Which? Policy Holder Event Epilogue

Which? Policy Holder Event Epilogue

Last week Which? held a policy holder event in Westminster for Norwich Union and Prudential policyholders, the objective being to publicise the Which? campaign for a fair deal for with-profits policyholders.

The day started with a photo-call with "Dick Turpin", where they called on the Financial Services Authority to "stand and deliver" for policyholders.

They were then joined by John McFall MP, the Chairman of the Treasury Select Committee and Derek Wyatt MP, a supporter of the campaign.

After the photos, they went to a meeting in the House of Lords hosted by Lord Joffe, who has been campaigning on this issue since 2000. Vince Cable MP, the Liberal Democrat Shadow Chancellor, expressed support for the campaign and discussed his involvement.

This was followed by a roundtable discussion with Vince Cable MP, Derek Wyatt MP, policyholders, their constituency MPs and Which? policy expert Dominic Lindley.

Which? intend to continue the campaign.

Which? Policy Holder Event

Which? Policy Holder Event

Which? has confirmed that it will be holding an event for policyholders on 25th June tomorrow at Parliament. It will take place between 1-3pm.

The event will give policyholders a chance to take part in a photo opportunity, and attend a reception in Parliament with Which? and politicians involved in their campaign to secure a fair deal.

Barmy FSA Regulation

Barmy FSA Regulation

The Treasury Select Committee has published their report based on their inquiry into inherited estates. The Committee is none too complimentary about the Financial Services Authority’s (FSA) regulation of the with-profits industry.

Quote:

"The Committee concludes that the Financial Services Authority (FSA) is not providing a robust enough framework to manage the conflicts of interest inherent in proprietary life funds."

I am hardly surprised, the FSA's "regulation" has been all but non existent.

Chairman of the Committee, the Rt Hon John McFall MP said:

"The approach taken by the FSA towards inherited estates seems a long way from the philosophy of 'principles-based regulation' to which it aspires. Policyholders need to have confidence that their interests are being protected, but the current oversight by the FSA gives no such assurance.

Policyholders deserve a regulatory framework based on a clear set of principles and unambiguous guidance on how inherited estate can be used by life firms’ management."

He refers to FSA regulation as "barmy":

"Shareholder tax is another example of the FSA's barmy regulation in this field."

He then goes on to put a well aimed boot into Prudential:

"I was astonished that the Prudential had taken £1.6 billion from their inherited estate to pay the costs of compensation arising from mis-selling."

Then Norwich Union:

"Tens of thousands of Norwich Union’s longest-standing policyholders do not stand to receive the whole value of the recently announced special distribution. The Committee was not convinced by the argument that such phasing of payments was necessary for the stability of the funds concerned.

In my view, phasing represents an unreasonable barrier for policyholders wishing to exit the fund."

The Committee calls on the FSA to take action in several areas to ensure that policyholders interests are protected, including the following:

• To ensure that a fair price is offered in a re attribution, not just an adequate price.



• To provide a very strong case about why the phasing of special distribution payouts should be permitted, noting that the FSA has yet to put forward an adequate case.



• To consult on a redesign of the overall regulatory system for with-profits funds during 2008. The Committee said that they are not satisfied that the FSA has done enough to provide a robust framework.



• To consult on the charging of shareholder tax to the inherited estate by the end of 2008, noting that their view is that it should not be permitted.

The full report can be downloaded from this link Treasury Select Committee.

It is clear that those with money stuck in these lousy endowment funds have been ill served by the FSA. It really is worth, in my view, considering mounting a class action against the FSA and the life assurance companies for this disgraceful situation.

Policyholder Event

Policyholder Event

For information:

"Which? is considering staging a policyholder event in central London on 25th June, from 10am to 12pm. This is a great chance for policyholders to stand up and be counted in our campaign for a fair deal.

We are only in the planning stages at the moment, but if you'd be interesting in coming along please let us know asap. We will then keep you updated with our plans.

Best wishes,

The Which? With-Profits Team

Which?
2 Marylebone Road
London NW1 4DF
www.which.co.uk"

Reattribution Change

Reattribution Change

The Financial Services Authority (FSA) has proposed that insurance companies should no longer be able to use surpluses from their with-profits funds to compensate customers who have been mis-sold endowment policies.

Many of the claims for mis-selling of endowment policies have been settled using with-profit surpluses and returns on the retained funds.

Under existing FSA regulations, compensation and other business costs can be met from orphan funds, which are eventually reattributed to policyholders and shareholders, normally at a ratio of 90-10 (policyholders to shareholders).

However, the proposals for the reattribution of Norwich Union's £2.6BN has brought down a deluge of criticism on the heads of the FSA and life assurance companies for the use of retained funds in this way.

Clare Spottiswoode, the policyholder advocate in this case, has described Aviva's (owners of Norwich) proposals and the FSA regulations as unfair to policyholders.

The proposal by the FSA may be a step in the right direction, if it is implemented.

Risky Business

Risky Business

A survey of more than 2,000 people, carried out by Engage mutual assurance, showed that 23% of people with a mortgage will only be able to pay it off if they inherit money.

That's a risky way to keep a roof over your head.

Standard Life Rejects Fund Call

Standard Life Rejects Fund Call

Standard Life has rejected a call to use £100M a year from its profits to fund a programme to cover the firm's endowment policy "black hole".

The call to build up a fund to cover the shortfalls of with-profits mortgage endowments, came at the company's annual general meeting in Edinburgh last week.

Alastair McClelland, a Standard Life shareholder, used the AGM to demand that the company set aside £100m a year over ten years into the firm's "with-profits fund".

