Ghosts in the money machine

Draw your chairs closer to the fire, my little ones, for tonight is Hallowe'en, and we have stories to chill your blood. Well, not perhaps to chill your blood exactly, but certainly enough to bring a nervous shudder to the wallet.

The world of personal finance has no shortage of horror stories all its own. Every day of the week, building societies miss out crucial pages from surveyors' reports, life offices take months to complete the paperwork needed for you to withdraw your own money, and debts people thought were long since cleared come back to haunt them.

Some of the horror stories financial advisers tell fall firmly into the shaggy dog category. These include tales like the man who bought permanent health insurance on what turned out to be the evening before he died, and another who declined critical illness cover days before a serious accident. Who knows, some of these may even be true.

Other horrors are far more serious, and these certainly do happen. Stuart Cliffe, of the National Association of Bank and Insurance Customers, has just such a case on his files at the moment.

This involves a couple who bought their house in 1985, and have been regretting it ever since.

The day after completion of the house purchase, Bristol & West, the couple's building society, sent them an additional page of the surveyor's report which, the society said, had previously been "omitted in error". This page, unfortunately, turned out to be the one which showed that the house might be subject to subsidence.

Mr Cliffe says: "The couple moved in regardless, but in the next five years, the property suffered badly from subsidence and they had to fight hard with their insurance company to ensure that damage was repaired.

"The property is worth much less because it is still subject to subsidence and, had they realised how bad the situation was, the sale would not have been completed in the first place."

Bristol & West has told the couple it is too late to come crying to them.

On other occasions, the horror lies not in the financial crisis itself, but in just how long after the event its effects can come back to haunt you.

Ian Darby, of mortgage advisers John Charcol, says: "One real financial horror story is the number of lenders who are chasing borrowers for shortfalls on negative equity five or six years after the property was repossessed.

"Over the past 12 months, there's been quite an increase in this. There's a lot of people who have really been taken by surprise."

In fact, the evidence suggests that many thousands of erstwhile borrowers from the late Eighties, who thought that they were resolving their negative equity problems simply by handing in the keys to their properties, are receiving threatening letters from their lenders, demanding many tens of thousands of pounds.

Lenders can do this because of the mortgage indemnity insurance which many mortgage packages include. Although the premiums for this insurance are paid by the borrower, the insurance actually protects the lender.

Where negative equity means the lender could not recover the full loan from sale of the house, the mortgage indemnity cover comes in to make up the shortfall. But lenders drawing on this cover are still obliged to pursue borrowers for the sum involved, in the hopes of eventually repaying the mortgage indemnity insurer.

To make matters worse, they are being joined in their hunt, which usually involves detective agencies and threatening bailiffs' letters, by the insurers themselves. This is because, when the indemnity policy was paid for, nothing in it actually said that the insurer could not reclaim from the borrower the money it has paid out to the lender. That pursuit may come many years after the borrowers have handed back their keys, thinking that was an end to the matter.

Mr Darby believes lenders are serious about recovering through this route. He says: "If you're being slapped with a pounds 20,000 bill and you're living in rented accommodation with no disposable income, then they know they're not going to get pounds 20,000 out of you - but they might get pounds 3,000 or pounds 4,000."

It may turn out to be a small sum in the end, but the arrival of the initial letter can generate sheer terror. Mike Thompson, who does not want his real name used because he is now dodging bailiffs, says: "I was told I owed pounds 39,000. After my third letter, I upped sticks and moved to another town."

Then there are the horror stories that involve nothing more than good old-fashioned bureaucratic incompetence. But even this can delay a perfectly routine transaction for several months.

Kevin Mills, a partner at Holden Meehan, London-based independent financial advisers, recalls his company's repeated attempts to get Legal & General to do the necessary paperwork for a client who wanted to use his accumulated pension funds from two other companies to buy an L&G annuity, or retirement income.

This is something he was perfectly entitled to do under the two pension plans' "open market options".

But this apparently routine request, Mr Mills says, led to "a catalogue of disasters from start to finish".

His diary of the saga starts on 20 May 1998, when he tried to get some sense out of Legal & General staffers Hayley (who wouldn't call back), Glenda (who had gone home sick) and Wendy (who promised to call back but never did).

Further calls and faxes from Holden Meehan followed to L&G's Pam (who sent back a fax with the wrong figures on it), Melissa (who promised her boss Geoff would call back), Geoff himself (who never returned the call) and Robin (who failed to respond to a letter of complaint).

It was not until two months had passed that the Holden Meehan client involved managed to finalise the transaction and secure what Mills calls a "quite small" sum of compensation after all his trouble. Matters could have been worse: annuity rates might have changed. Holden Meehan is still waiting for L&G to pay its own invoice for all the extra work involved.

Mills says: "It's all left a bit of a nasty taste in everyone's mouth, and I just will not do business with Legal & General again."