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Your home may be repossessed if you do not keep up repayments on your mortgage
Financial Conduct Authority
Progress report and
1 Executive summary 3
2 Firms 6
3 Consumers 11
Annex A: Background and history
Annex B: Consumer communication activity
© The Financial Conduct Authority 2005
This paper reports on progress and sets out our plans for future work on
This is not a consultation document, but should you have any comments
please address them to:
Retail Themes Division
Financial Conduct Authority
25 The North Colonnade
Executive Summary 1
Financial Conduct Authority 3
1 Source: FSA Database covering 110 firms
1.1 It is important for consumers that firms handle complaints fairly, effectively
and promptly. Where firms fail to do so, the FSA will encourage and where
necessary, insist on, appropriate action.
1.2 This paper reports our recent actions and sets out our future plans and
expectations of firms in relation to mortgage endowment complaint handling.
Our plans have been informed by recent consumer research, which we are
publishing alongside this paper, as ‘Mortgage endowments – shortfalls and
1.3 Mortgage endowments have been a priority for the FSA – and indeed the
Financial Ombudsman Service (FOS), as well as trade associations, firms and
consumer groups – for some time, and a great deal of progress has been made
over the last few years. We have carried out extensive supervisory work
ranging from data collection and visits to monitor firms’ performance, to
requiring some firms to review past files, and in some cases taking enforcement
action. Since 2000 we have taken enforcement action against nine firms.
1.4 Firms that sold endowment policies have improved and strengthened their
communications so consumers understand whether their policy is on track to
repay their mortgage. There has been a sustained effort by the industry to
handle complaints and provide appropriate redress for any misselling. At the
end of 2004 major firms had handled more than 695,000 complaints1 and
paid around £1.1 billion in redress.
1.5 We will now be focussing our effort on those few firms that have not yet
established appropriate complaint handling standards, and working with all
firms to ensure that any increase in complaints over the next period can be
handled by them fairly, effectively and promptly.
4 Mortgage endowments: Progress report and next steps (July 2005)
2 Figures total more than 100% as there is a small overlap between groups
1.6 Supervisory work, and potentially enforcement, is therefore being vigorously
pursued by us with those firms that still fall short in their complaints handling.
In addition we are broadening our work to include a wider range of smaller
firms involved with mortgage endowments, to check that they have taken on
board the requirement to handle complaints properly, as set out in our rules
and detailed in our ‘Dear CEO’ letters of April 2002 and December 2004.
1.7 To identify firms on which we need to focus, we are establishing key
performance criteria and collecting qualitative and quantitative data from
firms to assess performance.
1.8 Looking forward, all firms must ensure that they are able to handle any
increases in complaints that may arise as a result of the sending out of ‘red’
reprojection letters, and of time bars implemented by some firms. Firms’
senior management need to act now to ensure that they have adequate
contingency plans in place. We are asking a range of firms for their
contingency plans. And we will also use the performance criteria we are
establishing to monitor the performance of all firms in the event of an increase
in complaints. In this event, we will not hesitate to use our range of remedial
and disciplinary tools – including enforcement action – should some firms not
be handling complaints well.
1.9 In addition, we will work with the industry, the FOS and the Financial
Services Compensation Scheme (FSCS) to manage the volume of complaints
and the impact any significant increase may have on consumers, the FOS and
the FSCS. We are therefore convening a forum of senior industry
representatives, the FOS and the FSCS to consider these issues and identify
1.10 On the consumer side, the results of our consumer research are encouraging, and
are consistent with our earlier research in 2002 (which indicated that 86% of
consumers who had not then complained recalled receiving reprojection letters in
the previous two years). Most of those with endowment policies that are showing
a potential shortfall and are still linked to a mortgage have now reviewed their
situation. Many have taken action to restructure their loan, endowment or savings
(around 48%), or made a complaint or taken advice (around 21%).
1.11 Some consumers (around 14%) have not taken action, but plan to; we anticipate
that the ‘red’ reprojection letters may spur many of these to action. A further 9%
judge that they feel informed and believe they do not have a problem.
1.12 We are however concerned about those consumers (we believe around 11%2)
who believe that they cannot afford to do anything. This group is small and
difficult to characterise and so difficult to reach. We plan to work with the
industry and other agencies to find ways to identify these consumers and,
Financial Conduct Authority 5
where possible, encourage them to take action to deal with their projected
shortfalls. But some consumers will have no option to act now and will
therefore be facing a residual debt at the end of their mortgage term. We will
be encouraging firms to find ways to help these consumers understand how
they can manage this situation.
