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ombudsman news

issue 69

April / May 2008

a selection of recent cases involving mortgage endowment policies

issue 69 index of case studies

  • 69/6 - business defends its sale of mortgage endowment policy to first-time buyer on grounds that she had been willing to take a risk with her investment
  • 69/7 - consumers complain that they were wrongly advised to take a mortgage endowment policy but adviser's records indicate that policy was not mis-sold
  • 69/8 - mis-sold mortgage endowment policy - consumers disagree with basis on which their loss was calculated
  • 69/9 - adviser defends sale of mortgage endowment policy on grounds that consumers had specifically requested least expensive option
  • 69/10 - consumer complains about basis on which bank calculated compensation for mis-selling mortgage endowment policy

69/06
business defends its sale of mortgage endowment policy to first-time buyer on grounds that she had been willing to take a risk with her investment

In 1993 Mrs W contacted a large insurance company for advice about a mortgage. She was recently divorced and planning to buy a house for herself and her two small children. The business advised her to have an interest-only mortgage and to repay it by means of a mortgage endowment policy. This was invested 50% in the with-profits fund and 50% in the managed fund.

Some while later, she was alarmed to receive a letter from the business telling her there was a high risk that the policy would not produce enough, when it matured, to pay off her mortgage. This was a so-called "red" letter, sent as part of the industry-wide mortgage endowment "re-projection" exercise.

Mrs W complained to the business. She said it had never told her there was any risk that the policy might not produce the sum she needed. She said that if she had known about the risk, she would have taken a repayment mortgage instead.

The business rejected the complaint. It said that when its representative had discussed her requirements with her and provided advice, he had recorded her attitude to risk as "careful but willing to invest". The business also said that the representative had given her an illustration showing that a shortfall was possible, if the policy failed to achieve a certain level of growth.

Mrs W remained very unhappy with the situation and she brought her complaint to us.

complaint upheld
We noted that the mortgage endowment policy was invested in funds that would generally have been considered suitable for an investor who was willing to take a "low to medium" approach to risk. We therefore had to consider whether, at the time of the sale, Mrs W had been prepared to take such a risk and had been in a position to do so.

We established that she was buying a home by herself for the first time - and that she was entirely reliant on her sole income to support herself and her children. We noted that she was borrowing a relatively substantial amount, considering her income.

The mortgage endowment policy was due to mature when she reached the age of 59. This left her with little time before her expected retirement date in which she could try and remedy matters, if the policy failed to produce the amount she needed. We concluded that Mrs W's overall circumstances made it unlikely that she would knowingly have taken a risk with the repayment of her mortgage.

We examined the records that the business had made at the time of the sale. Such records - and particularly the consumer's answers to questions about investment risk - can often provide a helpful indication of the consumer's attitude at the time of the sale. But we did not find the description of "risk" used in this instance to be particularly persuasive evidence that Mrs W was willing to accept the degree of risk associated with an endowment policy.

After weighing up all the available evidence, we thought it unlikely that Mrs W had been aware of the level of risk represented by the mortgage endowment policy, or that she had been willing to accept this risk.

We said the insurer should compensate her for any loss resulting from its advice - and that it should calculate loss in accordance with the guidance provided by the regulator, the Financial Services Authority (FSA).

69/07
consumers complain that they were wrongly advised to take a mortgage endowment policy but adviser's records indicate that policy was not mis-sold

In 1997, after deciding to move to a larger house, Mr and Mrs E consulted an independent financial adviser (IFA) as they needed to increase their mortgage. Their existing mortgage arrangement consisted of an interest-only loan supported by a low-cost endowment policy. They were advised to take out an additional with-profits low-cost endowment policy.

Some years later, Mr and Mrs E received a letter telling them the policy was unlikely to repay the target amount when it matured. They said the adviser had never warned them of any risk that the policy might not repay their additional borrowing. They also noted that they had not been told about any alternative methods of repaying their mortgage.

complaint not upheld
The IFA sent us a copy of his records, made at the time of the sale. These suggested that he had given the couple a key features document, setting out the risks associated with the policy, together with illustrations showing how the policy might perform. It appeared from his notes that he had discussed the relevance of this information with Mr and Mrs E.

We saw a copy of a letter the adviser had sent the couple a few days after his meeting with them. In this letter, the adviser had confirmed his reasons for recommending the policy. He had also reminded them that the policy would need to have grown by a certain minimum amount in order to produce the target sum at the end of its term. The letter indicated that the adviser had discussed different methods of mortgage repayment with the couple.