Standard Life chairman Gerry Grimstone argued that the problems with with-profits policies were a legacy of the company's mutual past.

In 2000 Standard Life promised that it would meet any shortfall policyholders faced on their endowment policies. However, when the company got into solvency problems, the promise was changed in 2004 to a guarantee of paying only a proportion of shortfalls.

The 9 Million Shortfall

The 9 Million Shortfall

Over 10 million endowment policies were sold to hapless mortgage applicants in the 1980's and 1990's. The policyholders were assured by the insurance companies that the endowments would pay off the mortgage (why buy it if it wasn't fit for purpose?) and that there may even be a surplus.

Unfortunately those assurances, as we are all well aware, were worthless.

Fairinvestment.co.uk have conducted research that shows that a staggering 86% of endowment policy holders (who were questioned) have been warned that their endowment policy will not be enough to pay off the mortgage.

Could the companies that sold and manage these useless products please explain to us exactly what is the purpose of these useless products, if they are not going to pay off the mortgage?

Within those who expect a shortfall, 41% are expecting a deficit of 25% and 23% are expecting ashortfall of a mind numbing 50%.

What exactly have the companies that have been "manging" these policies been doing with their policyholders' monthly contributions?

The figures confirm government findings, which in 2003 estimated that 80% of endowment policies would fail to fulfill their intended purpose.

So, once again, let me give the companies that sold and manage these useless policies the opportunity to answer this question:

Given that these products are incapable of paying off policyholders' mortgages, what exactly are they good for and why did you sell them in the first place?

The Traded Endowment Policy Market

The Traded Endowment Policy Market

The Motley Fool gives a straightforward, helpful and easy to understand explanation of the traded endowment policy market.

"A traded endowment policy (TEP) is an endowment that the original policyholder has sold on to an investor. The new investor is then entitled to all future benefits that the policy provides, as they have effectively bought it second-hand. They will also take on responsibility for paying the remaining premiums (if applicable)."

It is worth reading if you are considering selling your policy.

Worse Than Worthless

Worse Than Worthless

According to a recent survey by Investment, Life & Pensions Moneyfacts the vast majority of 25 year with-profits endowment policies are now are producing lower returns than they did last year and the year before that.

That's not too good!

Are the people who sold us these useless products, and the people who continue to mismanage them ,receiving lower bonuses as a result of their failure?

I doubt it!

The Motley Fool has some advice about the options available to holders of these useless products.

Norwich Union Deadlock

Norwich Union Deadlock

The negotiations over the fate of the orphan assets of Norwich Union have become deadlocked.

As such the task of freeing up the deadlock has fallen to John McFall, chairman of the Treasury Select Committee.

Norwich Union are refusing to offer policyholders anymore. However, policyholder advocate Clare Spottiswoode is standing firm against the current offer on the table by Norwich Union.

Norwich Union have surplus (orphan) assets of £5BN (aka "inherited estate"). They are using £2.1BN to increase the value of policyholders' assets over the coming 3 years.

However, the dispute centres around what will happen to another £2.7BN.

The argument is focused on whether it is right for Norwich to use the money in ways that do not benefit policyholders, eg instance paying tax or financing growth.

The danger is that Norwich walk away from the negotiations and keep this £2.7BN for themselves.

Endowment Maturity Table

Time Bar Pays Dividends

Time Bar Pays Dividends

Life assurance group Chesnara, the holding company for Countrywide Assured plc and City of Westminster Assurance Company Limited, has benefited from the time bar on making mortgage endowment complaints for mis-selling.

Its results for 2007 have improved.

Figures show that pre-tax profits rose 11% to £27.7M in 2007 from £25M in 2006. The significant reduction in endowment complaints allowed for a provision release of £2.8M.

Chesnara Chairman, Christopher Sporborg, said:

"Our recent experience of mortgage endowment mis-selling complaints has been generally positive. The number of complaints has reduced significantly and an increasing proportion of those received are time-barred in line with FSA rules, while uphold rates on those complaints which are not time-barred have increased.

Although we do not believe that this issue has fully run its course, we do feel able, however, whilst maintaining an element of conservatism, to reduce our redress provisions, by £2.8 million, based on our revised expectation of future complaint activity."

It's nice to see that someone can make money out this mess.

Fingers in The Pie

Fingers in The Pie

The trouble with some of the life assurance companies that are "managing" this country's useless and underperforming endowment policies, is that they can't seem to distinguish between assets that belong to their hapless and much put upon policy holders and the company's assets.

Normally, this "confusion" over ownership is demonstrated by the excessive and unjustified management charges levied by life assurers against the minuscule returns of the endowment policies that they fail to manage.

However, Norwich Union have found another way to tap the assets of their hapless endowment policy holders. The Times reports that Norwich Union has helped itself to £300M of policyholders' funds, in order to plug a hole in its own pension fund and to pay for its own mis-selling costs.

Some would argue that it is pretty rich of Norwich Union to help themselves in this manner, in fact most people with any concept of ownership and property would argue this. However, Norwich Union is unabashed; safe in the knowledge that it can do this, because it can do this.

If only life were that simple and profitable for its policy holders!

Needless to say this raid on the policyholders' funds will mean lower payouts for 1.1 million policyholders.

Norwich Union has helped itself to £83M of its surplus assets to cover a deficit in its staff pension scheme, with £182M being set aside to pay for endowment and pension mis-selling.

To run that by you again, it is making its policy holders pay for its pension failings and for its mistakes wrt selling endowment policies.

Happy with that?

