their salaries and outgoings that they would have been able to afford a repayment mortgage over 20 years.

We therefore asked the firm to calculate redress in accordance with the FSA's Regulatory Update 89. Because of the reduced term, deduction of notional savings was at issue. The firm was unable to provide any justification for deducting these savings and ultimately decided not to do so.

08/04
Miss O had a number of concerns about her endowment policy. She alleged that:

  • her adviser had not made it clear that he was a ‘tied' adviser, only able to recommend one firm's products;
  • he had not discussed with her any alternative means of repaying her mortgage;
  • a repayment mortgage could have reduced the term; and
  • she was sold life cover even though she did not need this and it was not a requirement of the loan.

The firm denied all these matters except for the life cover issue. It offered to add units back to the policy to increase the surrender value, should Miss O decide to cancel.

We concluded that the policy was unsuitable for Miss O. The adviser had not established her attitude to risk and had ignored the fact that she had an existing life insurance policy, even though she had provided information about it.

We asked the firm to calculate loss in accordance with the FSA's Regulatory Update 89. The cost of life cover, usually included to cover the repayment mortgage, was left out, as an acknowledgment that this was not required. Miss O accepted the offer.

08/05
Mr and Mrs G complained about two policies they had been sold in 1992 and 1999. They said the risk associated with the endowments had not been made clear to them on either occasion and that, if it had been, they would have settled for a different approach.

In terms of the 1992 sale, we found in the couple's favour, based on information we obtained from the endowment mortgage questionnaire, since the firm was unable to provide any documentation from the time. The firm challenged this, claiming that, as a result of its subsequent dealings with Mr and Mrs G, it had a full picture of their investment attitudes and of decisions they had made over the years. The firm also raised this evidence with a view to establishing that the 1999 recommendation was suitable.

We examined these investment records in depth and concluded that most of the transactions related to cautious investments involving capital guarantees, consistent with a cautious attitude to risk.

We upheld the complaint because we felt the policies constituted too high a risk for Mr and Mrs G. The firm agreed to accept our calculation of redress, in accordance with the FSA's Regulatory Update 89.

08/06
Mr and Mrs H had a number of complaints about the endowment policy sold to them in April 1992, the main problem being that they considered the sale unsuitable because they did not wish to take any risk.

Following investigation, we upheld their complaint. The firm had been unable to produce any documentation from the time of the sale. We therefore used the endowment mortgage questionnaire and established that the policy was too high-risk for Mr and Mrs H. They described themselves as "cautious" people, who had no previous experience of mortgage endowments. They had no other investments and there was nothing to support the firm's view that the couple had been prepared to accept the risk associated with endowments.

The firm accepted our suggestion that it should make redress in accordance with the FSA's Regulatory Update 89. However, it was unable to calculate the redress because it had not yet installed the appropriate software. We therefore calculated the figures and issued them to both parties for comment. Mr and Mrs H were concerned that the calculation did not take into consideration the fixed-rate mortgage interest they had enjoyed at various times, a matter that they had not previously mentioned. After they provided details, we recalculated the figures and compensation rose from £2263 to £2940.

08/07

When they received a re-projection letter, making it clear that their endowment policy was not likely to repay their mortgage "based on current rates of projection", Mr and Mrs M complained to the firm. They said that if this risk had been made plain to them, they would have taken a different type of mortgage. The firm's investigations revealed little to support the suitability of the sale and established that this was Mr and Mrs M's first endowment mortgage and that they had no existing investments.

The firm did not, at that time, have the facility to perform detailed calculations in line with the FSA's Regulatory Update 89. It therefore made an offer of redress based on the greater of a refund of the endowment premiums, plus interest, or the amount of capital the couple would have repaid if they had taken a repayment mortgage. Mr and Mrs M did not trust the firm by this stage, and referred the matter to us.

Having established that the firm was still prepared to honour its offer, we ensured that it was willing to meet the additional life cover costs and the charges associated with switching to a repayment mortgage. Using the details gathered from the endowment mortgage questionnaire, we obtained a calculation and mediated with Mr and Mrs M on the basis that the firm's offer was likely to exceed any award we would be able to make in line with Regulatory Update 89. They accepted the offer.

