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ombudsman news

issue 23

December 2002

mortgage endowment complaints

Here is a selection of some of the many complaints about mortgage endowment policies that continue to reach us.

mis-sold mortgage endowment policy - customers' unrealistic expectations of compensation

Mr and Mrs O had taken out a repayment mortgage when they bought their first property. When they moved to a larger house several years later, they thought they still had the same kind of mortgage. But two years after their move, in the course of a meeting with an adviser to discuss other financial arrangements, they discovered that they had been sold a mortgage endowment policy.

After the couple complained to the firm that sold them the policy, it offered them compensation in accordance with the regulatory guidance. But Mr and Mrs O were dissatisfied with the amount offered so they brought their complaint to us. Mr and Mrs O thought the firm should pay them:

  • a refund of the premiums they had paid in to the policy;
  • the policy's surrender value;
  • an amount equal to the commission the firm's representative received for the sale;
  • an amount equal to the capital they would have paid on a repayment mortgage to date, if they had taken this type of mortgage from the outset;
  • the fee that the firm would normally charge to convert an endowment mortgage to a repayment mortgage;
  • the additional amounts they had paid out for an endowment mortgage over the amount they would have paid for a repayment mortgage; and
  • £10,000 additional compensation.

complaint rejected
We agreed that the sale of the mortgage endowment policy had been unsuitable for Mr and Mrs O. But the firm's offer of compensation was fair and reasonable, so we did not uphold the complaint.

Initially, Mrs O disagreed with our view. She eventually decided to accept the firm's offer after we had a lengthy telephone conversation with her. We stressed that the offer was in keeping with the regulator's guidance and that the aim was to put her and her husband back in the position they would have been in if they had taken a repayment mortgage from the outset.

mis-sold mortgage endowment policy - attitude to risk not assessed - policy extends beyond customer's retirement

Mr and Mrs Y had been in their mid-forties when they became first-time house buyers. They took out a mortgage for £20,000 to buy their council house under the "Right to Buy" scheme. Their adviser arranged a unit-linked mortgage endowment policy for them. This extended over a 15-year term, which meant it would not be paid off until after Mr Y had retired.

Several years after taking out the mortgage, the couple complained to the firm, saying the adviser had never told them there was a risk that the policy might not produce enough to repay their mortgage.

The firm rejected their complaint. It said its records showed that the adviser had:

  • discussed with them the possibility of their having a repayment mortgage;
  • assessed their attitude to risk as "balanced" (which would suggest that the endowment policy was suitable);
  • explained that the policy ran past Mr Y's retirement date; and
  • checked that they would still be able to afford the premiums after Mr Y had retired.

complaint upheld
We noted from the "fact find" completed at the time of the sale that the couple had no loans, credit cards, store cards, previous investments, savings plans or life cover.

When the adviser had asked them about their financial objectives, the couple had said that their main aim was to pay off the mortgage, although Mr Y said he also wanted a new garden path and his wife said she wanted to win the lottery.

We concluded that:

  • the couple's attitude to risk had not been assessed on the ‘fact find';
  • there was no evidence to show that the adviser had explained the risks associated with a unit-linked endowment; and
  • the adviser had not discussed with the couple the fact that the policy continued after Mr Y retired.

We were satisfied that the proper advice would have been for the couple to take out a repayment mortgage with a term that coincided with Mr Y's retirement date. The firm agreed with our view and offered compensation of £2,300, calculated in accordance with the regulatory guidance.

mis-sold mortgage endowment policy - policy incompatible with attitude to risk and extends beyond customer's retirement

Mr L complained to the firm after discovering that his mortgage endowment policy was not guaranteed to pay off his mortgage, and that it continued after his normal retirement date.

The firm agreed that its sale of this policy had been unsuitable, since Mr L had not wanted to take any risk with his investment. But it did not accept his complaint about the length of the policy. It said that he had been made aware of this from the outset and that he could, if he wished, have chosen a policy with a shorter term.

Mr L did not agree with the firm's conclusion so he brought the complaint to us.

complaint upheld
We were unable to find any evidence to support the firm's sale of a policy that extended beyond Mr L's retirement. The firm's representative did not appear to have discussed any alternative with him, and there was no reason to believe that Mr L could not have afforded a policy with a shorter term.

The firm argued that, in all probability, Mr L would still have been able to afford the endowment mortgage after he retired. But in our view, since Mr L could have afforded a policy that matured before he retired, this would have been the more suitable option. We decided that the firm should pay compensation, calculated on the basis of a comparison between his present position and the one he would have been in if he had taken a repayment mortgage that matured at his planned retirement date.

mis-sold mortgage endowment policy - whether firm should pay cost of advice for client

The firm upheld Mr G's complaint about his mortgage endowment policy and offered him redress, calculated in accordance with the regulator's guidance.

Mr G wanted to put this money towards paying off his mortgage and to then switch the rest of the amount he owed into a repayment mortgage. But he wanted first to take financial advice on how to switch, the ramifications of doing this and the type of replacement life cover that would be most appropriate. When the firm refused to reimburse Mr G for the cost of this advice, he brought his complaint to us.

complaint upheld
The Financial Services Authority's (FSA's) Guidance on Mortgage Endowment Complaints states that:

"The reasonable costs and expenses the complainant may have incurred in limiting his loss are to be taken into account in assessing compensation. This is likely to include the complainant taking advice on whether he should convert from an endowment to a repayment mortgage and incurring expenses in doing so..." (Paragraph 2.2.15).

The costs Mr G incurred were reasonable and were a direct consequence of the mis-selling, so we decided that the firm should reimburse them.

mis-sold mortgage endowment policy - firm ignores ombudsman's decision

Mrs C complained to the firm when she realised that the firm's representative had given her incorrect advice. He had told her that her mortgage endowment policy was guaranteed to repay her mortgage and to provide an additional lump sum. The firm ignored her complaint, so Mrs C came to us.

We wrote to the firm and asked it to send us a copy of the relevant file. It failed to respond. Mrs C's evidence therefore remained unchallenged. We concluded that the firm's sale of the policy had been unsuitable. Mrs C had no previous investment experience, had previously had a capital repayment mortgage and, on the basis of the information she provided, was not prepared to take a risk with her mortgage.

The policy premiums had been invested in a high-risk fund for the first 10 years and had then gradually been transferred into a low-risk fund, so we concluded that this was a medium- to high-risk investment.

complaint upheld
The firm eventually contacted us just before we issued a final decision. In a very brief note, it claimed that the complaint was time-barred under the Limitation Act and that we could therefore not consider it. This was not in fact the case, because three years had not yet elapsed since the date when Mrs C ought reasonably to have been aware that she had cause for complaint.

We awarded redress in accordance with the regulatory guidance and Mrs C accepted our decision. This made it binding on the firm but the firm refused to pay. So Mrs C has now taken legal action to enforce our decision through the courts, as she is entitled to do under the Financial Services and Markets Act 2000.

Walter Merricks, chief ombudsman

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.