The adviser's records did not include details of Mr and Mrs E's attitude to risk. But we thought it plausible, from their circumstances at the time, that they would have been willing to accept a certain level of risk. They were both in secure employment with prospects of a rising income in the future. The mortgage endowment policy in question was due to mature at the same time as the mortgage came to an end - and this was some years before either of them planned to retire.

Their overall borrowing was modest in comparison to their joint income, and as well as having savings in a building society account, they held a portfolio of unit trusts and individual company shares.

Overall, we thought it more likely than not that Mr and Mrs E had been made aware of the risks associated with the mortgage endowment policy, and had been prepared to take those risks. We did not uphold their complaint.

69/08
mis-sold mortgage endowment policy - consumers disagree with basis on which their loss was calculated

In 1993 Mr and Mrs A contacted a representative of an insurance company for mortgage advice, as they were planning to buy their first home. They subsequently took out an interest-only mortgage and a 25-year mortgage endowment policy. At the time of the sale, Mr A was 42 years of age and his wife was 37.

Some years later, the couple complained that they had been given inappropriate advice. They said that they had never been told there was any possibility that the policy might not produce the amount they needed, when it matured. They also complained that the length of the policy was unsuitable, since it continued for two years beyond their expected retirement dates.

The business upheld the complaint. It said it would compensate them on the basis of a comparison between their present position and the position they would now be in, if they had taken a repayment mortgage over the same 25-year term.

Mr and Mrs A rejected this offer. They said they had never wanted a 25-year term and could easily have afforded a repayment mortgage over a shorter period. However, they said the adviser had insisted that the 25-year mortgage endowment policy was a better option for them. He had told them they would be able to pay off their mortgage early in any event, because the policy would do so well.

In view of this, they wanted the business to calculate compensation as if they had taken a repayment mortgage over 23 years, to tie in with their expected retirement dates. When the business refused this request, Mr and Mrs A referred their complaint to us.

complaint not upheld
When a mortgage endowment policy has been mis-sold, the usual remedy is to put the consumers back into the position they would have been in - financially - if they had taken a repayment mortgage from the outset.

In this case, the business did not dispute that mis-selling had taken place. So we needed to determine how likely it was that Mr and Mrs A would have opted for a term of less than 25 years, if they had been advised to have a repayment mortgage.

In our view, by taking the mortgage endowment policy over a 25-year term, Mr and Mrs A had been prepared to accept a policy that continued for two years after they both retired, albeit in the mistaken belief that the policy was certain to repay their mortgage by the end of its term.

We did not think that they would necessarily have chosen a repayment mortgage over a shorter term, even though they could have afforded to do so. Most people balance long-term financial aims against their short-term needs and Mr and Mrs A had told us their income was relatively modest, compared with their normal outgoings.

In the circumstances, we decided that if they had taken a repayment mortgage, which is normally certain to be repaid at the end of its term, they would more likely than not have taken it over 25 years. So we told the business to calculate loss up to date, using the same 25-year term for the hypothetical repayment mortgage.

69/09
adviser defends sale of mortgage endowment policy on grounds that consumers had specifically requested least expensive option

In 1994, Mr and Mrs K consulted an independent financial adviser (IFA) for advice about re-mortgaging their property. They had a £40,000 repayment mortgage and wanted an additional £10,000 in order to carry out a number of home improvements. They were advised to switch to a £50,000 interest-only mortgage and to repay it by means of a low-start with-profits endowment policy.

Some years later Mr and Mrs K complained to the business after it had sent them a "red" letter warning of a high risk that the policy would not produce the amount they needed, when it matured. The couple said they had been happy with their repayment mortgage, and had not wanted to change. However, the adviser had persuaded them that a mortgage endowment policy would be better for them. They said he had told them it was a cheaper option and would do sufficiently well to enable them to either pay off their mortgage early - or have the benefit of a surplus when the policy matured.

The business rejected the complaint. It insisted that the couple had not been given any assurances about the future performance of the policy. It also said the couple had specifically requested the cheapest option, regardless of any other considerations. Mr and Mrs K then brought their complaint to us.

complaint upheld
Mr and Mrs K had been advised to invest in a with-profits policy - the type generally considered suitable for investors willing to take a "low" approach to risk in connection with their mortgage. In this case, however, we noted that the policy required an annual growth rate of 9.8% in order to meet its required sum. This was a relatively high level for the year when the policy began, and in our view it increased the overall degree of risk inherent in the arrangement.

