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Up to 40% of endowments are in the red

Around 40 per cent of the 10 million endowment shortfall letters going out to pol-icyholders are understood to be in the red or “definite” risk category, with another 20 per cent categorised as amber or “some danger”.

This flies in the face of efforts by the FSA and ABI to play down the size of the problem by claiming most endowments are on target to pay off people&#39s mortgages and a review is not needed.

Consumers&#39 Association spokesman Mick McAteer says: “We suspect there is a serious problem. We would like full transparency and open debate on the subject.”

The FSA will not comment until it releases its own round-up this autumn.

So who or what is to blame for the endowment crisis? There appear to be two answers – the fall in interest rates which has seen returns fall and misselling.

The new Financial Ombudsman Service is suggesting that direct-sales life offices were responsible for most of the misselling which took place in the late 1980s and early 1990s.

But IFAs may not yet be able to breathe a sigh of relief. The person who gave bad advice will have to foot any compensation bill and many of the life offices involved have substantial IFA distribution channels.

Major players in the endowment market are Standard Life with 1.2 million policies, Legal & General with 1.1 million policies and Scottish Amicable with 850,000 policies. Friends Provident, Norwich Union, Royal & Sun Alliance, CGU, Scottish Life, Lloyd&#39s TSB, Prudential and Axa also have substantial numbers of policies on their books.

Not every life office is equally culpable. The ombudsman says there are “pockets” of incidence across the industry, meaning some life offices have more red letters to dole out than others depending on their relationship with building societies, penetration in the market and client base.

But when Money Marketing enquired about numbers, few life offices would publicly state they have a big problem on their hands.

One life office, which does not wish to be named, says it has a high proportion of reds but “under 40 per cent”, while the number of amber letters is expected to be more than 20 per cent.

Standard Life claims it has only 11,000 policyholders in the high-risk red category out of 1.2 million endowments, that is, less than 1 per cent.

Prudential says 2 per cent of its letters are red and 37 per cent amber. R&SA admits to 20 per cent red and 40 per cent amber.

The Consumers&#39 Association and industry pundits remain sceptical of these figures.

According to the ABI, one-quarter of the 10 million endowment shortfall letters have gone out so far, prompting a string of complaints to the ombudsman.

The colour-coded letters resulted from an FSA decision that insurers requote likely returns using a 6 per cent annual growth rate, half the annual increase used in many original quotations before the early 1990s.

Green letters indicate no problem, amber means a small shortfall is possible, while the reds warn “there is a high risk that your plan may not pay out enough”.

Endowments now account for half the cases seen by investment ombudswoman Jane Whittles, which she attributes to the letters. But it is not even peak season yet – the letters do not all have to be out until September 2001.

Whittles has grown so concerned that she will be issuing guidance this autumn telling product providers to compensate endowment holders who have been given bad advice – but not all endowment holders.

The FOS is drafting the guidance at the moment. It says it will be recommending that providers look at the position homeowners would be in if they had acted on appropriate advice, ask where they would be with a more suitable mortgage such as a repayment vehicle and pay compensation to put them in that position.

The FOS has pinpointed several categories of policyholder who have received bad advice outside the one category identified previously by the FSA – those who were sold endowment mortgages too close to retirement.

The new categories are right-to-buy cases, people with the wrong risk profile because they have no knowledge of the stockmarket and borrowers who have moved house and cancelled their original endowment before starting a new policy. However, the ombudsman is unable to estimate how many people will fall into these categories.

There is also the difficulty of proving bad advice was given. IFAs are keen to point out other complexities involved in righting any wrongs. Macartney & Dowie Financial Services senior consultant Charles Brown says: “Returns on endowments are calculated in terms of assumptions of growth rather than reality. What if in the end there is no policy shortfall? Do the IFAs who paid compensation get compensated? The PIA used to put out guidelines on expected returns, which we followed. Will they take their share of the responsibility?”

The FOS will be informing consumers that they may be eligible for compensation but that payouts will not be automatic. The ombudsman stresses it is the last port of call for disgruntled consumers and only steps in when complaints cannot be resolved by the parties involved.

But when the FOS informs consumers, IFAs can expect another spate of inquiries from worried clients.


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