Response to my mis-selling complaint

Pennywise

dunstonh wrote:

Had endowments not been cheaper than repayment mortgages, then many consumers would not have chosen them. The vast majority of the ones I sold were done on the basis that they were £10-£20pm cheaper than repayment mortgages and that was the priority. The risk was highlighted and, in my case, clients signed a document showing the comparison and they wrote why they chose that option.

Although I do not doubt a significant number were sold without warnings. I also know that a significant number were sold correctly and consumer greed was the priority. If more advisors, at that time, had taken more care with their documentation, there would be considerably less compensation payouts.

You never said a truer word about greed! When I got my mortgage in the mid 1990's, I was "offered" an endowment alongside a repayment - yes the endowment was tempting because it was cheaper, but I still chose the repayment because I had doubts about the endowment and the IFA to give her credit did make it clear that the illustrations were just that and not guarantees. My friends and family thought I was mad because they all had endowments and were looking forward to their lump sums - I kept trying to explain to them but they just wouldn't listen - their neighbour/father/sister/pet dog had all got their lump sums and they wanted theirs too! The fact that the montly repayments were cheaper was an added bonus. A bit like the current housing "boom" - people see others get unearned windfalls and follow the herd to do likewise.

dunstonh

Dunstohn - I'm sorry have I really upset you at some point? I feel quite personally attacked by your comments today.

I'm sorry that you feel that way. There was no intention to attack you in the responses. However, it did appear that you were unhappy that you were £4000 better off in your current situation than you would have been if you had gone repayment. Hence why I did not support your views you should have compensation.

I am not a greedy consumer, just one who feels that I was taken in by the promises of an FA of good returns on the money I was investing and who, like many others , woudl not have undertaken to take on this type of mortgage had I been warned that there was any possibility of the mortgage not being repaid. By nature my husband and I are both rather cautious investors. I only wish that my FA was as diligent and honest as you obviously were with your clients, then I might not be in this situation.

That is totally fair and what you should expect. It appears that their is insufficent evidence to prove that you were advised knowing the full facts which is why the they have upheld the complaint.

You again mention remortgaging but I don't know if you had taken into account the comment about my husbands current emplyment (he was made redundant 2 months ago) I do not know of many lenders who would consider us a particularly good risk at the moment.

You don't need to remortage. You contact your current lender. Advise them that you wish to switch to repayment mortgage and ask them how much it will cost and what the monthly payments will be. If you choose to surrender the endowment, you can also tell them you intend to repay the amount of the surrender value off the mortgage at the same time. They will write back to you informing you of this information. It will probably cost you between £50 and £200 to switch but it is not new lending. Its just an alteration of the existing loan.

All I am concerned about is the £20k that I may not be able to repay at the end of the term. And as for WL not telling me my endowment won't perform why are they still regualrlybombarding me with letters telling me to take out another policy to cover the shortfall?

You are right to be concerned. I will cover the point about projections at the bottom of this response as Somerset has queried the same point.

I can see you mention consumer greed but I don't see you mention FA greed

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and my response:

Although I do not doubt a significant number were sold without warnings. I also know...

I do not for one minute dispute that some providers favoured endowments purely due to earnings potential. Where full information is not disclosed on important matters like risk, then its only fair that a complaint is upheld. However, you cannot blame advisors for all the endowments sold.

I'm confused about something and I suspect many other posters are too. You say ( for example ) that an endowment may still pay off a mortgage, or even give a surplus, even though policyholder's are getting shortfall projection letters. I understand the market may improve and that projections are only that, projections ie based on future performance. But how then can an individual 'work out ' whether what their position will be at the term end. I've been reading these threads lately. Some funds/companies are doing better than others or have a better reputation - there seems to be a question with terminal bonuses ( which can be anything ??? ). How can someone ' not in the business ' actually make an informed decision here ?? It feels like a secret club that non-members can't infiltrate.

It is confusing and i totally understand the situation that this can place individuals in. There have been some extremely good endowments surrendered with people thinking they were bad and some extremely poor endowments being kept because people think they will be good enough and come right.

Lets start with some basics...

When an endowment is set up, the premium is set with life cover being some of the cost and the rest being the investment element and usually some charges. To hit the target mortgage balance at the end of the term, the insurance company and/or advisor could set a target annual average growth rate. This can be quite low with some endowments or crazily high on others. I have seen 4% as the lowest and 12% as the highest. An endowment only needing 4% average per annum over the term would be more expensive than one needing 12% per annum over the term. The 4% would also be safer as it has more chance of hitting target as 4% is easier to achieve than 12%. Most endowments were set up with 6-8% as target growth rate.

So, lets assume 7% was the required target growth rate on our example.

This means that if the endowment fails to hit 7% p.a. average over the term, then it will not pay off the mortgage. If it grows at 8% p.a. average over the term, it will pay a surplus.

