Unravelling the mortgage endowment scandal

Fingers have been pointed at investment providers, lenders, pushy estate agents, mortgage advisers, compensation culture and the various financial services regulators that we have been subjected to over the years.

Questions have even been asked about what is really the nature of this scandal. Was there widespread mis-selling, or did the regulators of the time simply fail to protect consumers by not making gloomy projections be given greater weighting in sales aids?

The fact is mortgage endowments were pushed in huge volumes in the 1970s through into the 1990s alongside interest-only mortgages.

A mortgage endowment is a mixture of an investment and an insurance policy, providing both life assurance and savings, which is designed to repay a mortgage. The consumer only pays interest on the mortgage each month, and also pays monthly into the mortgage endowment.

If growth assumptions at the start are realised the mortgage was supposed to be paid off at the end, possibly with an additional lump sum for the individual. Providers and advisers who sold these deals also highlighted the mortgage should also be paid off if the individual dies before the insurance policy ends.

When you pick through the complaints made to the Financial Ombudsman Service and Financial Services Compensation Scheme over the years, what is clear is most mis-selling claims were rooted at a time when the regulators set very different guideline for yield assumptions on endowment mortgages than they do now.

The fact that these projections were too ambitious has caused some to question whether it can truly be said that mortgage endowments were actually mis-sold.

Speaking in 2005, Mark Chilton, then chief executive of Purely Mortgages, said: “There is a big difference between real mis-selling and compliant advice, where performance has not met the return assumptions.

“The major fault of the industry was that the endowment mortgage was a holistic product which was not looked after holistically.”

Mr Chilton said the real scandal was when stock markets dropped and interest rates came down, clients should have been advised to re-invest the interest earned from their savings by increasing their endowment payments. Instead the money was spent.

He said the industry as a whole - regulator, product providers and intermediaries - were guilty in this regard.

He said: “The industry is at the end of the day culpable, but it is not a case of mis-selling.”

The argument of who was to blame for the mortgage endowment scandal came to a head in court back in 2004, when Legal & General challenged accusations of widespread mis-selling of mortgage endowments made against it by the then regulator the FSA.

The Legal & General tribunal marked the first time the regulator had been publicly challenged over a fine. During a six-week hearing at Central London County Court both sides agreed that mortgage endowment customers had to be made to understand the risks of the product.

But the regulator and provider argued over what could be considered sufficient warning that an endowment policy may fail to deliver the amount investors expected.

Legal & General fought against the FSA’s £1.1m fine for endowment mis-selling between 1997 and 1999 by attacking the way the regulator had applied stricter rules on the advice process than had existed at the end of the 1990s.

During the court battle the regulator only managed to prove eight mis-selling complaints were justified and the tribunal ruled the FSA had therefore been wrong to say these cases represented a wider problem with the insurer’s sales processes.

As a result of the tribunal’s ruling, the FSA agreed to conduct a review of its own processes. During the battle the FSA was also forced to come clean and reveal its “behind the door” dealings done with IFAs and providers suspected of mortgage endowment mis-selling by Legal & General.

The move came after L&G claimed the FSA should have offered it a private warning rather than publicly accusing it of widespread mortgage endowment mis-selling and fining it £1.1m.