We therefore needed to consider how likely it was that Mr and Mrs K had been prepared to take such a risk, and whether their circumstances at the time meant that they were in a position to do so.

We established that, at the time of the sale, Mrs K had not been in paid employment but was looking after the couple's three young children. Her husband was earning a modest income in a job that offered only limited scope for future pay increases. The mortgage was due to finish when Mr K was 63, two years before he was due to retire. In view of their circumstances, we thought it unlikely that Mr and Mrs K would have been prepared to accept any risks with their mortgage.

We noted the business's assertion that Mr and Mrs K had insisted on the least expensive option. Whether or not this was the case, and this was by no means certain, the business had still been obliged to provide the couple with suitable advice.

The business was unable to provide any evidence that it had shown Mr and Mrs K any cost comparison between different types of mortgage. When we looked into what the cost of an equivalent repayment mortgage would have been, we found it was slightly more expensive than the option the couple had taken up. However, we did not consider the cost difference to be particularly significant and there was no doubt that Mr and Mrs K would have been able to afford a repayment mortgage.

As soon as they received the "red" letter, and before contacting the business to complain, Mr and Mrs K had arranged to have their entire mortgage converted back to a repayment basis. We therefore directed the business to calculate loss up to the date of the conversion, and to add interest to any loss, up to that same date.

69/10
consumer complains about basis on which bank calculated compensation for mis-selling mortgage endowment policy

In 1990, when she was planning to buy her first flat, Ms T went to her bank for mortgage advice. She was told that her best option was to take out a unit-linked endowment policy with an interest-only mortgage. Ms T went ahead on that basis and took out a policy that was invested in the bank's managed fund.

Some years later Ms T received a letter from the bank telling her that the policy might not produce enough, when it matured, to re-pay her mortgage. She contacted the bank right away to complain about the situation. Ms T said the bank had never told her that the amount she received from the policy would depend on the performance of the stock market. She said she had no idea that the policy might fail to produce the sum she needed - and she would never knowingly have taken such a risk.

After investigating the complaint, the bank agreed with Ms T that the advice it had given her had not been suitable. It then carried out calculations to compare Ms T's current position with the position she would have been in - if she had been correctly advised from the outset and had taken a repayment mortgage. These calculations revealed that she had not suffered any financial loss.

Ms T refused to accept this. She insisted that she had suffered a loss as a result of the bank's poor advice and she said the bank had failed to carry out the calculation correctly. In her view, it should not have included a number of individual lump sum payments that she had made - over the years - in order to reduce the balance on her interest-only mortgage. She said she would not have made these payments if she had taken a repayment mortgage, so they should not be taken into consideration.

Ms T referred the matter to us after the bank refused to re-work its calculations, omitting the lump sum payments. It told her it had carried out the calculations correctly, in line with the regulator's guidance, and it would not be appropriate to carry out the calculations on any other basis.

complaint not upheld
The standard method of calculating compensation in endowment mortgage complaints like this involves comparing:

  • the total amount paid by the consumer in connection with the endowment mortgage, the amount still to be repaid on the interest-only mortgage, and the surrender value of the policy; with
  • the total amount the consumer would have paid if they had taken a repayment mortgage over the same period, and the amount that would still be left to be repaid on that mortgage.

We could not be sure whether Ms T would have made the same lump sum payments if she had taken a repayment mortgage. However, we decided that it was fairest to assume that she would have done. She had made some of the payments before she first became aware of the risks attached to the mortgage endowment policy. She told us she had done this because she wanted to reduce her mortgage.

We accepted that Ms T had been prompted to make the later lump sum payments because of a concern about a possible shortfall when the policy matured. However, we thought she might well have made similar payments if she had taken a repayment mortgage. She could afford to make the lump sum payments and the amount of interest she could have earned by keeping the money in a savings account was unlikely to be as high as the interest she was paying on the mortgage debt.

We also noted that the overall result of the loss calculation would be the same if we were to assume she would not have made the lump sum payments to a repayment mortgage. We explained to Ms T that the calculations had shown that she had suffered no loss, as a result of taking a mortgage endowment policy rather than a repayment mortgage. But we asked the business to carry out an up-to-date loss calculation for Ms T, to show her exactly what the position was.

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ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.