Selling a mortgage endowment policy ?  (F.S.A. Guide )

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Are Mortgage Endowment Holders Still Being Sold Short by the Life Companies?
Are you well endowed?

 August 2001 saw the Financial Services Authority tell the life assurance companies that must inform endowment policy holders of the option of selling their endowments instead of surrendering them, but how many are making the effort to comply with this, and is the UK public being sold short yet again? Not if a new web site gets it's way.

United Kingdom (PRWEB) January 10, 2006 --

 Mortgage endowments are a bit of a hot potato at the moment, with warning letters being sent out to thousands of unfortunate endowment policy holders, giving them the bad news that their endowment policy, so enthusiastically sold to them all those years ago, is not so well endowed after all.

Just when a significant increase of cash would help to solve this dilemma, adding fuel to the fire is the apparent reticence of the life assurance companies to fulfil their legal obligations, and inform those looking to surrender their policies of the extra money they could get in return, by selling the endowment policies privately instead.

It’s a situation that a new web site, www.sellendowments.co.uk is looking to rectify, by making the whole endowment selling process painless, and instantly available to anyone.

The F.S.A (the UK government regulator set up to protect our interests by policing the financial services industry) make it compulsory for the life assurance offices to inform the public of this “endowment selling” option, so why are they apparently so lax about doing it?

Could the reason lie in this statement, made by the F.S.A in its consultation document CP106 – section 3.9, way back in August 2001?

“It is where policyholders approach the issuing life office direct with, perhaps, a direction to surrender, that they are at greatest risk of losing out through ignorance or lack of understanding of the alternatives. Historically, some life offices have been reluctant to accept responsibility for informing such policyholders about the alternatives to surrendering a policy. They have not, for example, considered it to be their responsibility to tell policyholders how to dispose of their policy and have been reluctant to get involved in the additional administrative effort in being a party to the sale of a policy.”

And again, on the recently revised F.S.A web site:

“If you surrender your policy, the life office pays you a surrender value for it. If you trade it in, you sell the policy to a third party (usually via a traded endowment company, sometimes called a market maker). The new owner takes over the policy and pays the premiums but the assurance remains on the life of the original policyholder. So when it matures or if the original policy holder dies, the new owner gets the money. Depending on how long the policy has been running, you may get more money trading it in rather than surrendering it.”

So wrapped up in adhering to correct financial speak, and complying to the letter of the F.S.A law, the life assurance companies go to great length to dissuade you from cashing in or surrendering the endowment policy.

As, quite rightly, they point out that “You may be tempted to cash in your endowment policy. Never do this, or stop making payments, without calling our helpline, or speaking to a Financial Advisor.”

One assumes that the financial adviser, who sold it to you in the first place, is now going to welcome you back with open arms, a red face, and admit that they got it wrong?

With financial advisers leaving the industry on a daily basis you may be a bit hard pushed to track him down.

Where in all the junk mail sent out by the endowment life assurance companies does it say that you can sell your endowment policy as a “going concern” with many years of hard earned premiums paid already, and get a better return than that offered by the original life office?

It doesn’t seem to mention that if you did just that, not only could you potentially get more money than by surrendering it, but the new owner could benefit from your premature death, and get the life assurance paid to him instead.

So the question that begs an answer is “if you approach your endowment policy company, to discuss the surrender value of your endowment policy, will they inform you, as they must do according to the F.S.A, of the option of selling the policy to a third party instead of surrendering it back to them?”

Is it perhaps the fact that you could get a better offer elsewhere that is influencing the way they respond to you?

Should you wish to find out what your endowment policy is worth if you sell it instead of surrendering it, try a visit to the web site www.sellendowments.co.uk

If in any doubt, follow the directive of the F.S.A and talk to an independent financial advisor before acting.

MP's endowment mortgage campaign

BBC News .co.uk
By Peter MacRae
Producer of The Investigation


A Scottish MP has vowed to help thousands of house owners who have been mis-sold mortgage endowment policies. Sandra Osborne helped bring in tough new rules governing the sale of endowment policies by banks and building societies.
Many home owners with endowment mortgages are struggling financially
She said she intended to lobby the government to help the thousands of people who have been mis-sold the same policies by their solicitor.

