Mis-sold Mortgage compensation guide lines

SPANNERS_2

Hi

I have received an offer of compensation from the Royal Bank of Scotland for a Low Cost Endowment policy sold to me in 1991 by Natwest Insurance Services.
The Endowment plan was to cover a capital borrowing of £54,000 for the purposes of purchasing and secured against my house.
At the time the of sale this policy was strongly recommended as the best option for a mortgage comensurate with my financial position at that time. With a strong emphasis on the likelyhood of a cash surplus at the end of the term. Natwest claimed total impartiality in their recommendation although I note they received commission from the sale.
The policy illustration and letter of recommendation, of which I still hold, do not mention anywhere a risk that the policy may fail to cover the capital sum assured at the time of maturity. Neither was I warned of the likelyhood / risk of this situation by the officer of Natwest at the time I was interviewed for this type of mortgage. I was only told that the Endowment policies recommended and sold by the bank always performed in excess of their expected growth as show by their previous results
I note that Natwest was bound by the Conditions set out by the then SIB ( Securities & Investment Board) a copy of which I also hold, clearly states that the seller of such policies must make any such risk clear to the buyer.


The basis of RBS offer of compensation is that RBS calculate the difference between where I would be now financially had I taken a standard Capital plus interest repayment mortgage at that time and the surender value of my low cost endowment policy now.

The offer of compensation stands at £5,800. plus any fees in relation to converting the mortgage into a repayment scheme .RBS say they have followed the guidelines set out by the FSA for compensation claims of this nature in reaching this sum.

My question is based on the following points :-

1) I was only told about the advantages of a cash surplus as the main advantage of this type of mortgage and having supporting documentation to show this,

2) The basis of the compensation hardly corrects an agreement which was sold on the basis that a cash surplus was likely

3) I am now faced with completing the mortgage as a repayment scheme within 10 years . This means that the £5800 sum offfered will only reduce the capital sum to repay to around £48,000 whch I estimate to equate to a monthly outgoing of approx £640.00 pm which I can not afford

Is the amount of compensation offered satisfactory??



Can anyone out there tell me what the FSA guidelines are and how do these actually stand in relation to the law?

dunstonh

2) The basis of the compensation hardly corrects an agreement which was sold on the basis that a cash surplus was likely

And it shouldnt. You argued in your complaint that you would have gone with a repayment mortgage and that endowment was not the right thing for you. The complaint has ruled in your favour and agreed. The redress payable is to put you back in the position you would be in if you had gone with repayment mortgage from the start.

3) I am now faced with completing the mortgage as a repayment scheme within 10 years . This means that the £5800 sum offfered will only reduce the capital sum to repay to around £48,000 whch I estimate to equate to a monthly outgoing of approx £640.00 pm which I can not afford

Endowment mortgages are cheaper than repayment mortgages generally. So an increase in monthly payment is to be expected. However, not as much as you have shown there as you have forgotten to include the surrender value of the endowment to reduce the mortgage balance.

Is the amount of compensation offered satisfactory??

The figures use a defined calculation method and as long as the figures input are correct, the outcome should be as well. You should have a calculation sheet showing how they came by that figure.

The amount is not negotiable. Indeed, if you force a recalculation, you may find the amount you get is reduced as a recovering stockmarket and reduced surrender penalty increase the surrender value of the endowment and reduce the redress payable.

Cannon_Fodder

I'm sure an expert will be along shortly, to comment on the FSA/Legality side...(though at a glance, it doesn't appear far out.)

But I just wanted to say that your comment 3) maybe unduly pessimistic - the compensation is not the only source to help with repayment - you should also consider the value of the endowment that's been running since 1991, when doing the maths on how to repay...

i.e. get its surrender value, get some offers to sell the endowment, look at the performance of the endowment over the last 2 or 3 years - you should have been getting shortfall letters, so you can see if its beginning to recover as some have since the FTSE bottomed out...The experts will hopefully have an opinion on RBS/Natwest as far as poor/medium/good performance goes, also, and whether its better to hold or sell.

Then you can start to consider your options;

- if you keep the endowment going, but top up your savings - putting the 5,800 aside to grow ready for 10 years time, plus adding a bit to be sure...depends on shortfall indications.
- if you keep the endowment going, put the 5,800 to reduce the capital sum, start overpaying the remainder, remembering the lower capital sum will reduce interest payments, freeing some cash up for further overpaying.
- switch to repayment basis, sell/surrender the endowment to cover your increased mortgage payments.
- if you surrender/sell the endowment, reduce the mortgage by it plus the 5,800 and do a fresh repayment mortgage on the balance.
- if you surrender/sell the endowment, put it and the 5,800 somewhere to grow, ready to pay off in 10 years.

things like current Mortgage rate, ease/fees of overpaying, early repayment charges and so on will influence the direction you head in this process.

