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Karen Honnoraty asks whether you are ready to deal with unexpected complaints about endowment mortgages?

If your firm arranged an endowment policy for a client within the last 15 years you should be prepared to deal with a complaint about it.

Over the last few years increasing numbers of people have received notices from their insurers warning that their endowment policies are unlikely to provide sufficient funds to repay their mortgage.

Endowment policies as a vehicle for repaying mortgages were popular in the late 1980s and early 1990s when many ACCA firms were authorised to conduct investment business.

Although few of these firms remain authorised today, they will still be responsible for dealing with any complaints received from clients regarding endowment policies that they advised on and arranged many years ago.

FSA Position
The FSA has stated that it will not be instigating a general review of endowment selling of the sort that applied to pensions and FSAVCs. This means that there is no obligation for firms to review endowment polices that they arranged unless they receive a complaint.

However, the FSA is clearly concerned to ensure that consumers who have suffered a loss have access to redress. This has been demonstrated by the recent series of adverts aimed at reminding consumers of time limits for complaints and urging them to make a complaint before this limit expires.

Many insurance companies and advisers have already paid compensation to clients in respect of endowment policies. In these cases firms that have not been able to provide documentation to demonstrate that the advice they gave to clients was compliant have been found liable to pay compensation.

ACCA has also received a number of complaints from clients of member firms regarding endowment policies.

Documentation
Therefore, if you arranged endowments it will be worthwhile identifying these cases and checking what documentation you have even if you have not received a complaint. You can then ensure that files are retained and relevant information not archived or destroyed.

If you do receive a complaint you will need to review your documentation to determine whether, when you advised the client, you explained fully the risks of the investment and why you considered this a better option than a repayment mortgage.

If your records do not show this the client may have a claim against you on the basis that he or she did not understand the risk and therefore the endowment was unsuitable. However, a client does not have a valid complaint against you purely because of the poor performance of the investment.

In addition many clients mistakenly think that the shortfall predicted by the insurance company is the amount they have lost. This is not the case. The loss is the difference between the position they are in now and the position they would have been in had they taken out a repayment mortgage initially.

In many cases this is less than the projected shortfall because mortgage interest and endowment premiums paid were less than the total amount which the clients would have paid under a repayment mortgage.

Karen Honnoraty – Head of Regulatory Affairs, ACCA

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