BBC Radio Scotland's series, The Investigation, explains how many people, who were mis-sold these policies in the 1980's and 90's by banks, building societies and other financial institutions, have successfully claimed compensation for performance shortfalls.
But Scots who were sold identical policies by their solicitor when buying their homes have virtually no hope of being compensated for their losses.

One woman from near Glasgow is now having to pay an extra £150 a month to ensure her mortgage will be paid off at the end of its 25-year life.

Mortgage shortfall

She said she was never told of the risk of a shortfall, nor that her solicitor would receive a commission for selling her the endowment policy.

David Smith, from Edinburgh, is facing a combined shortfall of almost £10,000 on two policies he was sold by his solicitor in the late 80's and early 90's.
He told Radio Scotland: "If I'd been told of the risk, I'd have opted for a repayment mortgage instead."

Ken Nicholas, an independent financial adviser with Glasgow firm MacArthur Denton, is acting for a number of clients who believe they were mis-sold endowment policies by their solicitor. He said many of them had to be extremely dogged in their determination to "hang on in there" in the face of frequently being ignored by their law firms. I want people in similar circumstances to contact me so we can bring pressure on parliament to sort this out
 

Gail McEwan, from Johnstone, has just received £700 compensation after a two-and-a-half year fight with her solicitors and the Law Society of Scotland. But she is still £7,000 out of pocket because of her endowment shortfall and she told Radio Scotland: "It's not about the money any more, it's the principle of the thing. "I want people in similar circumstances to contact me so we can bring pressure on parliament to sort this out."

Sandra Osborne was the only Scottish MP who sat on the committee scrutinising the Financial Services Bill five years ago. She said the consequences for this particular section of endowment policy holders were not anticipated at the time.

Stocks and shares

But since hearing about the problem from Radio Scotland, she is promising to try to get the government to address it. Mortgage endowment policies were very popular in the 80's and 90's. For a low monthly payment, they were designed to build up a healthy lump sum in 25 years which would pay off the mortgage with cash to spare.

They were linked to stocks and shares and were sold by banks, building societies and, uniquely in Scotland, by solicitors who also act as estate agents. But in their eagerness to sell these products, and gain commission from financial companies who promoted them, some banks, building societies and law firms did not inform house buyers of the risks involved.

Consumers should have been told that poor performance of the stock market could result in an endowment lump sum not growing enough to repay the mortgage.

Linda Costello-Baker blamed statutory weakness They were mis-sold the policy.
As so-called "red traffic light" letters warning of endowment policy shortfalls have been posted out to people across the country in recent years, dismay has turned to anger. Dreams of one day being mortgage-free have been shattered and many people who felt conned by those who sold them the policies, have sought compensation.

If the policy was sold by a bank or building society, you complain to them first. If you don't get satisfaction there you can take your complaint to the Financial Services Ombudsman (FSO) .

The FSO was set up in 2001 at the same time as the Financial Services Authority came into being. If he upholds a complaint of mis-selling, the FSO has the legal power to order a bank or building society to pay compensation for a shortfall.

Compensation claims

Across the UK, the FSO receives nearly 100,000 complaints a year about alleged mis-selling of endowments. His office upholds about 40% of these complaints and those successful can receive several thousand pounds in compensation. But if you bought your endowment policy from a solicitor before 2001, you cannot complain to the FSO.

Mortgage policies sold by Scottish solicitors in the 1990's are regulated by the Law Society of Scotland and it has no legal powers to order compensation for a shortfall on a mis-sold policy. If you cannot resolve your mis-selling complaint with your solicitor, and most people can't, you can take the issue up with the Law Society.

But it can only deal with a complaint claiming inadequate professional service. The society's Philip Yelland said it had upheld about 10% of such complaints, but only has the power to order compensation up to a maximum of £1,000.

Scotland's Legal Services Ombudsman Linda Costello-Baker, who has none of the powers of her financial counterpart, said the situation was one of a statutory weakness rather than a loophole in the law. She said politicians have got to sort this anomaly out.

Campaign details

Executive ministers, MSPs and MPs have all been in contact with the Law Society on behalf of their constituents. The society has explained the difficulties to these politicians and said it was sympathetic to people who have been left with endowment shortfalls.