This paper may be of interest to consumers as it sets out how we will
supervise firms to make sure that they treat their customers fairly and handle
complaints in accordance with our rules.
It also says we intend to work with the industry and other agencies to enable
further support to be given to consumers who feel that they cannot afford to
tackle their projected shortfall.
6 Mortgage endowments: Progress report and next steps (July 2005)
3 A more detailed history of the issues and action taken is at Annex A to this paper.
4 Caught Short – Mortgage Endowment Shortfalls (Cazalet Consulting) 2003
5 Source - ABI
6 See paragraph 2.18 for information on Skilled Persons Reports, and Annex A for information on other regulatory actions.
2.1 Sales of endowment mortgages increased rapidly during the 1980s. In 1982
around 18%4 of mortgages were endowment-linked. Sales were highest
between 1986 and 1992, peaking at over 80% of mortgages in 19885; at the
time, they appeared an attractive alternative to repayment mortgages.
However, at the beginning of the 1990s, changes in market conditions led to
concerns about the performance of existing policies and resulted in a dramatic
reduction in endowment mortgage sales.
2.2 In 1999, ABI members began regular reprojection exercises using the ‘traffic
light’ system, to inform consumers whether their policies were on track to
meet their target sums assured. (A ‘red’ letter means there is a high risk of a
shortfall – that is, the projected value of the endowment on maturity is very
unlikely to meet the target amount. As a consequence the consumer may not
have sufficient money to repay an associated mortgage loan.)
2.3 Where consumers feel that they were missold their policy, they can complain,
and with the publicity given to the misselling of endowment policies the
volume of complaints to firms has risen dramatically. The number referred to
the FOS has also risen – from 13,570 in 2002/3 to 69,737 in 2004/5.
2.4 We have undertaken a considerable amount of supervisory work with firms in
relation to mortgage endowments, covering sales and complaint handling.
This has included information gathering, ‘Dear CEO’ letters, visits, and, in
some cases, file reviews and ‘Skilled Persons Reports’6. And since 2000 we
have taken enforcement action against nine firms in relation to mortgage
Financial Conduct Authority 7
7 http://www.fsa.gov.uk/pubs/ceo/ceo_letter_4apr02.pdf and http://www.fsa.gov.uk/pubs/ceo/endowment_dec04.pdf
endowments. (We have also done a considerable amount of work on
consumer communication – Annex B to this paper summarises our
publications and media activity since 1999).
2.5 It is important for consumers that firms handle complaints fairly, effectively
and promptly, and resolve them at the earliest possible opportunity. Our
supervisory strategy in relation to endowments is designed to make sure that
firms achieve these outcomes.
2.6 The larger groups and firms together account for over 50% of the mortgage
endowment market and much progress has been made among this group. But
there are still a few of these firms that operate below acceptable standards.
We are therefore vigorously pursuing supervisory and enforcement activity
with these few.
2.7 Of course, other firms must also abide by our complaint handling rules.
That is why we are now broadening our attention to a wider range of firms
involved with mortgage endowments. We want to check that these firms have
taken on board our complaint handling requirements, as set out in our rules.
We reminded firms of these obligations in ‘Dear CEO’ letters issued in April
2002 and December 20047.
2.8 To identify firms on which we need to focus we will be collecting qualitative
and quantitative data from a wider range of firms to assess performance (we
already collect some data from larger firms). We will also be establishing some
key performance criteria (see below) and assessing performance against these.
2.9 Looking ahead, firms must ensure that they are able to handle any increases in
complaints that might arise over the next period. An increasing proportion of
reprojection letters are expected to be ‘red’, and time bars are being imposed
by some firms. (Time bars limit the time period during which consumers can
complain, in line with general legal principles – and of course, our rules.)
Together these circumstances could result in a large number of consumer
complaints in a relatively short time period. This would put pressure on firms’
complaint handling processes, and if these processes are deficient, could
ultimately generate a ‘bubble’ of complaints reaching the FOS.
8 Mortgage endowments: Progress report and next steps (July 2005)
2.10 We already collect data from the largest firms, but we will extend this to
include some medium-sized firms and large distributors (so covering a greater
proportion of market sales). We are setting objective performance criteria
against which to assess the performance of firms. This will allow us to
determine which firms we need to focus on. The objective performance
criteria will cover the following areas:
• Timeliness – our rules require firms either to give a final response to a
consumer within eight weeks of a complaint or, if this is not possible,
explain to consumers the reason for the delay, when they will receive a
final response and that they can refer their complaint to the FOS. We
believe it is important that firms ensure that adequate resources are in
place to manage complaints in a timely manner and we will monitor their
ability to meet the eight week standard. Where firms have compelling
reasons for being unable to meet the standard – such as delays in receiving
information from third parties – we will take this into account.