Lots of maths to be tackled..

Hope this helps a bit.

SPANNERS_2

Thank you both Cannon fodder & DunstonH for your time to give fair and helpful comments. Interesting to have the opinion of a financial adviser (DunstonH) as our minds think differently.

Am I missing something ?? I went to a reputable Bank and asked them for sound advice on a mortgage to buy my house, not to gamble on the future. We are not dealing with a car loan for replaceable car here – we are dealing with a fundamental life long financial commitment to provide a roof over ones family’s head! In return I was recommended and sold a product which performed abominably and was not fit for purpose.
There is no excuse for the oversell on these Endowment mortgages. The selling of these mortgages was without a doubt nothing less than a confidence trick.
My brochure says:
“This type of Mortgage offers a lower cost of repayment. There is also the likely prospect of an attractive cash surplus at the end of the term.

But what does not appear anywhere in the Mortgage brochure is:
“This mortgage is cheaper because it is relying on the indicated levels of growth in the Market for the next 25 years and if they are not sustained then this investment policy will not realise the capital value owed at its date of maturity”. ”.

Had that statement been added in the brochure then only the financially insane would have taken up this type of Mortgage option.

I do vaguely recall remember raising the consequences of slower than predicted growth rate with the Mortgage consultant at the time. She looked at me bemused – almost with distain and then assured me that Natwest only recommended policies from the highest performing companies. It would not be in ( Natwest’s) interest and they would not be able sell any scheme that was unlikely to pay of the mortgage as the minimum requirement. Shame I don’t have it in writing eh?. It is pretty clear that she had little grasp of investment principles and also fully believed in the bullish hype of the sales brochure herself .
Clearly there is something wrong here. The point is that we rely on these professionals to give us sound advice and reliable products from their field of expertise.
What I do not grasp is this, it not rocket science. If it were not realistic to provide an endowment policy with a maturity value that would repay the capital sum borrowed why try pretend that you can?
Yes, I use the word “unrealistic” robustly here as we are talking about well trodden ground . How long have our financial institutions taken to develop these investment systems - 200years or more?? Working with market trends the value of investments can go up or down – as we are all now cynically warned by them.
What???? is this a new revelation to the financial sector!!!. Come on who is fooling who here? At the time I bought this mortgage I was no more an expert on expected growth rate than the mortgage adviser was on electron optics. I trusted the advisor’s credentials when I was sold this policy on growth rate predictions of between the limits of 7% & 10% “as recommended by the SIB for illustrative purposes”.
If the prevailing growth rates have already been that high surely any professional institution would err on the side of caution for a 25 year future? After all this is within a 10 – 15 year economic cycle as I have often heard these so called professionals quote. 7% - 10% was deemed satisfactory growth in a period of high inflation It was widely understood \t that time that the economy would have to move into a period of sustained low inflation.
Anyway, what were the current growth rates at the time these policies were sold? - 1991 was only just over 3 years since the Stock market nose dive of Black Monday ( 19 Oct 1997) with 2 years of observation in hand, was the market really recovering at 7 – 10 % pa then – I don’t think so.
Simply had the Financial sector been more pessimistic in their estimation of growth rates then these endowments would have been more expensive and not been made such an attractive choice. I am sorry, but there is no escaping that these policies were sold on unrealistic premise backed by an institution which I would like to trust that they knew better at that time and were fundamentally flawed from the outset.



Yes Dunstonh , I did not include the liquidation of the Endowment on purpose, it was sold to me remember, the value and future risk of the endowment became mine at the point of sale. The fact that this product was not fit for the purpose is the problem of the vendor as it is would be any other type consumer complaint. We are all advised from the outset that cashing in an endowment before its maturity is breaking the terms of the investment agreement and we will be penalised on its value. How can that be a part of fair compensation? To be penalised yet further!!???
The liquidation of the policy can not therefore part of any formula for providing an alternative other than a reference for its lack of performance.


One other point. From the outset, I have not suggested at any point that I would have chosen a repayment scheme as an alternative. This has been assumed as default benchmark in the compensation offer, it was not the only option to me at that time -- and I could have saved myself £73,000 in 12 years!!

What do I see as fair?:-
Let us be clear about this. The compensation should be based on the fact that the endowment has failed to grow at the rates indicated at the time it was sold and nothing else. The Financial Sector realised that these policies were not likely to produce the minimum required fund at maturity some while back – and panicked at the implications of that.. They should be made liable for the shortfall in the predicted value against the actual value at the time they owned up and simply put the investment back on track at their own expense.. Rather than warning us we may have made a mistake!!