Vince Cable, the Liberal Democrats’ Treasury spokesman, is quoted in The Times:

"The Financial Services Authority perpetuates rules which give preference to shareholders over policyholders and allow such appalling abuses as penalties for pensions mis-selling to be taken from policyholders' inherited estates. Companies like Norwich Union and Prudential are managing, under the cloak of complexity, to deprive their policyholders of large sums."

Norwich Union is currently involved in "testy" and "bad tempered" negotiations as to how it will split up £5BN of orphan assets (inherited estate). Needless to say, Norwich Union wants to take as much of that money for themselves as they can, they believe that their shareholders outrank their policyholders.

The fact that these orphan assets arise as a direct results of the policyholders' contributions, and not from anything that the shareholders have done, is irrelevant to Norwich Union.

Why are they treating their policyholders with such contempt?

Simple, because they can!

They know that their policyholders lack the legal and vocal clout of their shareholders.

It is high time that the policyholders gave companies such as Norwich Union a very bloody nose, a class action should be initiated by the policyholders of Norwich Union and the life assurance companies given a lesson not to treat their policyholders with such contempt.

Named and Shamed

Named and Shamed

As we all know, endowment policies have proven to be the worst, most costly financial scandal perpetrated on millions of home owners in living memory.

Money Management have produced a list of the worst performers.

Endowments managed by Resolution and Pearl, which bought up several closed-life funds, dominates the list.

Money Management shows that their endowment policyholders have earned less than in a deposit account over 25 years.

Resolution owns Life Association of Scotland, this was the worst performing endowment in the survey. It gave a 3.9% return over 25 years..yes you did read that correctly...3.9% over 25 years.

What exactly have they been doing with people's money?

Crusader and Britannia, also owned by Resolution, were the third and fourth-worst performers at 4.3% and 4.9% respectively.

National Provident was second with a return of 4.2%.

Clive Cowdery, Resolution's founder, has made millions from his dealing with these funds. However, his policyholders haven't.

Ironically some of Resolution's funds have done very well. Phoenix Assurance, owned by Resolution since September 2004, has paid out £317,800 on typical 25-year maturing endowment policies, reflecting an annual growth rate of 20%, or 1,168% more than the Life Association of Scotland policy.

Phoenix has paid out so much because it has been winding down its estate, and distributing the proceeds to 1,500 policyholders.

Resolution owned National Employers Life, with an annual growth rate of 11%, and Swiss Life, at 9.4%, also topped Money Management's list of 25-year policies.

Money Management reveals that some 10 year endowments have in fact lost money over 10 years, even though the FTSE All Share is up 43.3% during the last 10 years.

The worst 10-year policy, Pearl-owned London Life, fell by 1.6% a year while Resolution's Sun Alliance & London Assurance dropped 1.2%, Royal Life fell 0.6% and Scottish Mutual declined 0.4%.

The holders of these useless products are going to receive a nasty shock when these shortfalls crystallise.

The Endowment Rip Off

The Endowment Rip Off

Underlying funds held by insurance companies have risen by an average of 6% over the last year. This in theory should be good news for the millions of people holding useless, underperforming with-profits endowment policies.

Unfortunately, as with all endowment policy matters, what at first appears to be an opportunity for the hapless policy holder to earn a respectable return turns out to be an opportunity for the life insurance companies to take "a dip".

The biggest and the "best" of Britain's life insurers have in fact reduced their payouts by 3% last year (remember the funds they "manage" on our behalf have actually risen by 6%).

This cut in payouts has cost the endowment policy holders around £8BN, according to The Times.

The Times quote Tom McPhail, at Hargreaves Lansdown:

"Stock markets have risen substantially since the end of the bear market in 2003, but final payouts keep on falling.

It just doesn't add up."

That's putting it politely!

We would be better off having "invested" our money in a "bog standard" savings account over the last 10 years.

• A 10 year endowment policy from Friends Provident has returned a mind numbingly small 0.9% a year, compared with 1.6% from a 90 day deposit account.



• Prudential's fund grew by 7.2% last year. However, a typical maturing £50-a-month, 25 year Prudential endowment policy will now pay out £44,515. This represents a 5% cut on the £46,695 paid out on an equivalent plan that matured in 2007.



• A typical 25 year Commercial Union endowment policy will pay out £40,737. This is 7% down on the £43,697 paid out on an equivalent plan last year.

Why is that the insurers are able to take "a dip", and not pass on the increased returns to their policy holders?

Simple!

Because they can!

Insurers have discretion over how much of the gain they pass on, therefore they choose to keep the money for themselves.

A report for the trade body Actuarial Profession expects payouts to continue to fall by 3% per annum until 2020.

We are being ripped off by the insurance companies, and no one in the regulatory authorities is doing anything about it.

Scottish Widows

Scottish Widows

Lats year holders of endowment policies with Scottish Widows were bitterly disappointed to be told that they would not be receiving any bonus on their policies, in spite of the fact that the underlying with-profits fund grew by 10%.

However, this year Scottish Widows, despite only showing a return of 5%, has added bonuses to 239,000 polices.

Needless to say, what is given with one hand is taken with the other, the final payout to mortgage endowment customers has fallen compared to 2007.

A typical 25 year, £50 a month mortgage endowment policy maturing in January paid out £38,136 this year, last year it paid out £38,758.

A mind numbing 88% of Scottish Widows endowment policy holders will not receive payouts large enough to cover the mortgages that their policies were designed to cover.

The blindingly obvious question therefore arises, what is the point of these policies if they do not do what they were designed and sold to do?

Dwindling Returns

Dwindling Returns

The Times offers some advice to those who hold underperforming endowment policies which look like missing their targets:

"In the light of dwindling returns, investors should be asking themselves whether they want to keep their with-profits policies or head for the exit."