Officially, the executive said it and colleagues in Whitehall were considering the position carefully, but it would be very difficult to change the regulatory arrangements with retrospective effect.

If you think you have been mis-sold an endowment policy by your solicitor and want to join Gail McEwan's campaign to get parliament to act, you can contact her at PO Box 19582, Johnstone.


 

Don't put more money in endowments, borrowers told

The Telelgraph, 14th May 2002

FINANCIAL advisers recommend homebuyers with endowment mortgages consider selling their endowments or saving into another form of investment rather than taking out another endowment to make up potential shortfalls.

The Association of British Insurers yesterday published a report showing that 35pc of endowment mortgage holders being sent projection letters by their providers at the moment will receive a "red" letter urging them to take action as their endowment is thought unlikely to pay off their mortgage at the end of the term.

A further 26pc have received amber letters suggesting they consider taking action to cover a potential shortfall. This is the second round of letters sent out by endowment providers. So far, 1.25m have been sent out of a total 10.2m due to be sent.

In the first round of letters, organised by the Financial Services Authority, about 45pc of 10.7m mortgage endowment holders received amber or red letters. Clive Scott-Hopkins, from financial advisers Towry Law, said: "Interest rates have fallen on borrowing, so people should be prepared to use the money they are saving on their interest-only mortgage to supplement the endowment with another savings vehicle."

A statement from the ABI said: "Between April 2000 and March 2002, average mortgage interest rates fell from 7.74pc to 5.75pc. This caused net payments on a £50,000 interest-only mortgage to fall by £83 per month, or £996 per year. "That amount invested into repaying the existing mortgage over a 10-year period will produce a return of £13,360."

Mr Scott-Hopkins said: "I don't think there are any circumstances in which I would advise people to increase their premiums into the endowment. I think a regular contribution into a unit trust or investment individual savings account would be better and, hopefully, the stock market will start to recover." Brian Dennehy, of the financial adviser Dennehy Weller, said: "Investors could sell on the endowment and use the money generated to pay down part of the mortgage. Then switch to a repayment loan to cover the rest.

"The problem with endowments is not the endowments per se, it is the fact that the risk/reward balance from stock market investments has changed so much over the past 10 years."

House Prices May Aid U.K. Economy
Bloomberg, 6th August 2002
www.bloomberg.co.uk

Less than two months ago, the Bank of England said record-high house prices posed a threat to the economy. Now, they may protect it.

The boost to confidence from rising house prices is more important to Europe's second-largest economy than the risks to inflation, executives said. U.K. manufacturing plunged in June. The FT-SE 100 stock index has shed more than a quarter of its value this year. House prices, though, have risen 20 percent.

``I'm extremely confident,'' said Garfield Thompson, a 22- year-old bank employee who agreed to buy a 315,000-pound ($493,000) garden apartment in the London district of Islington in May. Since then, he says his two-bedroom home has risen in value to 350,000 pounds.

Homes account for about 42 percent of U.K. household wealth, according to J.P. Morgan Chase & Co, more than three times as much as share ownership. Almost three-quarters of Britons own their home, compared to about half in France and western Germany and 64 percent in the U.S., realtor Savills Plc estimates.

``The strength of the housing market is good for consumer spending,'' said Mike Pearce, the general manager of Lakeside Shopping Centre in Essex, England, the country's largest mall.

Borrowing More

Consumers raised their mortgages against the increased value of their dwellings by a record 8.1 billion pounds in the first quarter. They spent more than a fourth of that money on purchases such as cars, holidays and appliances. The rest went on home renovations.

Thompson plans to buy a sofa-bed this month and to take a vacation in Spain in October. Buying a home ``has started to reap benefits and I haven't even moved into it yet,'' he said.

U.K. home prices in July rose 1.9 percent from June and 20.8 percent from a year ago, the fastest annual place since 1989, said HBOS Plc, Britain's largest mortgage lender. The FT-SE 100 index reached a six-year low last month, while the Dow Jones Stoxx 50 index of European stocks has shed 30 percent this year.

The value of U.K. pension funds fell an average of 6.6 percent in the first half and 12 percent from a year ago, according to Russell/Mellon CAPS, a pension research company.