• Uphold rate – this is the percentage of complaints about a firm that are
upheld by the FOS in favour of consumers. A high uphold rate indicates
that firms may not be applying appropriate standards in their own
complaint handling. Our initial focus will be on firms with an uphold rate
clearly above the average for mortgage endowment cases, but we believe
this level is itself too high and that over time the uphold rate for mortgage
endowment complaints should reflect that for non mortgage endowment
• FOS complaints by market share – this is the number of complaints
received by the FOS in relation to a particular firm compared to that firm’s
market share. We will be looking for outliers who are generating a level of
complaints that is significantly disproportionate to their market share.
2.11 Firms’ senior management should pay particular attention to their performance
against the above measures as they are key indicators of their complaints
handling ability. It is also important that firms work closely with the FOS to
learn from their case handling experiences and so improve their performance.
2.12 We will assess firms’ performance against the above measures using supervisory
judgment to interpret the data, allowing us to take account of individual
circumstances and to pursue a risk-based approach. We will also consider other
sources of intelligence on their complaints handling performance.
2.13 It is essential that firms’ senior management are ready for any significant
increase in complaint levels that might emerge over the next period. We
expect firms to stress test their plans and to make contingency plans for
possible increases in complaints that could emerge in response to ‘red’
Financial Conduct Authority 9
reprojection letters and, where relevant, the imposition of time bars. We will
be asking the leading providers and distributors to share these plans with us.
We will monitor these and the data we receive from firms to establish whether
there are signs of a complaints ‘bubble’ emerging. Focussing on leading firms
and distributors is a proportionate and risk-based approach – 16 firms or
groups account for around 50% of policies sold.
2.14 Assessment of each firm against performance criteria is not a proportionate
approach to supervising the smallest firms. We will therefore use thematic
work amongst these firms. We have already done some early work in this
area. We visited a small sample of financial advisers, and the preliminary
indications are that such firms appear to handle endowment complaints well,
although we did find a number of administrative problems which we will be
working with firms to correct. However, this was a limited sample and we will
continue to use a thematic approach in monitoring small firms’ complaint
handling over the remainder of the year.
Managing the future – industry-wide activity
2.15 We are working with firms, the FOS and the FSCS to consider the industrywide
impact of potentially increasing levels of complaints following the
issuing of new-style reprojection letters and the imposition of time bars. A key
objective here is to ensure that the FOS is able to continue to operate
efficiently in handling complaints. We are convening a Mortgage Endowment
Industry Forum, involving firms and trade bodies, as part of this work. The
Forum will be seeking to identify and agree what industry-wide steps might be
taken to limit or mitigate against a substantial increase in complaints.
2.16 We will also undertake a thematic review of firms’ communications with
consumers. It is vital that firms communicate clearly and fairly with
consumers about the outcomes of complaints and the reasons behind those
outcomes; a failure in this respect can generate unnecessary complaints to the
FOS. In response to concerns in this area, the ABI has developed content
guidelines for ‘decision letters’ for use by its member firms.
2.17 For those firms not reaching acceptable standards, for example those who
perform badly against the performance criteria set out above, we will set
demanding timescales to rectify the situation. And such firms may be subject
to a range of remedial and disciplinary tools, including enforcement action.
10 Mortgage endowments: Progress report and next steps (July 2005)
Skilled Persons Reports (s.166 FSMA)
2.18 For example, under section 166 of the Financial Services and Markets Act
2000 (FSMA) we can require a ‘Skilled Persons Report’ to be undertaken by a
firm. This route is often used when we have grounds to believe there is a high
risk of consumer detriment that must be corrected without delay. In the case
of mortgage endowments, we have used this tool where complaints handling
is so deficient that it urgently needs supplementing by outside assistance;
during the last few years we have commissioned four Skilled Persons Reports
in relation to endowments.
2.19 The immediate appointment of skilled persons at firms might involve
appointing independent experienced complaint handlers and managers to
review the firm’s procedures. We may also consider whether these people
should review the past decisions made by a firm, in which case it might be
appropriate for the FOS to wait until the completion of the review before
accepting cases brought against the firm.
‘Own initiative variations of permission’
2.20 We also have the power under s.45 FSMA to vary a firm’s permissions (to
carry out regulated activities) on our own initiative in certain circumstances,
such as to protect consumers’ interests. This allows us to impose requirements
on firms to take, or stop taking, particular actions. For example this could
mean requiring a firm to allocate more resources to mortgage endowment
2.21 Those firms that have persistent problems with their complaint handling and
do not successfully implement a remediation programme place themselves at
risk of enforcement action.
