Prudential hit with £750,000 fine for endowment mis-selling

Prudential, the UK's second-largest insurer, was fined £750,000 by the City watchdog yesterday, and told it might have to pay compensation of £11m, for misleading policyholders when selling them endowments.

Scottish Amicable, which is owned by Prudential, did not give customers enough warning that endowments relied on stock market performance and therefore were not guaranteed to repay loans when it sold the policies between January 1999 and February 2001, the Financial Services Authority (FSA) said.

Prudential's fine is the fourth largest handed down by the City regulator and is part of its crackdown on the insurers, which sold hundreds of thousands of endowments when the stock market was booming.

Many of those policies are now unlikely to yield enough of a return to repay policyholders' home loans, a predicament that has led large numbers of people to complain to the financial regulator. According to the Consumers' Association, 5 million endowment policyholders have a mis-selling case.

The FSA has stressed that simply having a shortfall on a policy is not sufficient grounds for a mis-selling case. But it has nonetheless found evidence that inappropriate sales techniques were used in a number of instances across the industry.

Lloyds TSB was fined £1m in December for mis-selling endowments and Royal Bank of Scotland was hit with a £2m penalty, the largest from the City watchdog in this area, for problems with the sales process of its Royal Scottish Assurance life arm.

Scottish Amicable failed to follow regulatory advice published in December 1999 on how insurance policies linked to the sale of mortgages should be managed, the FSA said. The company is now reviewing 33,781 policies it sold between 1999 and 2001 to consider whether it ought to compensate policyholders.

Andrew Procter, the FSA's director of enforcement, said: "The issues relating to mortgage endowments were well known in the industry towards the end of 1999 and the firm should have acted quickly and effectively on our guidance."

Scottish Amicable said in a statement: "The shortcomings in our procedures were identified in January 2001, and immediately rectified to the satisfaction of the regulator."

Endowment mis-selling has historically not been seen as a serious drain on company's profits and provisions. Unlike the pensions mis-selling scandal, which has taken 15 years to put right and cost the insurance industry £15bn, companies have taken the view that misleading customers about the potential risks of an endowment was a more confined problem and unlikely to get them into much trouble with the regulator.

But the City regulator has made it clear that it is not afraid to hand out hefty financial penalties in instances where it believes there is evidence that consumers were misled when buying endowment policies.