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Redress rehearsal

If the Abbey Life £1m endowment fine was the tip of the iceberg, it looks like the insurance industry could be heading for a Titanic compensation bill.

News that Abbey Life has set aside £165m to cover compensation for customers missold endowment mortgages, and that Pearl is thought to have allocated £100m, has sent shockwaves rippling through the industry.

The attitude of complacence among other insurance groups prior to the inquiry has been replaced by anxious mutterings as the very real possibility of a compensation bill of more than £500m looms large on the horizon.

The FSA is still refusing to release details of the 20 companies which are “helping it with its inquiries” but many more household names and players now closed to new business are expec-ted to feel the regulatory heat.

The biggest fines apart from Abbey Life have been £2m against Royal Scottish Assurance and £500,000 against Winterthur Life for endowment failings but these pale into insignificance next to the compensation bills.

Charcol senior technical manager Ray Boulger says he would not be surprised if heavier fines were meted out in the next few months. He says: “The FSA will obviously be dealing with the larger culprits first. I am not saying that IFAs were blameless but they weren&#39t the ones with the most stringent foot in the door tactics – these were the big providers with direct salesforces.”

But Chase de Vere savings and investment manager Anna Bowes is confident that the industry can withstand more fines. She says: “Those people who are about to face big fines know who they are and have probably been preparing for them over a considerable period of time.”

So far, the sums of money involved have not been huge. But there are voices in the industry predicting a similar scenario to the pension mis-selling scandal, with smaller claims at the beginning of the inquiry resulting in vast sums for the firms by the time all the compensation was finally totted up.

Falcon Group chief executive Allan Rosengren says: “I really hope the endowment problem will not reach the scale of the pension review but there is a feeling among IFAs that the FSA seems to be inviting claims.A really unwanted consequence of this action is a rise in PI premiums.”

At the root of the compensation claims lies the problem of how exactly the FSA will define misselling and how this will affect advisers and providers. IFAs feel victimised by retrospective decisions which they believe criticise them for work that at the time it was carried out was, in their opinion, compliant.

The ABI&#39s muted response to the report backed the FSA&#39s handling of the inquiry, saying the report would give some much needed “perspective” to the situation. But the Consumers&#39 Association believes its own campaign has really forced the hand of the FSA and significantly raised public awareness of endowment misselling.

The CA website promoting the campaign has seen more than 300,000 hits since its launch just over six weeks ago and interest is showing no signs of subsiding. CA senior policy adviser Mick McAteer says: “The number of enquiries we have received through our website is probably more than the FSA has received during its entire two-and-a-half year inquiry.”

The main criticism McAteer levies against the FSA is based on its campaign, which he says has “a conflicting and complacent message”.

The FSA is still ruling out a full-scale inquiry because it says the £5bn needed to cover costs is not justified on a cost-benefit analysis and it is not prepared simply to compensate people for investments that fail to perform. Despite rumours to the contrary, McAteer says the CA is not calling for a full-scale inquiry. It would rather see a stratified review that gets the fastest results for consumers.

He says: “What they ought to be doing is taking out full-page adverts in the papers showing people the comparison between the biggest providers&#39 endowment policies and repayment mortgages.”

The consumer watchdog, which estimates there are five million people eligible for compensation, lodged an official complaint with the Treasury against the FSA over the way it handled the endowment inquiry. The regulator has now extended the deadline for customers to submit complaints.

Boulger thinks it is unfair to criticise the FSA too harshly over the inquiry. He says: “A lot of the criticism has been misguided – people are working on the premise that the FSA was sleeping on the job, which was not the case. There has clearly been a lot going on behind the scenes.”

He says when the pension review was carried out, it was easier to assess whether customers had been badly advised in being told to take out a personal pension rather than add to a company scheme. He foresees a delay in claims because of the problem gaining accurate documentary evidence on deals done more than 10 years ago.

The PIA first began investigating Abbey Life&#39s compliance procedures in 1995 and again in 1997. However, it was not until 1999 that it visited with a compliance team. So far, Abbey has been fined for misselling and other deficiencies in its compliance procedures only for the period between 1995-99 and for no time prior to that point even though the majority of endowment sales were probably made in the late 80s.

Much to the surprise of endowment misselling victims, the regulator was positively congratulatory of Abbey&#39s cooperation in the inquiry and its “remedial action”. There have been murmurs that because it cooperated, Abbey was let off the hook over a bigger fine.

Boulger thinks providers which fail to help the FSA could be on the receiving end of even higher penalties than Abbey. He says: “It is a case of the sinner repents. One suspects that there is going to be a broad range of fines according to the levels of cooperation between the providers and the regulator.”

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