2.22 We reserve the right to take immediate enforcement action against firms with
severe deficiencies in their complaint handling.
Financial Conduct Authority 11
8 CRPR16 - Mortgage endowments: the consumers’ view December 2002 (http://www.fsa.gov.uk/pubs/consumerresearch/
3.1 Millions of our mortgage endowment factsheets have been distributed by
firms or requested by consumers since 1999 (see Annex B). There has been a
great deal of media activity, and a large number of consumers have
complained or taken some other action already.
3.2 In order to take stock, look at how effective the consumer work has been and
identify which consumers most need help going forward, we decided to
commission some consumer research. IFF, an independent research company,
undertook this for us. Their report, along with the terms of reference, is
published alongside this paper as ‘Mortgage endowments – shortfalls and
3.3 Our earlier consumer research in 20028 suggested a high level of awareness
amongst consumers, including those who, at that point, had not made a
complaint (the research suggested that 86% recalled receiving reprojection
letters in the last two years, rising to 99% for receipt in the last six months).
We wanted the new research to identify how successful consumer awareness
work (and in particular our consumer information) had been in prompting
consumers to take action.
3.4 A large number of consumers move home or remortgage every year and some
have taken the opportunity to transfer their entire mortgage loan to a
repayment basis. Therefore we recognise that many consumers have
endowment policies that are now effectively savings vehicles (or, indeed, were
always intended to be such). Of course, our information on how to complain
is equally valid for them if they feel they were missold. Other consumers have
transferred part of their mortgage – for example an amount equivalent to the
projected shortfall on their policy – to a repayment basis. But some have not
12 Mortgage endowments: Progress report and next steps (July 2005)
9 Figures total more than 100% as there is a small overlap between groups
taken action at all. To focus on risk, we wanted the research to concentrate on
those who are relying on a policy to repay a mortgage loan, and in particular
on those whose shortfall will leave them with a residual debt which they may
not be able to repay except by selling the property.
3.5 We also wanted to know whether particular groups of consumers were more
severely affected by projected shortfalls than others, and whether there are
particular groups of consumers who have not taken action to deal with their
shortfalls, and if so, why. In addition, although the research was particularly
focussed on those with shortfalls, we wanted to find out whether some consumers
felt they had grounds for complaint but had not complained (and why).
3.6 Changes in consumers’ attitude to savings and the dramatic increase in the
value of property over recent years has made it commonplace for a single
household to have more than one endowment policy. For this reason we set
out to find out how many households (rather than numbers of policies) are
affected by endowment shortfalls.
Summary research findings
3.7 On page 14 there is a diagram that illustrates the detailed research findings. In
total, 2.7 million households have an endowment-linked mortgage (but not all
have a projected shortfall). 62% of households have already taken some
action, and a further 19% say they intend to.
3.8 Turning to the households who are facing a shortfall:
• 2.2 million households with an endowment linked to their mortgage (see
box ‘1’ on the diagram) face an average shortfall of £7,200;
• however, of that 2.2 million, over a million of those households have
restructured their mortgage, savings or endowment (around 48%)
(see box ‘2’);
• in addition, just under half a million have complained or taken advice
(21%) (see box ‘3’);
• and another 200,000 people don’t think their shortfall is serious for them
(around 9%) (see box ‘4’);
• leaving just under half a million who have not acted. Some still intend to
act (around 13%) (see box ‘5’); others are deterred from acting – for
example because they believe that they cannot afford to do so. We
estimate that about 11%9 fall into this category (see boxes ‘6’ and ‘7’).
Financial Conduct Authority 13
3.9 We also wanted to identify whether specific groups of consumers were more
severely affected by projected shortfalls than the overall population, e.g. those
who were sold policies pre-1988 (i.e. before the Financial Services Act 1986
took effect), or maturing after retirement, or had bought their homes through
the right-to-buy scheme. The research suggests that they are not.
3.10 On complaints, the research shows that around 18% of those people with an
endowment still linked to their mortgage say they have complained. In the
past we have published a conservative estimate of 6% of policyholders having
complained, although more recent data suggests a slight increase to 8% as at
the end of 2004.
3.11 One reason for the difference between 8% and 18% is that the figures were
derived from different questions; the IFF survey asks about the number of
households that have policies still linked to a mortgage, whilst the figure of
8% is based on the much larger total number of endowment policies sold
(whether or not still linked to a mortgage).