``Falling equity markets are having an effect on people's pensions, but they're not feeling it today,'' said Richard Donnell, head of residential research at Savills. ``If their house is rising in value, it's going to offset that.''

Gary Arthurs' 247,000-pound house in Birmingham, central England, gained 11 percent in value in the past year, more than compensating for losses of 60 percent since March 2000 in a technology equity fund he invested in.

`Feel-Good Factor'

``There's something nice in feeling you have a bit more,'' Arthurs said. ``There's certainly a feel-good factor. It does help with your spending.''

Houses cost on average four times as much as annual income in May, compared with five times as much at their peak in May 1989, HBOS figures show. With inflation low, some economists say incomes won't rise fast enough to sustain the pace of price growth.

``People will sit in their houses, unwilling to sell them at lower prices,'' said Saxon Brettell, an economist at Cambridge Econometrics, a research institute. ``That will happen until incomes catch up. It could be that we have a stagnation -- a very uninteresting housing market for the rest of the decade.''

Consumer Spending

In the U.K. average dwelling prices rose 43 percent in the 10 years through 2001, to 67,250 pounds, HBOS figures show. The average price of a family home in the U.S. rose by 52 percent in the same period, to $192,200, the National Association of Realtors said.

German prices fell 1.5 percent between 1995 and 2000, to an average price of $2,115 per square meter for a new apartment, Bulwien AG figures show. In France, they jumped 28 percent between 1995 and mid-2001 to $1,422 per square meter, according to the Federation Nationale de l'Immobilier.

Consumer spending kept Britain from following Germany, Japan and the U.S. into recession last year as manufacturing shrank at the fastest rate in a decade.

Europe's second-largest economy expanded 0.9 percent in the second quarter, its quickest pace in more than two years. It grew 0.1 percent in the previous two quarters. Retail sales increased 6.9 percent in June from a year ago, the British Retail Consortium said.

``The housing market is now -- for most people, their pension is distant,'' said Jim Martin, chief executive officer of N Brown Group Plc, the largest U.K. mail-order retailer. The company's sales of household items and electrical goods jumped 28 percent in the 17 weeks ending June 30.

Unsustainable

Policy makers have called the surge in house prices unsustainable. On June 13, Bank of England Governor Sir Edward George and Deputy Governor David Clementi said they may have to raise interest rates from a 38-year low of 4 percent to curb consumer demand, including spending on houses.

They may give a different view at tomorrow's presentation of the bank's quarterly inflation report. Investors are no longer expecting a rate increase this year, interest rate futures show. The implied yield on the three-month Libor futures contract due December dropped to 3.92 percent from 4.66 percent a month ago.

``They'll be extremely nervous to do anything that will soften consumer confidence,'' said Pearce at Lakeside.

Government warned over long-term mortgages

Bank of England governor Sir Edward George is warning Continental-style fixed-rate mortgages can not be imposed on British homeowners by the Government.

The volatile British housing market, with most homeowners on variable rate mortgages, was identified by the Treasury as one of the main obstacles to joining the euro in its assessment of the five economic tests.

Chancellor Gordon Brown is looking at ways of encouraging a shift to long-term, fixed-rate mortgages to ensure the British economy responds to interest rate changes in a similar way to the rest of the euro-zone.

However Sir Edward, who retires at the end of the week, says the Government can not enforce change and any switchover to fixed-rate mortgages will have to be voluntary.

"I think there is no reason at all why public policy should not encourage them if that is what the authorities choose to do. You cannot impose them, even through public policy," he told the Commons Treasury Committee.

He says it is "logical" for the Government to look at ways of using tax policy to manage the economy once control of interest rates has been given up to the European Central Bank if Britain does join the euro.

However he says in the past, using taxes to control demand has not worked well.

Citywire comment - More endowment headaches
By Joanne Wallen

LONDON (Citywire) - As if endowment mortgage holders have not suffered enough in recent years, many people are likely to find they may have an even bigger shortfall than expected after the Financial Services Authority told insurers to be even more conservative with their projected growth rates.

Many endowment policy holders will already have received letters from their provider telling them that their endowment policy may not be worth enough to pay off the mortgage when it matures.