In essence, it is a keep or sell decision.

Pass The Parcel

Pass The Parcel

The endowment scandal has created a legal version of pass the parcel as policyholders claim damages from those who mis-sold these useless products and they, in turn, claim damages from insurance companies etc.

Legal Week recently reported that Reynolds Porter Chamberlain (RPC) is facing a multimillion-pound negligence claim relating to its involvement in a case brought by Standard Life.

Standard Life Assurance recently won a case against AON, and stands to be awarded up to £75M.

Aon has brought its own negligence claim against RPC, as a third party to the proceedings, and a second trial will now take place to decide whether or not the firm was negligent.

Aon's claim against RPC argues that the firm did not recognise that the wording of the policy meant claims could not be grouped together.

Now don't you think that all this trouble, time and expense could be avoided if the life assurance companies simply underwrote these useless, underperforming and badly managed polices?

Sir Nicholas Montagu

Sir Nicholas Montagu

Liberal Democrat Treasury spokesman, Vince Cable, has questioned the impartiality, effectiveness and independence of the Norwich Union With-Profits Committee (set up to protect the interests of policyholders).

He is concerned about Norwich Union's plans to distribute a proportion of its inherited estate to policyholders over three years, as opposed to a one off lump sum payment.

Mr Cable wrote to Sir Nicholas Montagu, chairman of the committee, questioning the committee's role in allowing the special bonus to be phased over three years.

Quote:

"Your committee has been established to protect the interests of policyholders and yet in your first public act you seem to have destroyed any prospect of being seen as a credible champion for them."

Montagu, a former civil servant who presided over the Inland Revenue during a period of bungles and who now gives after-dinner speeches for £5K a time, is seemingly reluctant to answer questions from "This Is Money" about this decision.

However, Montagu is paid from policyholders' funds to safeguard their interests therefore he is obliged to answer questions from policyholders.

Policyholders should send their complaints, comments and any queries relating to his role to:

Sir Nicholas Montagu,
Norwich Union With-Profits Committee,
Norwich Union Life,
2 Rougier Street,
York
YO90 1UU.

With-profits committees, if they are to really serve the policyholders that they claim to represent, need to be independent, impartial and effective.

It would appear that some fall short of this.

Call For Evidence

Call For Evidence

In a move designed to ensure that another endowment related scandal does not occur, the Treasury Select Committee has called for written evidence as part of its inquiry into the orphan assets (Inherited Estate) held by life companies' with-profits endowment funds.

The call comes as concerns are raised over the actions of AXA, Prudential and Norwich Union as they attempt to re attribute their Inherited Estates.

These assets are worth billions of pounds yet, despite these funds being contributed by policyholders, some insurance companies have been using a portion of them for the benefit of their shareholders rather than policyholders.

In 2000 AXA paid out a paltry 31% of its inherited estate to policyholders, this gave rise to the FSA to creating the post of Policyholder Advocate.

Claire Spottiswoode, Policy Advocate, is currently acting on behalf of Norwich Union policyholders.

Ms Spottiswoode, who is not happy with the current plans by Norwich Union (eg to pay the policyholders their share over 3 years), has welcomed the call for evidence:

"Foremost among the issues will be the way in which the FSA allows companies to subsidise the writing of new business, which has the effect in a re attribution of transferring value from the estate directly to shareholders.

Further, the way in which the FSA allows companies to pay shareholder tax from the estate is costly to policyholders and requires explanation."

The committee would like to hear about the following areas:

• The regulatory definition of the inherited estate in a with-profits fund.



• The extent to which life assurance companies should be permitted to diminish inherited estate in order to subsidise corporate activity, including financing new business, making strategic investments, paying shareholder tax and paying the costs of compensation for mis-selling.



• Whether allowing life assurance companies to use inherited estate to subsidise corporate activity has any adverse effects on competition.



• The principles that should guide the division of inherited estates in 90:10 funds between policyholders and shareholders upon re attribution of the estate.



• The appropriate sharing of inherited estate between current and future policyholders.



• Whether policyholders' reasonable expectations of distributions from inherited estate should be zero or have a positive value.



• Whether any distribution of benefits from the inherited estate should be made in a single payment or phased over several years.



• The role and responsibilities of the Policyholder Advocate.



• The framework for negotiation between the Policyholder Advocate and the life assurance companies.



• The role of the with-profits committees of life assurance companies.



• The approach of the Financial Services Authority to the issue of inherited estate.

Written evidence should be sent to the committee at this address Parliamentary Committee.

Sauce For The Goose

Sauce For The Goose

It is refreshing to read for once a story about a life assurance company suing a broker for mis-selling, rather than an endowment policy holder suing a broker or life assurance company.

In this particular case Standard Life sued brokers Aon for advising it to take out the wrong indemnity insurance, to cover claims for mis-selling of mortgage endowments policies.

I would venture to suggest that had they not mis-sold the policies in the first place, they would not have needed to take the cover out!

Standard Life won the case and stands to gain £75M, the final amount will be determined at another hearing.

The judge ruled that Aon had been negligent, as no reasonably competent broker could have concluded that Standard Life's needs were clearly met by the policy.

I can't but help feel a small amount of shadenfreude over this.

Now at least one life insurance company may know what the millions of us, who were sold these useless underperforming endowments, feel like.

Norwich Union - Eligibility For Reattribution Payment

Norwich Union - Eligibility For Reattribution Payment

In order to find out whether your with profits Norwich Union policy is eligible for a Reattribution Payment, please visit this site.