3.12 Looking forward, the research suggests that around 400,000 consumers say
they intend to complain within the next 6 months, and approximately
450,000 more after 6 months or more. This is relevant to our planned
supervision work (see Chapter 2).
14 Mortgage endowments: Progress report and next steps (July 2005)
Mortgage Endowments – Shortfalls
All in force endowments
(originally sold for mortgage
8 million policies*
*Source: ABI as at 30 Sept 2004
Endowment Mortgage Households
(part or whole of mortgage still linked to an
2.7 million households
3.8 million policies
Other Households With Endowment
(mortgage no longer linked to endowment but policy
Between 3m and 4.2m households
4.2 million policies
Complaint or Advice Only
(43% intend to take further action)
1.05 million households
Intend to Take Action
Don’t Intend to Take Action
Shortfall Not Serious
Not Serious Problem
Not Necessary to Act
Already Paid Off Mortgage
Can Cover From Retirement
Not a Problem
Don’t Know How To /
All endowments - not included in survey
Included in survey
Financial Conduct Authority 15
10 Caught Short – Mortgage Endowment Shortfalls (Cazalet Consulting) 2003
Consumers – the next phase
3.13 Whether or not a consumer has grounds for complaint (and even if they have
complained and received compensation) they may still need to consider how
to deal with a shortfall that is projected when their policy matures.
3.14 We take comfort from the fact that a considerable number of people have
already taken some action to deal with their projected shortfalls. This is a
significant change from two years ago, when it was reported that many
consumers had taken no action10. We are confident that even more consumers
will take action as they receive the new-style ‘red’ letters.
3.15 But there is a vulnerable minority of policyholders, we believe numbering
around 250,000, who cannot afford to take action, or think that they that
they cannot afford to do so. Unfortunately this is not a neatly defined and
identifiable group of consumers.
3.16 Whilst the research does not highlight any particular vulnerable groups as having
greater problems than policyholders generally, we are particularly concerned to
ensure that older consumers, including retirees, get the help they need.
3.17 We think the best way to reach these consumers is through a range of
intermediaries with whom they are already in touch – money advice agencies
for example. That is why we intend to work with firms, trade bodies and
advice agencies to help identify and locate consumers who are in difficulty
and, where possible, encourage them to take action to deal with their
3.18 However, some consumers will have no option to act now and will therefore
be facing a residual debt at the end of their mortgage term. The work with
firms, trade bodies and advice agencies will explore how firms are preparing
to deal with such situations.
3.19 When more detailed plans are in place with our stakeholders, we will also
need to consider with them how to communicate those plans to consumers,
and we expect that some targeted media activity will result.
Background and history
1 Annex A
11 Caught Short – Mortgage Endowment Shortfalls (Cazalet Consulting) 2003
12 Source - ABI
A.1 An endowment mortgage is an interest-only mortgage backed by an
endowment policy. The monthly payment to the lender covers only the
interest charged on the mortgage, so the balance remains the same throughout
the term. The consumer then makes separate payments (premiums) into the
endowment policy with the aim of building up a lump sum to repay the
mortgage at the end of the term. Part of the premium pays for life insurance
cover, part covers the policy provider’s charges and the rest is invested.
Depending on the particular fund, there is usually a spread of investments
including shares, property, gilts and corporate bonds and cash.
A.2 There are two basic types of endowment policy:
• full endowment – where the policy is guaranteed to pay out at least the
amount of the mortgage on maturity and the premiums are set
• low-cost endowment – where the policy is not normally guaranteed to pay
out as much as the mortgage and consequently the premiums are lower.
It is the latter that is primarily at issue in this paper.
A.3 Sales of endowment mortgages increased rapidly during the 1980s. In 198211
around 18% of mortgages were endowment-linked. Sales were highest
between 1986 and 1992, peaking at over 80% of mortgages in 198812. They
appeared an attractive alternative to a repayment mortgage – the total
monthly cost was comparable, but the then high investment returns presented
the possibility of a tax-free lump sum once the mortgage was repaid. Tax
incentives were also part of this complex picture – tax relief on mortgage
interest (later known as MIRAS) existed for many years, finally being
withdrawn in April 2000. And policies taken out before March 1984 had the
benefit of Life Assurance Premium Relief. However, at the beginning of the
1990s, investment market rates started to fall; tax relief available under
MIRAS also began to be reduced. Sales of endowment mortgages reduced
dramatically, and nowadays very few endowment policies are sold.
