Endowments : The FSA’s conclusions and actions
21 December 1999
The Financial Conduct Authority
(FSA) today announces the conclusions of its recent work on mortgage
endowments, together with actions to get a better deal for consumers.
Chairman of the FSA, said
This is a complicated area and there is a risk that
consumers could become more worried than they need to be. That could
lead them to do the wrong thing by cashing-in their endowment policy or
stopping their payments and losing out as a result.
The industry needs
to ensure that doesn’t happen. Firms must now play a more
active role in alerting their customers to the risks of cashing in
their policies and ensure that they are aware of these risks before it
is too late. And rigorous suitability checks must be made on future
will be kept under close scrutiny by the FSA to ensure that consumers
get a fair deal.
The regulators have
considered the evidence about market trends, selling practices and the
typical performance of mortgage endowments. This includes the results
from a recent series of supervision visits to major firms selling the
A key conclusion is
that, on average, holders of mortgage endowments have enjoyed returns
which mean they have fared at least as well as they would have done
with a repayment mortgage. So there are no grounds for an industry-wide
review of all past business.
investment returns have, in money terms, fallen over recent years. As a
result, many people with endowments will find that they now need to
save more each month to be confident of building-up a sum sufficient to
repay their mortgage. They will find this unwelcome, even though most
of those concerned will have gained from the general reduction in
mortgage interest rates
It is clear from the
statistics that the proportion of mortgages arranged on an endowment
basis has shown a marked reduction over recent years. And a number of
life insurance companies and mortgage lenders have recently ceased
offering the product altogether. By the third quarter of 1999 the
proportion of new mortgages arranged on an endowment basis had fallen
to 28%. Even allowing for some under-reporting, this represents a
continuing decline from the peak of over 80% seen in 1988. This trend
is consistent with the progressive removal of significant tax
concessions, including now the abolition of MIRAS from April 2000,
which reduces the attractions of endowment mortgages for many
targeted regulatory visits to product provider and independent
financial adviser firms show current selling practices for endowments
to be poor. Record-keeping is generally inadequate and raises questions
about the suitability of a significant proportion of sales. The results
of the visits may lead to further investigation of the firms concerned
and to disciplinary action where appropriate.
In the light of
these conclusions and findings, the key action points are:
consumers with mortgage endowments:
- On average, consumers have done well from having an
endowment. They should not make any hasty decision to surrender, or
stop paying premiums on, their policies.
- However, they need to be aware that many people will
now need to save more each month, whether through their endowment
policy or otherwise, to be confident of paying-off their mortgage.
- The FSA factsheets, written in plain English, are
available to help explain the position of endowment policyholders and
their options for the future.
- If any consumers are unhappy about the advice they
were given when they purchased an endowment, and consider they have
lost out as a result, they should in the first instance contact the
firm that sold them the policy. The Ombudsman can step in if, once the
firm has considered the complaint, the consumer remains dissatisfied.
- Radical improvements are needed in communications
with the estimated 5 million households which have mortgage endowments.
It is essential that better information in clear language is provided
to customers about their position and their options for the future.
Firms must improve their helpline facilities where necessary.
- The ABI has committed its member firms to a package
of measures which, from Spring 2000, will deliver improved
communications with consumers. Meanwhile, by the end of January, all
mortgage endowment holders will be sent an initial explanatory letter
enclosing a copy of the FSA factsheet.
- The FSA with the Personal Investment Authority is
giving a public warning that poor selling practices in product provider
or IFA firms are unacceptable. These poor practices must stop and
standards must improve markedly.
- the FSA is doing further analysis to identify, within
the general consumer picture, any problem categories of past business.
In the light of that, the FSA will consider whether the industry needs
to take additional focused action to reach particular groups of
consumers. On cost-benefit grounds, it is highly unlikely, however,
that it will prove appropriate to require proactive industry-wide
- are doing more to provide relevant briefing and
information materials for consumers;
- have today issued clear consolidated guidance to
firms on the required standards of selling practice which are expected;
- have required the Chief Executives of insurance
companies to explain and justify the basis on which they sell mortgage
endowments and report back by 31 January; and
- will make follow-up visits to check for a marked
improvement in sales practices by the end of 2000. We will not hesitate
to take disciplinary action where appropriate if standards remain poor