Endowment mortgages

This page contains the following - 

• Background
• The ABI Code of Practice
• Making complaints about endowment mortgages
• Where to find more information

Background 

The poor performance of the stock market over recent years has seriously affected many mortgage endowment policies. Many consumers believe that they were mis-sold an endowment, on the grounds that the risks relating to endowment policies were not properly explained to them. This has resulted in large numbers of consumers seeking compensation from firms to put them in the position they would have been in had they been sold a repayment mortgage rather than an endowment mortgage. Consumers who are dissatisfied with the way their complaints are handled may refer to the Financial Ombudsman Service (FOS).

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The ABI Code of Practice

In September 1999 the Association of British Insurers introduced its Mortgage Endowment Policy Reviews Code of Practice. This was designed to ensure that all consumers who took out mortgage endowment policies with the intention of using the cash from the matured policy to pay off all or part of their mortgage, and who are still paying premiums, are given regular information about the progress of the policy.

The Code has been revised on a number of occasions. The current version came into effect on 1June 2004.

Under the Code, all policies should be reviewed every two years except -

• The first review can be issued up to three years after the start of the policy; and
• For policies in force before 2000, the gap between the first and second review can be up to three years, in accordance with the guidance issued by the ABI at the time.

The Code requires insurance companies to send consumers a "re-projection" letter which advises them on the likelihood of the investment performing well enough to pay off the capital element of the mortgage. There are three types of letter - "Red", "Amber" and "Green". "Red" letters warn that there is a "high risk" that there will be a shortfall between the amount which the investment will be worth on maturity and the amount required to repay the capital element of the mortgage. "Amber" letters warn that there is a "significant risk" of a shortfall. "Green" letters advise that the plan is on track to repay the amount required. The ABI website contains model reprojection letters for firms to use.

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Making complaints about endowment mortgages

Complaints generally have to be made within a reasonable time after the consumer becomes aware that there might be a problem. The fact that consumers must now be sent re-projection letters every two years means that their attention will be drawn to the fact that there is or may be a shortfall on their policy. Although the fact that the value of the investment may have gone down will not of itself be grounds for complaint, a consumer may wish to complain that the policy was mis-sold  on the grounds that he was not advised of the potential risks associated with such investments and the fact that their value can go down as well as up.   

Under current rules, firms are able to impose a deadline beyond which they will not accept complaints from consumers. The rules allow firms to refuse to deal with a complaint which is received three years after the first "red letter" warning was sent to the consumer. In addition, six months before the deadline date, the firm must write again to the consumer explaining what the date is and that he has six months in which to make a complaint. 

For example, if a consumer received a "red letter" warning on 1 May 2005, the three-year period would end on 30 April 2008. The firm would need to write to the consumer during October 2007 to make sure that the letter was received by the consumer by 31 October - a clear six months before 30 April 2008.    

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Where to find more information 

• The Financial Ombudsman Service's website has a consumer factsheet on how to make a complaint about an endowment mortgage.
• The Financial Services Authority issued a statement in August 2005 on Claims Management Companies - third parties which help consumers with their mortgage endowment complaints in return for a fee.
• The FSA published a consumer factsheet in April 2006 entitled "Will your investment or savings plan pay off your mortgage?"
• You can find the answers to a number of "frequently asked questions" on mortgage endowments in the consumer section of our website.
• Report issued by the FSA in July 2005, entitled Mortgage endowments – shortfalls and consumer action. This set out the findings of the FSA's research on households with endowment-linked mortgages and encouraged consumers who were aware that they faced a shortfall on their endowments but who had not already taken action to address the problem should "act now". 

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