New £17bn endowment scandal

Endowment policyholders may be losing a staggering £17bn in compensation from life assurers by not pursuing mis-selling claims, says a report by the respected analyst Ned Cazalet of Cazalet Consulting.

The research suggests that while life assurers have a potential mis-selling liability of £20bn, only 15 per cent of those entitled to the compensation are likely to submit claims or appeal to the Financial Ombudsman Service (FOS) after the claims are rejected by the product sellers.

Days ago, analysis by the Consumers' Association showed 72 per cent of those who do complain to endowment sellers take no further action if they are turned down. Yet the FOS says it finds in favour of half of those who appeal against rejected claims for post-1988 endowment sales, and a quarter of those pre-dating 1988.

Policyholders, it seems, assume product sellers use criteria to determine claims similar to those of the FOS. But many product sellers are actually using tougher criteria than the Ombudsman to determine mis-selling claims.

This is true of sales before and after 1988, when the Financial Services Act was implemented, laying down tight rules on the way companies sold financial products such as endowments.

Since 1988, sellers have had to assess customers' attitude to risk and specifically advise clients that endowments are share-based products which were not guaranteed to pay off a mortgage.

They have also been required to tell customers they could use a repayment mortgage and recommend against an endowment where a client has a risk-averse attitude. Before 1988, endowment sellers had a common-law duty of care to customers.

David Creswell, the FOS head of communications, said the Ombudsman feels the 1988 legislation "merely puts flesh on the bones" of those duty of care requirements.

Even where there was no specific advice on a sale there was, in practice, likely to have been implied advice. Product sellers should have assessed attitude to risk as part of the duty of care. But some product providers "disputed" this view, Mr Creswell said.

He added some financial services companies had raised the question of "seeking legal clarification" on the issue, which could mean taking the Ombudsman to judicial review.

Because of the problems over the difference in approach, the FOS is convening seminars for financial services companies to explain its interpretation of the pre-1988 situation and how it intends to continue to determine cases referred to it. The Association of British Insurers (ABI) and the Council of Mortgage Lenders (CML) confirmed they are meeting the Ombudsman to resolve differences of interpretation.

The issue of how to resolve pre-1988 cases has become a serious problem only recently after a growing number of 1980s endowment policyholders began to get warning letters that their policies may not produce sufficient to pay off their related mortgages.

Michael Coogan, the CML director general, said: "There's a lot of discussion of pre-88 cases because over the past two years lots have been crossing the Ombudsman's desk. The issue is relatively new." He said most of his members took the view that in pre-1988 cases they provided information on products, not advice.

Emma Grainge, the ABI spokeswoman, said its members dealt with pre-1988 cases using the same systems and approaches as post-1988 claims for mis-selling.

But she added that the ABI regarded the Financial Services Act as creating a new regime and it was difficult now to understand how the previous system was then perceived.

"It is all down to our understanding and that is evolving all the time," she said. "You can't impose today's rules on that time." Halifax's spokeswoman, Joanne Gill, denied it was taking a strong position with the FOS on interpreting the pre-1988 rules. Ms Gill said: "We always work with the Ombudsman. We don't accept there is a difference between ourselves and the Ombudsman."

Other leading mortgage lenders said they would properly consider their liability for alleged mis-selling of pre-1988 mortgages.

Jane Reynolds, the spokes-woman for Abbey National, said: "We would look at the circumstances. We don't rule out meeting claims on policies sold pre-88 where the attitude to risk was not established."

Rosemary Callender, the spokeswoman for Nationwide Building Society, said: "We recognise we had a duty of care and we understand how the Ombudsman is interpreting that now. And we accept we have to operate within those bounds. I would not say whether we are comfortable or uncomfortable with that."

Louise Hanson, head of campaigns at the Consumers' Association, said: "While it is good to see the Financial Services Authority giving guidance to consumers about endowment shortfalls, bearing in mind that up to five million people may have been mis-sold an endowment mortgage, it is disappointing that the FSA is not providing similar details about how to complain about mis-selling.

A year after the launch of endowment action, well over half a million people have flooded to our website to get information on endowment mis-selling and still the FSA will not acknowledge consumers need help or that mis-selling was widespread.

"Consumers aren't aware of the redress options open to them around endowments mis-selling and the FSA needs to take its head out of the sand and help the millions of victims of corporate malpractice."

Mr Creswell said the Ombudsman did recognise there were differences in the legal requirements on product sellers before and after 1988. "We are not simply looking at the 1988 rule book and applying that before then," he said. "But it is wrong, too, to believe there was no mis-selling before 1988."

In public at least, mortgage lenders and insurers are keen to play down suggestion of a conflict with the Ombudsman over claims for mis-selling before 1988.

But Mr Creswell added: "We wouldn't be dialoguing with firms as we are if all the firms were happy and understood what we are saying and why."

'We were never told there was a risk'

Andrew Spencer, of Huddersfield, West Yorkshire, is among those apparently affected by this difference in interpretation. He and his wife were sold a Scottish Widows endowment in 1986 by Halifax, converting from an existing repayment mortgage.

Mr Spencer says the policy was mis-sold. "The manager of our branch told us conversion to an endowment would not cost us more in monthly payments and, in addition to repaying the mortgage, we would also get a lump sum. We were never told there was a risk there would not be enough to repay the mortgage."

Halifax did not dispute his version of what it said. But it stated in its letter: "It was not a requirement to establish attitude to risk at the time this policy was sold. It would only be relevant under the 'know your customer' requirements following the introduction of the Financial Services Act in April 1988."

Mr Spencer is taking his case to the Financial Ombudsman. More victims should do the same.