Which? Campaign Against Norwich and Prudential

Which? Campaign Against Norwich and Prudential

Which? has launched a campaign against Norwich Union's and Prudential's plans for reallocating the assets of their respective inherited estates.

Which? does not mince its words, and refers to the schemes as "rip offs".

"Which? is calling on the Financial Services Authority (FSA) to act to prevent £7 billion of with-profits policyholders’ money being 'reallocated' to shareholders.

Without a change in FSA policy, millions of Norwich Union and Prudential policyholders could lose out. Which? believes it is unacceptable for the Government and FSA to stand by and do nothing to stop this smash and grab raid."

Which? are asking for people who hold with profits policies with Norwich Union and Prudential to contact them at withprofits@which.co.uk

I have a policy with Norwich Union, and most certainly be in contact with them.

Norwich Union Windfall

Norwich Union Windfall

Some good news for over a million Norwich Union endowment policyholders. They have been promised a share of a £2.1BN arising from Norwich's "orphan assets" or "inherited estate" surplus.

Norwich Union has agreed to hand back almost half the £5.4BN surplus in its two main with-profits funds.

Individual payouts will vary, depending on the size of investment and how long it has been in force. However, projections indicate that policyholders should see the value of their assets increase by 10% by 2010.

It is also estimated that approximately 50,000 holders of Norwich Union mortgage endowment policies, currently projected to shortfall, will be reassigned a "green light" over the next three years.

Policyholders will receive 90% per cent of the £2.3 billion being distributed. The remaining 10% will go to shareholders.

Norwich Union have tabled a separate offer of a cash payment to policyholders in exchange for renouncing their claims on the rest of the estate (£3.1BN).

Clare Spottiswoode, the policyholder advocate responsible for securing the best deal for Norwich Union customers, is not entirely happy with the arrangement. She is quoted in the Times as saying:

"The money is available now, so how on earth can it be fair to deny it to policyholders now?"

She also called on Norwich Union to backdate payouts to cover customers who have cashed out of policies since November, when Norwich first said that it would press ahead with a distribution.

IFA's who have paid out compensation, because of Norwich Union's mis-selling of endowment policies, are also not that happy. They are asking why, if the policies now look like thy are going to revert to surplus, should they have been penalised.

Banned For Life

Banned For Life

Jonathan Leigh Hardie, of Primedale Financial Services, has been banned indefinitely from being a senior manager by the FSA, for refusing to investigate nearly 400 cases of alleged endowment mis-selling.

Primedale Financial Services had been the subject of complaints over a five year period, to May 2006. The Financial Services Authority (FSA) had received 389 complaints over this period about potential endowment mis-selling, out of around 3,000 mortgage endowment policies sold between 1988 and 1999.

The FSA state that Hardie had "already decided that Primedale had never knowingly mis-sold an endowment policy", and refused to assess the claims properly.

The company is now in liquidation, and as a result of the FSA ruling Hardie is banned from entering senior management.

FSA Bends In The Wind

FSA Bends in The Wind

The Financial Services Authority (FSA), has given discounts of £4M on fines imposed on banks, building societies, mortgage firms and stockbrokers over the past year.

The firms (eg Nationwide, Capital One and Norwich Union) had been found guilty of serious rule breaches ranging from mis-selling of payment protection insurance (PPI) to failing to adequately safeguard the personal details of customers.

The discounts offered are in the region of 30%, in return for promising to co-operate and not challenging the FSA's findings at tribunal.

Which? is far from impressed, and accuses the FSA of "putting the interests of the industry over those of consumers".

The FSA has decided to bend in the wind as a result of the fight it had with Legal & General in 2005, over its endowments mis-selling case.

L&G successfully appealed against the size of the fine imposed on it.

The FSA is showing excessive weakness, it neglects the fact that were a firm to complain about the size of a fine it would receive an enormous amount of negative publicity during the tribunal.

By offering such large discounts, the FSA has let the insurance and banking industry have its cake and eat it.

Commercial Union Cut Payouts

Commercial Union Cut Payouts

Those unfortunate endowment policy holders who save with Commercial Union are in for a very unpleasant shock this year.

A saver who put in £50 a month for 25 years from January 1 1983, (from age 29) will receive just £39,321. This is 10% down on the £43,697 paid out on a 25-year plan taken out in January 1 1982.

To add to the misery, it is 19.6% down on the £48,889 paid out two years ago.

The odd thing is the fund, in which these policies are invested, grew by 5.4% last year and 11.7% the year before.

Why the cut the cut then?

Will the senior management of Commercial Union be taking a cut in their bonuses too?

Will Commercial Union be cutting their management charges, given that the fund is not producing the payouts that holders were led to believe it would?

As ever, it the hapless long suffering endowment policy holder that is left to foot the bill for failure not the managers of the endowment company.

Norwich Union Cuts Payouts

Norwich Union Cuts Payouts

This has not been a good week, PR wise, for Norwich Union; and a very bad week for those who hold endowment policies with Norwich Union. Earlier it was reported that Norwich Union was using part of its inherited estate to pay off compensation claims, now it has announced that it is cutting back on payouts.

Norwich Union has 900,000 endowment policy holders, and has announced that despite 4 years of rising stock markets 90% are still in the red zone.

Last year the red zone was 89%.

Norwich Union has now announced a 2% cut in its payout on a typical policy.

The company has 69,000 mortgage endowments that will mature this year, half are expected to fall short by over £1K.

The rather strange thing about the cut in payouts is that the fund in which the policies are invested grew by 5.4%.

Why the cut then?

Will the senior management of Norwich be taking a cut in their bonuses too?

