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Solving the endowment conundrum

The endowment problem is rather like that fiendish 1980s puzzle, Rubik&#39s cube. It is solvable but the answer seems to depend on the policyholder making a series of moves in the right order. I suspect they would rather have the problem unravelled for them.

The poor old punter is in the middle of a vicious circle. Millions of people trusted their endowment salesmen, not realising that they risked an erratic quality of advice or scant explanation of investment risk that could cost them dear at a later date.

Industry economists have shown that – albeit through luck rather than design – policyholders are unlikely to have suffered a loss with their endowment policy.

Consumers and the media are constantly being remin- ded of this “good” news. For the man in the street, it does not sweeten the nasty taste left by what he sees as ano-ther industry scandal.

Many commentators still believe the only possible answer is a proactive industry-wide review.

A more realistic view of the endowment “scandal” shows the FSA is caught between a rock and a hard place.

Its decision not to commence an industrywide endowment review has drawn scathing criticism from consumer groups and some MPs. But all of them find it convenient to overlook the extremely unpalatable reality of the cost-benefit analysis.

Industrywide review aside, there are other ways in which the FSA can show its mettle.

Last year, the FSA wrote to the chief executives of the endowment-selling insurers asking for each firm to explain and justify its reasons for selling endowments. Since then, the number of firms offering mortgage endowments has more than halved from 44 to 20.

The proportion of first-time homebuyers taking out an endowments has also halved over the last year.

The insurers wrote back to the FSA to say that, if they were not pulling out of the market, they would improve their products, training and advice. But these commitments have not been followed through in every case.

The FSA now concedes that its recent mystery shopping has revealed that: “Disappointingly, and despite the regulator&#39s clear warnings and guidance, the results of these sample studies have not given us comfort that the necessary improvement in selling standards has yet been achieved.

“In particular, some firms are still failing properly to match the risks of an endowment to the needs and personal circumstances of the consumer.”

This is outrageous – so what is being done about it? The answer is, not enough. And so there are still customers being sold a product that is not right for them. Once again, the hard work done by most firms to address the situation is being spoilt by the avaricious few.

The FSA promises further visits to the worst offenders but these will not take place until next spring.

This is a slap in the face for the investors being missold endowments between now and then. Also, it must rankle with firms which have pulled out of the market, putting customer care above commercial profit. The FSA has the power to suspend the endowment business of the firms which continue to missell.

This seems to be the only thing that will focus their minds until they can satisfy the regulator that they are responsible enough to sell the product again. At the other end of the spectrum, the FSA should at least confirm it has called the relevant firms in to demand answers and immediate action. If not, the culprits will continue to undo the good work of the rest of the industry while thumbing their noses at regulator and customers alike.

At least when we hit a glitch with a Rubik&#39s cube, we could just peel off the col-oured stickers and replace them in the right order.

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Henderson Investors – Asia Pacific Absolute Return Fund

Thursday, 12th October 2000.Type: Oeic.Aim: Growth by investing in the Asia/Pacific region.Minimum investment: $100,000.Place of registration: Cayman Islands.Investment split: Any proportion of companies in the Asia Pacific ex Japan region.Yield: Nil.Charges: Initial nil, annual 1.25 per cent.Commission: Nil.Tel: 0800 881144.

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