A.4 However, although reduced investment returns have eroded the current value
of the endowment, consumers have benefited from low inflation and low
interest rates – giving endowment holders the benefit of reduced monthly
2 Annex A
s e i c i l o P f o r e b m u N
e c i r P e g a r e v A 0 0 1 E S T F
Policies Sold (Source: ABI) FTSE 100 Average Price
) s ’ 0 0 0 (
Number of policies sold since 1988 against the FTSE 100
FTSE 100 Average Price
1990 1991 1992 1993 1994 1995 1998 1999 1996 1997 2004 2002 2003 2000 2001
FTSE 100 Quarterly Prices against Bank of England Base Rate %
x e d n I 0 0 1 E S T F
% e t a R e s a B
FTSE 100 Index Quarterly Price Bank of England Base Rate %
A.5 At the end of 1999, the ABI introduced industry guidance requiring firms to
carry out regular reprojection exercises. This is in addition to the usual,
annual, client statements, which state the current value of the policy. The
reprojection letters include the estimated value at maturity based on a series of
projected rates of return. In 1999, after further reductions in investment
returns, we revised downwards the projection rates stated in our rules. In any
case, firms must use lower projection rates than those in our rules if they
expect returns to be lower. And firms should be checking to ensure that the
projection rates in their letters are appropriate in the light of any change in
the type of asset allocation.
A.6 The ABI guidance introduced the concept of a ‘traffic light’ system. A ‘red
letter’ means there is a high risk of a shortfall – that is, the projected value of
the endowment on maturity is very unlikely to be sufficient to repay the
mortgage loan. An ‘amber letter’ means there is a significant risk of a shortfall
and a ‘green letter’ means the policy is on target to reach the sum assured and
thus pay off the loan amount. Over the last five years the proportion of red
letters has increased alongside a corresponding decrease in green letters.
A.7 In October 2000 we published a paper ‘Progress Report on Mortgage
Endowments’ in response to growing concerns that this product may not have
been suitable for all consumers. And in 2002 it became apparent that the
decline in the equity market would have a significant impact on a large number
of consumers and that firms were ill-prepared for what was likely to follow.
Over that period we undertook a great deal of supervisory action with firms,
details of which are set out below. And in the light of our monitoring work, we
3 Annex A
Cumulative percentages of the number of reprojection letters sent to customers as Red, Amber and Green
Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Sep-03 Dec-03 Mar-04 Jun-04 Sep-04 Dec-04
s r e t t e l n o i t c e j o r p e r f o e g a t n e c r e P
Green Amber Red
14 Restoring confidence in long-term savings: Endowment mortgages – Fifth Report of Session 2003-4 (House of
Commons Treasury Committee) 11 March 2004
issued a ‘Dear CEO’ letter in April 200213. This set out a number of key
principles for firms in terms of their endowment complaint handling.
A.8 We have also done a considerable amount of work on consumer
communication, and Annex B to this paper summarises the publications and
media activity since 1999. In 2003 we launched a campaign aimed at
policyholders, which was designed to highlight the likelihood of shortfalls and
to encourage them to take action. Of course, where a customer feels that they
were missold their policy, they can complain, and with the publicity given to
the misselling of endowment policies the volume of complaints to firms has
risen dramatically. The number referred to the FOS has also risen – from
13,570 in 2002/3 to 69,737 in 2004/5.
A.9 At the same time we intensified supervision of those firms whose resources and
procedures were not sufficient to deal properly with consumer complaints.
A.10 Also in 2003, the Treasury Select Committee announced (in November) that it
would examine the problems relating to endowment mortgages as part of its
inquiry “Restoring confidence in long-term savings”. At the beginning of
2004 it reported on a series of evidence sessions14 and recommended, amongst
other things, that:
• policyholder letters should be clearer and make more prominent the risk
of a shortfall;
• clear information about how to make a complaint should be made
available to all policyholders; and
• the time bars that firms were invoking should be extended while the rules
about time barring were spelt out explicitly to all policyholders.
The Committee also voiced concerns over shortfalls that could have a serious
impact on the elderly and some of the more vulnerable sections of society.
A.11 In May 2004 we announced changes to our rules in relation to time bars15.
Many firms had been keen to limit their liability by limiting the amount of
time given to a policyholder to make a complaint. Imposing a time limit is in
line with a general principle of law (and, of course, our rules on complaints
generally) and is consistent with the Limitation Act 1980. Although we
believed it unjust to remove this right to limit liability, we did think it entirely
appropriate that consumers be given a more explicit warning if a firm intends
to invoke it. So the rule changes required firms using a time bar to state the
date or the period (with reference to a specific date) after which the customer
can no longer complain about the original sale of the policy.