Will Norwich be cutting their management charges, given that the fund is not producing the payouts that holders were led to believe it would?

Calls For £100K Limit To Be Scrapped

Calls For £100K Limit To Be Scrapped

IFAOnline reports that the Financial Ombudsman Service (FOS) has been told by the All Party Parliamentary Group on Insurance and Financial Services (APPGIFS) to scrap or substantially raise its £100K compensation limit.

APPGIFS says the existing limits on awards, that were established over 25 years ago, have not increased in line with financial transactions carried out by retail and small business customers.

The FOS has been heavily involved in the endowment policy scandal.

Norwich Union's Sleight of Hand

Norwich Union's Sleight of Hand

It seems that Norwich Union is planning an interesting use of £150M of its inherited estate (orphan funds), which in theory are meant to be for the benefit of its policy holders.

Norwich plans to use £150M of £5BN surplus assets to pay for claims made against the company.

Currently Norwich Union is in the process of re attributing the funds to with-profits policyholders and shareholders, which is perfectly reasonable. However, Which? has warned that £150M has been designated to pay for past mis-selling.

It should be noted that the Financial Services Authority (FSA) does allow money in with-profits funds to be used in a number of ways, including settling compensations claims. It is considering a change in its regulations.

However, it seems to be rather "sharp practice" to use policy holders' money to pay for mis-selling perpetrated by the company that claims to be acting in the interest of the policy holders.

Which? is of the same opinion, and has quite rightly threatened to take the matter to court.

Norwich Union is negotiating the re attribution of the £5BN surplus, and also wants to use some of the money to finance business expansion; which also seems to me to be taking a liberty with policy holders' funds.

Dominic Lindley, financial policy adviser to Which?, is also claiming that billions of pounds of with-profits money has already been used by insurance companies to pay for the mis-selling of endowments and pensions.

What are the FSA doing about this?

Why do they sit on their hands and allow companies, such as Norwich Union, to get away with this?

The Reckoning

The Reckoning

As Neasa MacErlean writes in The Observer:

"One of the biggest financial scandals of the past 30 years reaches its climax in 2008 when thousands of endowment policies linked to mortgages start to mature. Endowment mortgages were sold in massive numbers from April 1983 and - since most home loans were set for 25 years - will start coming up for repayment by borrowers from April 2008."

Norwich Union describes 2008 as a peak year in terms of the numbers of endowments it has maturing, estimated to be about 90,000.

She offers some advice to those hapless endowment holders facing shortfalls, estimated to be on average between £10K to £35K, on their policies.

However, the only effective solution to this shameful scandal is for the life assurance companies to underwrite these useless underperforming products.

Underwater

Underwater

Scotland on Sunday reports that two of the UK's largest endowment companies, Standard Life and Norwich, now have a staggering 1.4 million endowment policies underwater.

Guardian, which sold endowments for Nationwide, refused to take part in the survey. A spokeswoman for the company claimed that the omission was due to "an administrative oversight".

The report goes on to state that 90% of Norwich Union's 764,609 policyholders are now receiving red letters, while at Standard Life the proportion is 88%. At Friends Provident, 89% are in the red.

It's going to be a bleak Christmas for endowment policy holders.

Bleak News

Bleak News

Money Management's upcoming December issue survey shows a bleak outlook for those who hold endowment policies.

On average, a 25 year policy 10 years into its term needs to grow 6.9% per annum until the end of its term in order to meet its £50K sum assured.

The average 25 year policy 15 years into its term needs to grow 8.6%, while policies 20 years into their term need to grow an average of 8.2%.

Given the lousy levels of returns on most endowment policies, these required returns are very unlikely to be achieved and endowment holders can expect serious shortfalls when their policies mature.

Congratulations to the fund managers for doing such an "excellent" job of "managing" these policies, yet still being able to pay themselves a very nice management fee each year despite "managing" loss making policies.

L&G Increase Their Charges

L&G Increase Their Charges

Recently Legal and General, my endowment provider, wrote to me to inform me that my two endowment policies that I hold with them will most likely make a loss.

Using three projected returns, the 1987 policy (target £35000) will produce the following results:

-4% shortfall £5400
-6% shortfall £2700
-8% surplus £ 300

The 1991 policy (target £39700) will produce the following shortfalls:

-4% shortfall £10200
-6% shortfall £ 7500
-8% surplus £ 4600

I received another letter from them today, informing me of the following:

1 That they have changed the rules to give them the right to use fund managers other than Legal & General Investment Management Ltd, if they believe that it is necessary.

Don't they have confidence in their own management skills?

2 They are increasing the management fees for managing my policies. Seemingly they have compared their fees to other endowment providers, and feel that an increase is necessary!

The good news is that the new fees (after a search on the back of their letter, it seems that the fees are going up by 0.06% of the value of the investment per year) are, in the opinion of L&G, "highly competitive with typical market rates".

So that's alright then!

A couple of questions that have crossed my mind:

1 Why the hell are they raising the fees, when their "management" of my policies has produced losses?

2 Why are they charging more for their "management" services, when they have said that they may in fact use other fund managers?

Given the losses that my funds are projected to "yield", an increase in charges will simply make matters worse.

These endowment providers are very relaxed about changing the rules, when it suits them. Now is the time for them to change the rules to suit the hapless millions who own these useless, badly managed, costly and underperforming products.

Underwrite them!

Repayments

Repayments

There appears to be something of a sting in the tail for some long suffering endowment holders who make a successful mis-selling claim through the Financial Ombudsman Service (FOS), and then find that in fact their endowment policy recovers to leave no shortfall.

