Millions of UK life insurance policies will fail to produce an adequate fund at maturity in order to pay off the loan to which they are attached. Approximately six million of these policies were ‘missold’ by an insurance broker, bank, solicitor or life company and may give rise to an FSA mortgage endowment complaint for endowment compensation under the Financial Services Authority rules. For qualifying applicants compensation is calculated by quantifying the amount of the current fund and comparing it with the amount that would have been in the fund had the monthly payments been applied to a straight repayment loan. The difference represents the shortfall and is the amount of damages that can be claimed, together with any reasonable expenses, which would enable the policy holder to cash in his current policy and switch to a straight repayment loan with no financial losses.
The question of mortgage endowment policy compensation did not arise until the nineteen nineties at which time it was realised that many policies of insurance that had been bought in anticipation of the maturity value being sufficient to pay off the loan would not produce a sufficient fund due to a reduction of investment returns in the stock market. These policies first arrived in large numbers during the nineteen eighties at which time there was a very favourable tax regime. Most of the mortgage products on sale promised not only enough income to pay off the loan at the end of the term when the policy matured but also sufficient extra income so that the seller could also share in a fund comprised of excess profits. Insurance companies started to compete with one another on price and in due course policies started to be sold without the extra incentive of a share in the profits but still benefiting from favourable treatment for tax by the Treasury.
These basic policies relied on continuing growth of the stock market where each individuals monthly premiums were invested however as the nineteen nineties progressed rates of return on the stock market diminished to the point where over 80% of policies would fail to produce sufficient income to pay off the loan at the end of the term entitling the policy owner, in certain circumstanses, to claim endowment policy compensation. This situation resulted in an endowment mortgage problem and the Financial Services Authority stepped in to regulate once it was realised that many people had been persuaded to buy these policies of insurance without having had any explanation of the risk involved or advice on alternative and more suitable methods of repayment. Some Brokers had been lax in their sales techniques whereas others were deliberately deceptive or in exceptional cases dishonest.
The Financial Services Authority has now passed regulations in regard to the conduct of endowment mortgage policy compensation claims whereby only upon receipt of a ‘red letter’ warning of a high risk of an endowment mortgage problem can an approach be made to the seller of the policy for compensation and in the event of an unsatisfactory response an application can thereafter be made to The Financial Ombudsman Service whose decision is binding on the insurance company. It is incumbent on the sellers of insurance to advise clients of the status of their fund in a re-projection letter every two years and claimants must make an application within three years of receipt of the first ‘red letter’. Time limits do vary in certain unusual cases and some insurers will pay compensation even if the period has expired. Not all potential claimants come within the ambit of the legislation and some claims will fail. There is a fund of last resort called The Financial Services Compensation Scheme which will pay compensation to suitable applicants if the seller is no longer in business or is bankrupt.