4 Annex A
17 Estimated from ABI estimate of policies sold, and FSA database.
A.12 The rule changes came into effect on 1 June 2004 and were introduced
without consultation, reflecting the important consumer protection we felt
they afforded. In collaboration with us, and as part of this package of
measures, the ABI revised its industry guidance to require firms to make more
prominent in their communications with policyholders the risk of a shortfall
and to include our factsheet on how to complain ‘Your endowment mortgage
– making a complaint’ and also ‘Your mortgage endowment – have you acted
yet?’ It also encouraged the use of red ink in letters reporting shortfalls to
highlight the seriousness of the situation.
A.13 Throughout 2004 we continued to focus attention on endowment complaints.
We paid particular attention to those firms that have the largest number of
customers with endowment policies and so need the largest systems and
resources to cope. We have been monitoring these firms’ progress and
supervision visits have taken place to review their complaint handling
procedures. We issued a further ‘Dear CEO’ letter in December 200416, to
remind firms of their obligations in this area, including on matters such as
mitigation of loss and redress calculations, sales into retirement and complaints
about pre-1988 sales. We followed this up with more detailed information
gathering from the largest firms. However, although much progress has been
made, there are still some firms who operate below acceptable standards. Our
supervision strategy going forward is at Chapter 2 of this paper.
A.14 In the autumn of 2004 we undertook further consumer research to help us
identify those people who are most vulnerable. This consumer research
provides us with some important information and helps us identify who will
benefit most from our direct or indirect action. Our consumer research is
published alongside this report as ‘Mortgage endowments – shortfalls and
consumer action’ and a summary is at Chapter 3 of this paper, along with
further information on our intended consumer work.
Past regulatory action
A.15 We have taken regulatory action against a number of leading firms in relation
to mortgage endowments. Our supervision attention has been risk-based and
directed toward those firms that represent the largest part of the endowment
market. Sixteen firms or groups account for around 50% of policies sold17.
A.16 We will make our action public where appropriate, e.g. by publishing findings
in ‘Dear CEO letters’ or, in relation to individual firms, where enforcement
action occurs. In this way, we can establish good practice quickly and
communicate this to a wider audience through a range of channels. After all,
5 Annex A
those firms who sold only a few policies still owe their customers the same
level of care and attention as those large firms who have several hundred
thousand customers to manage. Spending more of our time on the larger firms
has also meant we have been able to target most policy holders more quickly.
A.17 Since 2000 there have been nine enforcement cases relating to mortgage
• Royal Scottish Assurance – fined £2mn – deficiencies in mortgage
endowment product (flaw in product premium pricing);
• Winterthur Life – fined £500,000 – procedural deficiencies resulting in
• Abbey Life – fined £1mn – procedural deficiencies, misselling;
• Royal & Sun Alliance – fined £950,000 – procedural deficiencies,
• Scottish Amicable – fined £750,000 – procedural deficiencies, misselling;
• Friends Provident – fined £675,000 – defective complaints handling
• Allied Dunbar – fined £725,000 – defective complaints handling
• Abbey National – fined £800,000 – mishandling of complaints; and
• Legal & General – fined £575,000 – procedural deficiencies likely to have
caused or contributed to mis-sales.
A.18 What is important to note in these cases is that the size of the fines was often
far less significant than the costs involved in the remedial action the firms
were required, or volunteered, to undertake as part of the settlement process.
A.19 Of course not all of our supervisory action leads to enforcement. Our
supervision methods fall into several categories depending on the size of the
firm, the risks to which it exposes consumers and the significance the firm’s
activity would have on the confidence of the marketplace in which it operates.
A.20 In our supervision of the largest mortgage endowment ‘providers’ we have
paid particular attention to the adequacy of complaints handling. We have
also looked at the robustness of the systems and controls underpinning sound
and consistent decision making, and have made twenty nine supervision visits
to nineteen of the biggest firms/groups since 2001.
A.21 As a result of our monitoring work, some firms have been asked to take
remedial action. Examples of the actions required are:
6 Annex A
18 Insurance Sector Briefing: The regulation of closed with-profits funds (FSA) September 2004
19 Speech 10 June 2005 http://www.fsa.gov.uk/pages/Library/Communication/Speeches/2005/0610_ml.shtml
• a review of past business for advisers against whom multiple complaints
have been received;
• a sample review of previously rejected cases;
• a review of all complaint decisions during a given period; and
• a review of certain cases following errors in redress calculations.
A.22 There are a small number of issues that arise in relation to mortgage
endowments, that have not already been covered in the Dear CEO letters.
Our views on two of those issues have already been stated in other
publications as follows:
• closed funds – covered in ‘Insurance Sector Briefing: The regulation of
closed with-profits funds’ (September 2004)18; and
• ‘phoenix’ firms – covered in a speech on 10 June 200519.