In the event that happens, the policy holder may have to repay money to their adviser.

A county court in Wales has ordered the claimant to pay back the sum of £1689, if their endowment manages to hit its original target of £13,000 in May 2010.

In September the FOS ordered retired independent financial adviser Eifion Hughes to pay the compensation to his client. However, Hughes refused to pay stating that the ombudsman had come to the wrong decision.

In an unpleasant irony, Hughes was then taken to court by the client who was being advised by an IFA acting as a claim-chaser.

The judge has upheld the complaint, but stipulated that the money would have to be paid back to the adviser on the policy's maturity if it reached above its expected value.

Hughes is quoted in The Herald as saying:

"At last this appears to be a victory for common sense. If the client loses out and it is the adviser's fault, he should pay out, but if there is no loss and perhaps even an extra gain, why should the adviser have to offer them money? Natural justice has won the day."

Evan Owen, chairman of the IFA Defence Union, said:

"It is refreshing to see the people who administer the law of the land reaching such conclusions. Let us hope that Lord Hunt takes this view on board as part of his review."

Quite right too!

As to whether many endowment polices will actually meet their targets, is open to conjecture. I can personally state that the two polices I hold with legal & General look very unlikely to get anywhere near their target.

It is also reported that almost 90% of Standard Life mortgage endowments are still highly unlikely to meet their targets.

However, I would also note that to some extent the IFA's (unless they were proven to be negligent) should not be the target of policy holders' wrath.

These lousy products were sold in the same manner as cars, TV's and other consumer products. Their sole purpose being to pay off the mortgage.

As a result of hidden/excess charges, lousy management and misrepresentation of the prospects by the funds themselves, they are massively underperfomring.

They are not fit for purpose.

It should not be the IFA's that are targeted, but the fund managers. The only solution to this shameful scandal is for the fund mangers to underwrite their useless, badly managed, products.

Useless

Useless

Much like the depressing inevitability of the return of an unloved season I received two red warning letters from my endowment provider, Legal & General (L&G), the other day. I am the "proud" owner of two endowment policies taken out with Legal & General, one in 1987 and the other in 1991.

Needless to say, neither are on target to reach their objective (ie to pay off my mortgage).

Legal & General claim, using three projected returns, that the 1987 policy (target £35000) will produce the following results:

-4% shortfall £5400
-6% shortfall £2700
-8% surplus £ 300

The 1991 policy (target £39700) will produce the following shortfalls:

-4% shortfall £10200
-6% shortfall £ 7500
-8% surplus £ 4600

Hardly a "stellar" performance is it?

The question remains though, how is it that some endowment companies have been able to manage their funds sufficiently well so as not to produce a shortfall whilst Legal & General haven't?

The Curate's Egg

The Curate's Egg

The Telegraph reports that around 260,000 extra mortgage endowment holders have seen their policies meet their targets in the past year.

It seems that buoyant stock market has helped some policies recover their lost ground over the past few years. However, as to whether a particular policy that had previously been deemed to fail to meet target will now hit target very much depends on a number of variables; not least the quality of the company that is managing the endowment policy.

The Telegraph notes that, eg:

"Prudential's fund has been strong. The proportion of its policies that are red has significantly reduced over that period too. In 2003, 44 per cent of its policies were flagged up as red, now the figure is 15 per cent of the remaining 201,000 policies.

To date none of the Prudential's policies has failed to pay out the full target amount."

Those with Scottish Amicable have also seen an improvement. In 2003, Scottish Amicable had 65% of its policies listed as red, this figure now stands at 10%.

However, those who hold Legal and General policies have not been so fortunate. In 2004 over 55% of its policies were expected to fail to meet their repayment value. The figure now stands at 40%.

Standard Life is even worse, as it has seen its red policies rise from 86% to 88%.

As can be seen from the above, the performance is very much dependent on the "quality" of the fund managers.

The Lautro 12

The Lautro 12

The recently published shameful case of the so called "Lautro 12", appears to be causing more than a few ripples in the financial services industry.

It seems that the knock on effect of the "Lautro 12" is that many Independent Financial Advisers (IFAs) may have paid out too much compensation for mortgage endowment complaints.

Needless to say, if this were to be the case, they may themselves be entitled to financial compensation from the endowment providers.

The Lautro 12 were found to have mispriced Lautro premiums, which lead them to give their hapless customers unrealistically high maturity figures between 1988 and 1994.

Other providers have also mispriced projections but, unlike the 12, have not necessarily paid any consumer redress.

OAC Actuaries and Consultants chief executive, Roger Grenville-Jones, said:

"Where compensation for misselling has been paid, the amount of compensation is automatically increased to adjust for the policy being too small, at the expense of the firm paying the compensation, but only up to the present time."

Whilst the extra sums that advisers have had to pay out due to mispricing by providers is difficult to estimate, it is estimated that approximately £83M has been paid out in compensation for endowment misselling.

Compliance expert Adam Samuel said:

"Under-pricing will have reduced surrender values which are deducted from the amount required to repay the loan and other extra costs to produce the compensation amount.

If the insurers had set the premiums correctly, the surrender value would be higher and this would have brought down the compensation."

Shakespeare Putsman LLP partner Gareth Fatchett said:

"We have had a positive opinion from specialist counsel about taking action on behalf of advisers. It is arguable that redress by IFAs could be reclaimed against providers who are shown to have used incorrect charging assumptions. Potentially, this creates a whole raft of claims from IFA firms who have paid redress needlessly."

IFA Defence Union chairman Evan Owen sums this disgraceful farce very neatly:

"IFAs should not have had to waste time defending complaints, paying case fees triggered by false shortfalls and forking out compensation that others were responsible for. The providers must be held to account."

