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Tep into the future

Every negative has a positive and the recent bad publicity over endowment mortgages may well be good news for the traded endowment policy market.

Every newspaper and consumer watchdog programme has been investigating the potential shortfalls on endowment mortgages and, with 40 per cent of endowment mortgage holders being sent red warning letters by life offices, there is a rising sense of panic among policyholders about being left in debt.

Policyholders are being given choices on the action they should take, from transferring to a repayment mortgage, taking out a top-up policy or simply not doing anything. However, for those who want to get rid of their policy, the message about selling an endowment mortgage on the open market rather than surrendering it back to the life office is starting to filter through.

Anything that increases consumer awareness of the Tep market has to be positive for the industry.

The Association of Policy Market Makers estimates the size of the market will be £550m by the end of the year – an increase of £100m on last year. Yet, with the entire market being worth a potential £1bn, market-makers are missing out on nearly half of all policies and consumers surrendering their policies to life offices are losing an average £1,250.

So, why are so many policyholders still losing out? Market-makers say many consumers do not go to IFAs for advice about cashing in their policies. When a policy was not taken out through an IFA, the policyholder is unlikely to have an existing relationship where they will go for finan-cial advice.

Aside from the recent endowment fears, consumers most often relinquish their policies because of a financial crisis.

A client&#39s relationship with an IFA is formed through the investment and planning of their money. As a result, many clients feel embarrassed about talking to an IFA about needing money and they take the direct approach.

Every policy will include the life office&#39s name and contact details and so it is the obvious step for policyholders. But is thisthe best move?

Many life offices will tell consumers about the option of selling their policy on the open market but there are still many that do not. These providers say they are not in the business of giving advice but is this about giving advice or it is about passing on information that will allow policyholders to get the best out of their investments? This inconsistency is causing nearly 50 per cent of policyholders to miss out.

Treasury select committee member and Labour MP for Newcastle upon Tyne Central Jim Cousins and the APMM have been campaigning to bring about the regulation of Teps.

IFAs are presently required to tell any clients considering surrendering their policy about the option of selling it but a loophole in the 1986 Financial Services Act prevents the regulator from requiring life offices to inform consumers about the open-market option.

APMM executive director Tim Villiers says the necessary changes to the Financial Services and Markets Bill giving the FSA these powers look set to come into force next summer. But in the meantime, he says there is nothing to stop the FSA informing life offices so they can get on with making the necessary changes. He says: “People should be given the information that amarket exists and that life offices are ina position to help them maximise that investment. We look forward to the FSA getting the power to say life offices have to look after policyholders.”

Unfortunately, it looks as though any change could be another year down the line as the FSA is only at the research stage.

Spokeswoman Louise Buckley says in the past the regulator has not been looking at the processes after the point of sale but will be focusing on this in the future.

Teps are just one issue and Buckley says it is unlikely the regulator will make all the changes in summer 2001. There is likely to be a transitional cross-over period. She says: “We do not want to overload the industry. We will conduct our research and then we will gradually filter it in.”

Regardless of regulatory obligations, by allowing customers to surrender policies, market-makers say life offices are missing the opportunity for ongoing business on the life of the policy.

While negative publicity is bolstering the supply side of the market, investors are certainly not being put off. The industry says there has always been a supply shortfall and this increased volume is needed to keep up with demand. Teps can be seen as a totally different form of investment without the requirement to pay off a mortgage. It becomes a product that gives good returns, it is relatively safe and investors like the security of a guaranteed payout.

However, there is now greater demand on market-makers to supply policies for funds. Fund managers are attracted by the good level of returns along with the smoothing features provided by bonuses. They present a good opportunity for diversification as the investments can be spread across different life offices.

Awareness of Teps is increasing, there is a growing supply of policies and market-makers say they still cannot keep up with demand. Yet, recent research suggests endowment mortgages are becoming increasingly unpopular. Research conducted by Surrenda-link reveals almost 80 per cent of borrowers would choose any other type of mortgage over an endowment. Where does this leave the future of the Tep market?

Beale Dobie director David Beale says there is a thriving market in prospect over the next five years but, with fewer people taking out policies, business will be affected further into the future. He says: “This will ultimately have an impact on the market but it is not an immediate concern. Lots of products come and go, Peps being one, and policies will still be around for many years.”

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