A.23 The third issue is that of claims management companies (CMCs).
Claims Management Companies (complaint pursuers)
A.24 CMCs are companies that facilitate the handling of consumers’ complaints for
a fee – usually a significant percentage (often around 25%) of any
compensation awarded to the consumer. They deal with a range of
complaints, but here we are referring to them only in the context of
endowment complaints. Firms and the FOS are experiencing a marked
increase in the number of complaints they receive from these CMCs on behalf
of their clients.
A.25 We should make clear that the handling of compensation claims is not
regulated. The government recently announced their intention to bring
forward legislation to regulate CMCs in the Compensation Bill later this year.
We do not know yet which body will regulate them, or when such regulation
might take effect. However, the Advertising Standards Authority can consider
complaints about CMCs’ advertisements at present.
A.26 Some consumers choose to pay for a service such as CMCs offer, and it is
desirable for consumers to be offered choice surrounding their financial
affairs. However, the choice should be an informed one, and consumers
should also be aware that they have access to a service that is free and is
designed to be easy for the complainant.
7 Annex A
20 FOS Annual Review 2004/5 – see http://www.financial-ombudsman.org.uk/publications/ar05/ar05-chair.htm
A.27 In particular, we require firms to have robust complaint handling procedures
and they are expected to treat their customers fairly. In the event that the
consumer is unhappy with the service they receive from a firm and has
suffered a monetary loss as a consequence of the subject of the complaint,
they can refer their complaint to the FOS. A decision by the FOS that a firm
should compensate its customer is binding on the firm.
A.28 The FOS has said that it is no more or less likely to uphold a complaint
referred to it through a CMC20. And where a complaint is upheld, they make
no additional award against the firm to cover the CMC’s charges.
Compensation for endowment misselling is intended to be an amount that
puts the consumer back in the position they would have been in, had a
repayment mortgage been purchased instead. So if some of this compensation
is paid to a CMC the consumer will have less money with which to address
8 Annex A
Type Date first issued Title Ordered by
Fact sheet August 1999 Endowment mortgages - what to do if you are
Fact sheet Dec 1999 Is an endowment mortgage right for you? 162,700 3,000
Fact sheet January 2000 Your endowment mortgage – what you need to
Media May – Sept 2000 Radio, newspaper articles & interviews
Report October 2000 Progress Report on Mortgage Endowments
1 e s a h P
Fact sheet Oct 2000 Endowment mortgage complaints 317,250 868,750
July 2001 Your endowment mortgage – time to decide 109,500 6,901,000
2 e s a h P
Research December 2002 Mortgage Endowments: the consumers' view
Fact sheet April 2003 Your endowment mortgage – have you acted yet? 17,000 1,458,000
Media Oct 2003 “Act Now” Campaign – National Papers; radio;
magazine articles; surgery leaflets
December 2003 Your endowment mortgage – find out where you
Fact sheets June 2004 Your endowment mortgage – have you acted yet?
Your endowment mortgage – making a complaint
(Firms were required to send both factsheets)
3 e s a h P
Research Jul 2005 Mortgage endowments - shortfalls and consumer
25 February 2005
Dedicated pages covering topics:
What is the problem?
What are my options?
Your re-projection letter – key information
What if I trade in my policy?
Do I have a valid complaint?
Are there any time limits for making a complaint?
How do I register a complaint with a firm?
Will I be charged for making a complaint?
I’m not happy with the Ombudsman’s decision – what next?
How will the firm calculate my compensation?
Do I have to pay tax on any compensation received?
The firm who owes me compensation has gone bust – what do
1 Annex B
• Caught Short – Mortgage Endowment Shortfalls (Cazalet Consulting) 2003
• CRPR16 – Mortgage endowments: the consumers’ view (FSA)
• Endowment Mortgages – The Facts (ABI) January 2005
• Financial Ombudsman Service: Annual Review 2004/5
• FSA website:
• Insurance Sector Briefing: The regulation of closed with-profits funds
(FSA) September 2004
• Letter addressed to the Chief Executives of banks, product providers and
IFAs in the mortgage endowment market “the Tiner letter” (FSA)
• Letter addressed to the Chief Executives of leading banks, product
providers and IFAs in the mortgage endowment markets (FSA)
• ‘Progress Report on Mortgage Endowments’ (FSA) October 2000
• Restoring confidence in long-term savings: Endowment mortgages – Fifth
Report of Session 2003-4 (House of Commons Treasury Committee)
• Speech: Regulatory action against Phoenix Firms (FSA) June 2005
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