The recent rule change by the FSA regarding mortgage-linked endowments must prompt the question – has regulation and the compensation culture gone too far?
The rule change positively encourages individuals to complain of misselling and it is arguable that a much more sensible solution to the problem would be simply to ban the imposition of a time limit for making a complaint or link it to the maturity date of the mortgage when any potential losses materialise.
After all, endowments are long-term investments and until the mortgage term is completed, nobody knows for certain exactly how much out of pocket the homebuyer will be – or even if there will be any shortfall at all.
The FSA changed its rules to require life companies exp-licitly to warn endowment policyholders who have a high risk of shortfall of the date that their right to make a complaint about the sale of the policy expires.
Homebuyers with endowment-linked mortgages have three years to complain from the date they receive a red letter notifying them that their endowment policy is running a high risk that it will not pay out the target amount when the mortgage term comes to an end. In addition, the notification of the impending time bar must be issued at least six months in advance of the date when the bar takes effect.
These new regulations refer to the time limit on a homebuyer making a complaint to the Financial Omb-udsman Service about the selling of an endowment-linked homeloan.
It is already apparent that many of those complaining of misselling knew perfectly well what they were doing and what they are really moaning about is that the investments have not performed as well as they had hoped.
The FOS increasingly finds that a significant proportion of homebuyers appear to be “coached” in making complaints. Indeed, a quick search on the internet using the words endowment, misselling or complaint throws up a number of firms which will advise on how to present a case.
Any journalist dealing with personal finance can cite dozens of examples of clearly well educated and sophisticated homebuyers who, when they think they can get some cash compensation, suddenly pretend that they did not understand what they were getting into. There has been misselling in some cases but probably a majority of homebuyers did understand the risks involved – that bon-uses depended on the performance of shares and that share prices and bonuses can go down as well as up.
It is difficult not to feel some sympathy for the product providers, given that not even the actuaries predicted that share prices would fall by such a big amount and stay depressed for so long.
The life companies' mistake was as much the result of overpaying bonuses in the good years and not saving enough to pay bonuses in the bad years as it was misselling.
Had they not overpaid bonuses in the 1980s, there would have been enough in the kitty to genuinely “smooth” the returns from equities and homebuyers may not now be facing shortfalls.
Moreover, prompting individuals to complain also runs the risk that some homebuyers could end up worse off. Many of those who have already got compensation have simply spent the cash and not used it to reduce their mortgage debt.
Those who are a long way from the end of the mortgage term may well have stood a good chance that the shortfall would not be as big as predicted and there might even have been no shortfall at all.
Consumer protection has come a long way since the 1986 Financial Services Act was first introduced and it is right that investors are informed of their right to complain and get redress where there has been genuine wrongdoing on the part of product providers, salesforces, IFAs or other advisers.
But it is arguable that both the providers and homebuyers are simply the victims of an unpredictable collapse in equities which has lasted longer than anyone could possibly have foreseen.