First issue we have now is that the projections being issued by providers are using rates of 3%, 4% and 5% the vast majority of the time. So an endowment needing 7% per annum to hit target is going to show a shortfall when you use a lower rate.

A projection is not what you will get back. Its an example of what you will get back if that rate of growth is achieved. In reality, the investment funds could be performing at 9% p.a. or could be in a zombie with profits fund at 0% p.a.

In both cases, the 3,4,5% rates are issued on projections but that doesnt reflect the potential growth of either fund. One is happily doing 9% , the other is stuck at zero and likely to remain that way.

There are also a few other things that can impact on a projection. Some providers will not include a terminal bonus in their projections. We have seen cases where a terminal bonus could be as much as £10,000 but as its not included in the projection, it pushes that projection into shortfall. Some providers also have increased allocation rates later in the term. That means they may have taken the first 18 months of premiums as charges. Then until year 10 they invested 95% into units but after year 10, they may have given 105% allocation. That means they are returning 5% into the plan giving it an artificial growth rate of 5% (probably closer to 3% after annual management charge). Plans with higher allocations later in the term also do not reflect that in the projection. And finally, some providers were unable to give current values on their plans as traditional with profits policies were desgined only to give a real value at the end. It costs millions to alter computers to arrange that so some of them decided to project from the surrender value. The surrender value would actually be lower than the real value, if that could be obtained. Indeed, Standard Life, for a period were issuing projections that showed the 4% growth figure was lower or the same as the current surrender value.

So, the mechanics and presentation of these projections when looked at in isolation can result in someone getting the wrong idea of what amount thier endowment is likely to pay out. It could be worse, it could be better.

Finally, you have investment performance. The stockmarket crash and FSA accountancy and reporting requirements hit the insurance companies very hard with regards to their old legacy with profits funds. I recall reading that over 70 insurance companies closed their doors to new business following the crash. If you are in a legacy with profits fund, there is a good chance you will be on zero or virtually zero bonus and likely to remain at that level. (so a 3,4 5% projection is totally useless there).

However, if you are on a unit linked policy and still have a fair time to go until maturity, the stockmarket crash is a blessing in disguise. All those units that were costing say £1.50 before the crash, cost 0.75p after. So each monthly payment was buying more units for the money. As things recover, it will be those units that make the most money and offer the greatest potential for growth.

Lets pick a balanced managed fund. Picking AXA, purely as they were the first provider alphabetically that had 20 year performance reported and was an open fund.

Over 20 years, they have achieved 8.04% (so that endowment needing 7% a year would have paid off with surplus it it matched that period). Over 18 years it only managed 6.51% average (into shortfall). Over 15 years it was 7.59% (surplus). Looking more closely at recent years we have 0.41% a year if taken out 5 years ago. However, years 4 to 1 were 5.30%, 13.13%, 14.19% and 19.07%. How realistic does that 3,4 & 5% projection look now?

So, when looking at endowments and the future beyond today, you can look at the red/amber/green projections as your first reference point but then you need to look at the potential of the fund to see what its likely to do in the future and then look at the charging structure of the policy itself. You can also look at what other funds are available and a spread amongst those funds may be a better than the bog standard balanced managed or with profits funds that too many people find themselves in.

Well, that was one hell of a response. I havent checked it for grammar and I bet there are still things in there which will lead to further questions, so please fire away.

EdInvestor

There's not many With-profit endowments now where people can be confident they will hit a 6-8% growth target long term.

Those at the Pru, some at Norwich Union, and a few small mutuals are about it IMHO.

These endowments are old policies set up at times of double digit stockmarket returns and inflation years ago, so they have high charges based on high returns. Now we are in the low inflation, low interest rate environment and the stockmarket return is likely to be single digit.But we still have high charges. It just doesnt work any more.Hence the shortfalls.

And that's before you take into account that most WP funds are at least half invested now in bonds, where they will make even less than if they were in the stockmarket.

I'm afraid I don't see much in the way of hidden reasons for optimism, more's the pity The position is potentially better with unit-linked funds but it depends on the insurer.There are some fairly old policies which should be kept till maturity as they have a high guaranteed value.For some policyholders the cost of replacement life cover will be the key factor.So one can't generalise entirely.

As for the OP, for the moment she might be best to surrender the policy and use it to reduce the capital owed on the mortgage, and use the monthly endowment premium to increase the monthly mortgage payment, so overpaying and futher reducing the amount owed. That would at least make a dent in the problem while not making things worse over this difficult period of the redundancy..

A chat with a mortgage broker about all the options wouldn't do any harm.

Amanda65

Thak you to everyone for your responses. I will sit down now with my OH and go through our options and I think take some idependant financial advice.