Keep this simple.
I was sold a mortgage to pay of the value of my house after 25years I did not ask for and was not advised of any risk in it not achieving that goal. I have since been strongly advised that mortgage is not going to do that .
The policy provider should simply pay in the top up sum required, manage the fund better, to assure the full capital maturity value at a revised growth rate as per the original. Problem solved, a mistake by and put right by the vendor, no added worry or expense for me, end of story.
That is fair.


I cant help feeling that there is something fundamentally wrong here and it has been brushed aside for the convenience of the financial institutions leaving us to sort out their problems

To encapsulate how I feel and Analogies are often flawed, I know – but for an illustration here goes:-

Imagine you go to a main agent to buy a car. You choose an Agent of a reputable car manufacturer for your new vehicle because you reasonably trust it to last trouble free for say 7 years.

You state clearly that can not afford buy a car outright and that you want to buy the car through a financial arrangement made by the Agent .You state that have a monthly budget with which you wish to buy a new car.

The agent offers you a number of vehicles which can be bought within your monthly budget . The vehicle you chose is to be bought on finance over 5 years with a variable rate of interest ( not common I know!!! but for illustrative purposes only)arranged on your behalf by the dealer. Before signing the financial agreement you are made aware of the risk that the interest rates can go up or down so you know that your future monthly budget has to be monitored carefully to take this into account. The Agent also states that they will buy the car back off you after 7 years at the market value as an added incentive for the purchase.
No mention at the time of sale of any gamble that the wheels might fall off ( its reputable make remember) or that you wont own the car in 7 years time

Having chosen your car you leave the show room with a smile and a warm feeling, satisfied that the main Agent has given you good advice and a good deal – a car you want at an affordable price and after seven years the prospect ( if the car is looked after well ) of some cash back towards another vehicle.
No less than you would reasonably expect from a reputable main agent and of course all of this is in the Agents interest too, as it maintains his reputation plus he has probably made a good profit to cover his commission and the overhead expenses of those very plush premises etc etc.

Everything is fine – car performs well and is reliable and meets every expectation etc – you have even taken out a maintenance insurance policy to cover repairs if it has a major mechanical failure

Shock horror !! 5 years down the line after your last direct debit to the Agent, you receive a letter from the finance company stating that your car is to be repossessed by them because the Agent has failed to pay them the full amount( again this is not common for the payments to go indirectly to a financier - for illustrative purposes only). You contact the dealer immediately – the dealer apologises to you profusely saying that they got their calculations wrong and had to pay commissions to their salesmen and have cash flow problems because of poor sales rising overhead costs beyond their control etc etc .

Surely not your problem you say – you have honoured your side of the agreement made regular payments and taken their good advice etc etc .
Before you consider talking to your solicitor, you ask what the Agent will offer to compensate you for the loss of your car. The Agent says that he is prepared take your financed car and sell it and with the proceeds, offers to SELL you a another car of a lower specification of the similar age and condition at a discounted price. The Agent is effectively persuading you accept your potential loss and receive a car that you probably don’t want - or have nothing.
NO WAY!!!
You contact your solicitor, he advises you that there are no guidelines – without a doubt a court of law will deal with the Agent and he would be ordered to settle the full debt with the financier so that you would keep the car, as a starting point.

How can the financial sector really expect us to trust them in the future to provide us with credible security and advise for our life long savings when their business ethics are well below that of a car salesman.


This whole situation stinks.

EdInvestor

Post some figures and we can see what your actual position is - at the moment you don't seem to be too well informed about this.

Interest rate payable on your mortgage

Endowment surrender value
Monthly premium
Maturity date

dunstonh

One other point. From the outset, I have not suggested at any point that I would have chosen a repayment scheme as an alternative.

If not repayment method and not endowment, what alternative method would you have done?

What do I see as fair?:-
Let us be clear about this. The compensation should be based on the fact that the endowment has failed to grow at the rates indicated at the time it was sold and nothing else. The Financial Sector realised that these policies were not likely to produce the minimum required fund at maturity some while back – and panicked at the implications of that.. They should be made liable for the shortfall in the predicted value against the actual value at the time they owned up and simply put the investment back on track at their own expense.. Rather than warning us we may have made a mistake!!

Not many in the financial services industry are happy with the current redress method. Many endowments are going back on track and people are getting redress payments and some are going to end up with surpluses. Plus coupled with the lower monthly cost (which was the most common reason for doing endowment morrtgages), the current method isnt really fair all round.

At this time you have no shortfall. You have an endowment that if it performs at 3 example rates, it may result in a shortfall. Those rates may or may not be reflective of the true performance. The endowment could be doing better or it could be doing worse.