08/08

Mr and Mrs L complained about the low-cost, with-profits endowment policy they were sold. The policy was intended to repay the £9,177 mortgage they took out in order to buy their council house under the "right to buy" scheme.

When we looked into the complaint, it was clear that the endowment policy was unsuitable for them; they did not wish to take any risks. The firm accepted our view and carried out a loss assessment in accordance with the FSA guidance. The firm did not wish to take the notional "savings" into account.

Even though the policy was unsuitable for Mr and Mrs L, the calculation showed that they had not actually suffered a financial loss, so no compensation was payable in that respect. However, since the firm should not have recommended an endowment policy, it agreed to pay the couple's costs if they wished to switch their mortgage to a repayment loan. It also agreed to provide a replacement life policy, if they chose to surrender the endowment policy.

The calculation, in accordance with Regulatory Update 89, was as follows:
capital comparison    
endowment surrender value £2,187.00  
the capital that would have been repaid under an equivalent repayment mortgage £2,057.25  
surrender value less capital repaid   £129.75
outgoings to date    
cost of an equivalent repayment mortgage (capital+interest+life cover) £9,387.93  
endowment mortgage (endowment premium+interest) £9,209.76  
notional "savings"   £178.17

08/09

We upheld Mr and Mrs D's complaint about their mortgage endowment policy, which represented too high a risk for them. They said they would have taken a repayment mortgage had they been made aware of the risks. The firm that sold them the endowment agreed to calculate redress based on the FSA guidance.

Mr and Mrs D were happy with this form of redress and provided a manual calculation of their mortgage repayments from the mortgage lender, a different firm from the one that sold the endowment. Unfortunately, the manual calculation was inaccurate, as the mortgage lender had not taken into account an additional capital reduction that Mr and Mrs D had made to their loan. The complaint was finally resolved when we obtained an accurate loss calculation from the mortgage lender's head office. Mr and Mrs D made it clear that they would only accept calculations provided by the mortgage lender, as they had lost faith in the firm that sold the endowment. Mr & Mrs D received compensation of £7,122.27.

The calculation, in accordance with Regulatory Update 89, was as follows:
capital comparison    
endowment surrender value £16,851.00  
capital that would have been repaid under an equivalent repayment mortgage £22,603.41  
surrender value less capital repaid (loss)   (£5,752.41)
outgoings to date cost of an equivalent repayment mortgage
(capital + interest + life cover)
£92,431.84  
endowment mortgage
(endowment premium + interest)
£93,751.70  
additional costs (loss)   (£1,319.86)
cost of conversion to a repayment mortgage   (£50.00)
total loss   £7,122.27

08/10

Ms W was sold an endowment policy with a term of 25 years. This meant she would have been 10 years into her retirement before she made the final payment. We established that, at the time she was sold the endowment, she could have afforded a mortgage and endowment over 15 years, to end on the date she retired. We also established that the endowment policy constituted too high a risk for her.

The firm accepted our view and agreed to calculate compensation in accordance with the FSA guidance. As Ms W was single, with no dependants, life cover costs were not included in the cost of the 15-year repayment mortgage, used for the calculation.

The calculation, in accordance with Regulatory Update 89, was as follows:
capital comparison    
endowment surrender value £11,970.11  
capital that would have been repaid under a 15-year repayment mortgage £32,902.75  
difference between the two (loss)   (£20,932.64)
outgoings to date    
cost of an equivalent repayment mortgage (capital+interest) £72,229.63  
cost of the endowment mortgage (endowment premium +interest) £60,811.15  
notional "savings"
(not taken into account by the firm)
  £11,418.48

The calculation showed that Ms W had made a "loss" of £20,932.64 as a result of having taken out an endowment mortgage over a 25-year period, rather than a repayment mortgage over a shorter term. As the firm decided not to take any notional savings into account, Ms W was compensated for the full amount of the loss identified.

Walter Merricks, chief ombudsman

ombudsman news issue 8 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.