Three endowment queries

Courtney

Having sought mortgage advice from a Building Society in 1998, their rep, who I found out was a Commercial Union rep, sold me an endowment policy.

I have three queries:

1) The question used to determine my Attitude to Risk was: “When addressing the solutions to fulfill your current priorities, which one of the following statements best describes your feelings towards future investments .”

Was this an appropriate question to determine the attitude to mortgage risk of someone who had sought mortgage advice, not necessarily endowment mortgage advice?

Should they have asked a separate question to determine my attitude to mortgage risk?

2) Looking at the FOS "Decision Trees" guide, how can you determine whether "appropriate charges" or "inappropriate charges" were used to set your premium?

3) How should affordability be calculated? How much detail should there be of expenditure?

Thanks for your time,

Courtney

Courtney

Hello? Is anyone there who can answer my queries?

BarryM_3

On question 2, see http://www.financevictims.co.uk/forums/index.php?act=ST&f=1&t=856&.

Courtney

Thanks Barry, Can anyone else help?

dunstonh

2) Looking at the FOS "Decision Trees" guide, how can you determine whether "appropriate charges" or "inappropriate charges" were used to set your premium?

When endowments are set up, the advisor has a choice of target growth rates that would need to be achieved over the term and the premium is set to match that.

For example, an endowment set up at 6% would need to average 6% over the term to repay the mortgage at the end of the day.

Now this is where it was abused by some people. Say you went to two advisors, the first one used a prudent rate of 4% and it cost £60pm. The second one would know what you had been quoted so he would look to undercut the first advisor premium so you go for what you think is the cheaper endowment. So he may have set the growth rate at 8% and you pay £55pm. Being naive about these things (as most were), you pick the one with the cheaper premium as you think its better value for money. However, it may be £5pm cheaper but it needs to have double the investment performance of the first one.

I don't know what would be considered inappropriate. I think anything over 7% would be inappropriate. I saw an 8% one recently and have seen a 12% one in the past. Any endowments set up after 1998, i would consider anything above 6% as inappropriate. However, these are just my opinions based on what was average at the time.

The insurance company can tell you the target growth rate. Or, if you have the original quote, it should show the target growth rate on the illustration or give you a fairly good indication if its an early one.

Courtney

Thanks dunstonh

The growth rate needed was 7.5%. The policy was sold in August 1998.

It says, "if your investements grow by 7.5%, after 25 years, you could get (the target amount) back."

It suggests "the deductions for life cover, illness benefits, commissions, expenses, charges, any surrender penalties and other adjustments, at 25 years is £7810, or the effect of total deductions could amount to £26400. Putting it another way, leaving oit the costs of life cover and illness benefits, this would have the same effect as bringing the investment growth used from 7.5% a year down to 6.2% a year."

I didnt understand it then............and I dont understand it now!!......but we did not take the "waiver of premium" or "critical illness cover".

dunstonh

Most don't understand that. I have come across advisors that have a problem explaining it. In very simple terms, that means that if the charges had not been made for life, CI, waiver and charges themselves, the final payout would be £26,400 higher. The actual cost is £7810 over the term but if that was left in, it would have grown to £26,400. In percentage terms that means if the investment had grown by 7.5%, the charges etc would reduce it to 6.2%.

7.5 down to 6.2 for an endowment is not bad. However, 7.5% for 1998 policy is higher than it ought to have been. Although its not high enough to be grounds for complaint.

Compensationitis

Dunston, how long have you been an IFA? Have a look at the FOS website.

Inappropriate charges means charges lower than those that actually affected the plan, this meant the premium was TOO LOW to do the job.

It has nothing to do with the growth rates other than the illustration may have assumed 7.5% would meet a target value with a given premium BUT, the growth rate ACTUALLY required could have been as high as 15% with some contracts from household names who are now saying it wasn't their fault.....

It's like pulling hen's teeth with some people :mad:

Courtney

Compensationitis

What does that mean for my policy?

And can anyone have a go at answering my first and third questions on my first post?

Courtney

Compensationitis

1) Mortgages were not regulated at the time so 'mortgage risk' was not an issue. In fact there was no perceived increased risk with an endowment mortgage at the time. Sadly the investment risk was far higher than any adviser or customer could have known, but the bank knew they had hidden the true charges from you.

3) Affordability is the same for the repayment method as it is for the endowment method, I don't understand how you can complain you couldn't afford the mortgage.

dunstonh

I first licenced in 1995. I seen your other posts mentioning this but I cannot find anything on the FOS website. However, that in itself is no surprise as finding anything many things there is not easy.

Courtney
1 - If the only business you were doing was mortgage, then asking it once is fine. If you did a pension or investment at the same time, then your risk goals may have been different with each "goal".

3 - Affordability doenst need to be in any detail other than how much comes in and how much goes out. A breakdown isnt required.

Affordability isnt going to be an area you will win much with unless you go past retirement. A repayment mortgage with life cover will be around the same cost as interest only mortgage with endowment. Somtimes a little more, sometimes a little less. If you say you couldnt afford it, you would be in effect saying you shouldnt have had a mortgage.