Endowments : The FSA’s conclusions and actions

FSA/PN/136/1999
21 December 1999

The Financial Services Authority (FSA) today announces the conclusions of its recent work on mortgage endowments, together with actions to get a better deal for consumers.

Howard Davies, 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 endowment sales.

Endowment business 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 product.

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.

Expected future 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 consumers.

However, recent 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:

For 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.

For firms selling endowments

• 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 Regulators:

• 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 reviews;

• 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