However, the next letter they receive could show an even greater shortfall, particularly if they have a with profits endowment fund that has switched a considerable amount of its investments out of shares and into bonds, an option favoured during falling equity markets.

The Financial Services Authority (FSA) said today that while it was happy for companies to continue to use the 4%, 6% and 8% rates for projecting growth rates on taxed products such as mortgage endowments, it advised companies to use the lower end of these, in other words 4%, where 'for example its asset mix contains a higher element of bonds.'

Until recently, a typical with profits fund would have held around 70% of its investments in equities. But following the massive crash in the value of shares over the past three years, many funds have switched out of equities into lower growth bonds, which offer more steady income streams.

Scottish Widows, for example, had only 38% of its fund in equities at the end of December last year, and a spokesman told Citywire that was unlikely to have changed much since then.

Since it is usually the equity portion of the fund that has the greatest chance of offering high growth rates and therefore a higher return on the initial capital employed, those funds with low equity content are likely to perform more steadily but are less likely to reach the desired level by the time the mortgage is ready to be repaid.

Scottish Widows has just started its second mailing to customers, a process that will take some nine months, and while in the first mailing it used the 'standard' FSA rates of 4%, 6% and 8%, to project whether your fund would pay off the required sum by the required date, this time it is using 4%, 5%, and 6% only, meaning there is a fair chance that more people than last time will be told they have a shortfall.

The FSA's recommendations have been based on some independent research carried out by consultants PriceWaterhouseCoopers (PwC). The study still concludes that equities will, on average over the longer term, outperform government bonds by 3% to 4% annually, implying longer term annual growth averaging between 7.5% and 8.5%, and it recommends that projections be made on this basis.

Citywire Verdict:

The news may not tell investors much more than they already know, or at least suspected, but it does show the FSA's intention to bare its teeth a little more with the financial services industry to prevent it misleading private investors.

Even when the nasty letter does land on the doorstep projecting a considerable shortfall at endowment maturity date, investors should step back and take a good look at their own individual situation and ask themselves some questions before rushing to pay more now to make up the 'potential' shortfall.

How many years have you got to run on the mortgage? If a number of years, is it possible that the stock market could have sufficiently corrected itself by then to make up the shortfall. How much equity do you have in the property? If you are likely to have sold up and traded down by the time your mortgage is due to be repaid, will you be happy to pay back the shortfall out of the equity in your property?

Finally bear in mind that whether your insurer uses 4% or 8%, these are only 'projections' based on how the market is currently performing.

(c)2003 citywire.co.uk

Disclaimer: "Any views expressed in this article are those of the individuals interviewed in the report and/or Citywire and not the views of Reuters."

Norwich Union has reviewed bonus rates and payouts on its with-profits policies following the bonus announcement in January. Since the January announcement there has been a small recovery in the stock market, which allowed a lowering in the level of Market Value Reduction (MVR) at the end of April.

The results of the latest review are:

• The average level of MVR will be lowered from 11% to 9% with immediate effect.

• Regular bonus rates on conventional and unitised with-profits policies and final bonuses on unitised with-profits policies will remain unchanged.

• Payouts on some conventional with-profits policies will be reduced by up to 5% with effect from 1 July 2003.


Commenting on the review, Norwich Union chief actuary, Mike Urmston, said: “The market recovery we have seen has worked through in the form of a lower level of MVR. However, on conventional policies that have matured in 2003, we have been paying out around 118% of what has been earned (asset share) so some further adjustment to payouts is necessary for overall fairness.

“On longer-term conventional policies we still need to see payouts more in line with asset shares as the higher investment returns of the past are gradually replaced by the lower level of investment returns we are now seeing. However, if we see a further recovery in the markets we can then start to build up unitised final bonus values again.”

Summary of changes

• Bonus rates/payouts:
Conventional policy payouts: Payouts reduced by up to 5%
Unitised policy payouts: No changes to final bonuses
Regular bonus rates: No changes

• Market Value Reduction (MVR)
The level of MVR on unitised policies is to be reduced from an average of 11% to an average of 9% with immediate effect. The level of MVR on unitised policies in April 2003 was reduced from an average of 14% to an average of 11%.

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