How can the financial sector really expect us to trust them in the future to provide us with credible security and advise for our life long savings when their business ethics are well below that of a car salesman.


This whole situation stinks.

You have been offered redress to make sure you are not out of pocket. That is a good there arent too many other industries that pay up like that. I dont see where the problem is in your case.

Cannon_Fodder

I'm sure if you read the small print on the original documentation you'll find something which warned you - as you say "investments can go down as well as up" had been around for a long time, now. Maybe it wasn't verbalised, but it will be in there, somewhere.

I heard once that there used to be Guaranteed Endowments - I don't remember them myself, but if there was then I agree that it was wrong of the industry/regulator to stop them being available. Would have been a useful midpoint between repayment and endowment, I guess.

Back to today - if you put the £5,800 into a Cash ISA, half now and half in April 2007, and got 5% for 10 years, you'd be looking at approx £9,400...

There are other options for investment that could earn greater returns, or you could, as stated, take it off your capital and save the spare cash from the reduced interest, periodically paying that off the mortgage too, until end of term...if able to earn (or avoid) 6%, you'd be hitting around £10,400...

Either way the bottom line is...what is the shortfall estimate?

SPANNERS_2

Sorry dont agree
Small print and insinuations are not appropriate in such important documents when dealing the general public - We are not buying a second hand car here. The warning should have been as plain and bold as the statement about the likelyhood of a surplus.

Some figures:-
There are two policies involved, both taken out in 1991
The estimated shortfalls are (as per notification recd 2004):-
Nor Union £9,400 on an expected maturity value of £25,000 @5.0% predicted
Std Life £12,600 on an expected maturity value of £29,000 @5.7% predicted

Nor Union monthly premium is 36.45
Std Life monthly premium is 41.54

Both policies mature in 2016
Motgage amount to be realised in 2016 - £54,000
Current interest paid is 7.14%pa

Compensation offered is £5,821

In veiw of the further potential loss of value I do not consider that cashing in either policy is sound advice.

The compensation is worked out on the basis of converting to a Captal + Interest scheme at this point in time. The compensastion basically represents the capital shortfall between the value of these policies to that which would have been paid off had I taken out a C + I mortgage from the outset .

With the above consideration this leaves a sum of aprox 54000 - 5800 = 48,200 to be paid off in 10years

No what I asked for or planned for.

I note that no one had actually addressd the legality of this compensation - It is only that recommended by the FSA ombudsman - not by a court.
Has there been any history of litigation on this matter?

toonfish

I might be bit slow here, but i can't really see what you are after. They have offered you compensation based on had you not been advised to undertake this plan.

What more do you expect?

dunstonh

Small print and insinuations are not appropriate in such important documents when dealing the general public - We are not buying a second hand car here. The warning should have been as plain and bold as the statement about the likelyhood of a surplus.

The first page of the key features document has a section on Risk Factors. You cannot get clearer than that. The illustration will show 3 projection rates and from around early to mid 90s, the lower projection figure would have shown a shortfall and contained a warning saying that you could get back less.

Nor Union £9,400 on an expected maturity value of £25,000 @5.0% predicted

That is not a prediction. It is an example projection. As it happens, NU is currently exceeding that rate on their with profits fund and the projection doesnt include any terminal bonus already accrued or the endowment promise.

In veiw of the further potential loss of value I do not consider that cashing in either policy is sound advice.

You are not going to be in the position of any loss when compared to a repayment mortgage. That is what the redress is for.

No what I asked for or planned for.

So, I ask again, if you hadnt done an endowment mortgage, what type of mortgage would you have done in its place?

I note that no one had actually addressd the legality of this compensation - It is only that recommended by the FSA ombudsman - not by a court.
Has there been any history of litigation on this matter?

The claims proceedure through the courts would place more emphasis on the documents issued prior to acceptance of the policy and issued prior to the cancellation rights. These documents state in a number of places that there is investment risk involved. There have been very few court cases proceeded with due to risk of failure and costs and a perfectly adequate claims process available free of charge (to you).

In your case, you have been offered a totally fair amount so going to court would be pointless.

Leon_W

SPANNERS wrote:

Simply had the Financial sector been more pessimistic in their estimation of growth rates then these endowments would have been more expensive and not been made such an attractive choice. I am sorry, but there is no escaping that these policies were sold on unrealistic premise backed by an institution which I would like to trust that they knew better at that time and were fundamentally flawed from the outset.

dunstonh

Just a quick question if I may.

As in the above quote, I thought it was the government or regulator at the time that told the insurance companies what rates to use in quotations. Am I right ?