As this site has noted many times, the failure of these useless policies is down to their bad design; ie they were not fit for purpose. On that basis alone, it is most assuredly the endowment providers' responsibility to clear this mess up.

As I have noted many times before, were they to agree to underwrite these failed products that they foisted on an unsuspecting generation of house buyers, much of the distress being endured by their hapless customers and IFAs (unfairly caught in the middle) could have been avoided.

Anyone care to take any bets as to whether the endowment providers will "step up to the plate" and admit their responsibility?

A Bumper Year

A Bumper Year

I received my 2006 with profits statement from my endowment provider (Legal & General) yesterday. Imagine my delight when I read the following in the covering note:

"We're pleased to be able to tell you that the investments underlying your policies have performed well during 2006 generating a return of 12% (before tax and charges) over the year."

Splendid!

Unfortunately, on delving deeper into the document I saw that the actual portion of that 12% allocated to me (re annual bonus rate applied to existing bonus and annual bonus rate applied to basic sum assured) was a less than staggering 2%.

The reason for this disparity?

• Tax, fair enough, that takes the 12% down to 11% according to L&G



• Charges, which are not disclosed



• Smoothing, to ensure that "short term fluctuations" in the value of investments are not immediately reflected in payouts

Either the charges are astronomical or the "smoothing" is far from "smooth".

I wonder why L&G don't disclose their charges in this this document?

What a joke!

The List of Shame

The List of Shame

Congratulations to Money Management magazine for naming and shaming the insurance companies and endowment providers, who tired to hoodwink their customers, that the Financial Services Authority (FSA) tried to cover up.

When these shamed companies sold their products to their unsuspecting customers they used industry standard charges laid down by Lautro, the industry regulator at the time, to show the returns etc that would be expected on the policies..

However, their actual charges levied by these shamed companies were often much higher sometimes double the Lautro rate. Needless to say, they chose not to tell their customers this. This shoddy practice took place between 1988 and 1995.

It is estimated that around 200,000 policyholders, with low-cost mortgage endowments, could be owed up to £200m by these companies as a result of this practice.

The list of shame includes:

-Standard Life
-Pearl
-Axa
-Scottish Widows
-Prudential, owned Scottish Amicable
-Scottish Mutual
-Scottish Provident, now owned by Resolution.

Companies were taking up to 0.75% a year in charges from the fund. However, their customers were given the impression that the charge was only 0.3% (ie less than half).

Some companies, including Axa, Legal & General and Clerical Medical, have set aside money to make good these shortfalls. Others, such as Standard Life, have so far refused.

Shoddy practice by a very shoddy industry, and a disgraceful attempted cover up by a toothless partisan FSA.

It is hardly surprising that the British consumer has lost all faith in the financial services industry.

Named and Shamed

Named and Shamed

The Financial Services Authority (FSA) is to be forced to name and shame the 12 endowment mortgage providers which misused Lautro projections in setting premiums.

Their misuse of the Lautro projections meant that customers were given unrealistically high maturity figures.

The FSA have been forced into the embarrassing climbdown by the Information Commissioner's Office, which has upheld a freedom of information request to name the 12 firms.

It is estimated that several hundred thousand policies could be affected by this ruling.

The FSA had stubbornly refused to name the firms, claiming that it would affect future informal reviews, damage market confidence and infringe the providers' rights. Proving once again that the FSA is an ineffectual body, that does not stand up for the consumer when faced with a conflict of interest.

The FSA conducted an informal mortgage endowment review in 2001 which found that between 1988 and 1994, 12 providers used standard Lautro charges to set premiums without informing consumers that their actual charges were higher. This meant consumers would need to pay higher premiums to meet their expected maturity figures.

The FSA said that the providers had "breached a contractual warranty and/or of material pre-contractual misrepresentation in the sale of endowment mortgages".

The FSA has been of little help to the victims of the endowment scandal. One has to ask, what is the point of the FSA?

Making Money on Endowments

Making Money on Endowments

The Telegraph has a good article explaining how it is possible, if you are well briefed and prepared to take the risk, to make money on endowments by investing in Teps (Traded Endowment Policies).

There is also a novel bonus, if you get the right policy, of earning a nice little lump sum if the original owner of the policy dies.

Quite:

"Life insurance is sold as part of an endowment policy; when a Tep is sold on, that insurance still covers the person who initially held the policy. But any payment made as a result of that individual's death will be paid into the Tep, says Modray.

It is not necessarily a palatable way of making returns, but a "deed of assignment" when the policy is sold will ensure that the money is added to the fund if the original policyholder dies."

The lesson here is that there is always a way to make money; if you are brave, lucky and well advised.

Time Bar Challenge

Time Bar Challenge

BrunelFranklin.com and CPH Financial Service have launched a legal challenge against the practice of endowment providers using a timebar to prevent claims being made for underperforming endowment policies.

Brunel and CPH have made a request for a judicial review, to establish if setting a time frame in which a complaint must be registered is fair and legal.

At present, endowment providers can "time bar" a complaint if the consumer makes the claim more than three years after they first receive a letter warning them of a "high risk" of shortfall on their policy.

Firms must also send out a "red letter" six months before the deadline, informing the consumer of the impending date.

It is estimated that the number of people affected by time barring exceeds 2 million.

Ian Allison, corporate relations director at BrunelFranklin.com, said:

"This is a very exciting day for us all.

We have been aggressively lobbying against time bars for three years and we are now reaching a point where there is a serious chance of a positive outcome for all those people who have been time barred.

We have always believed the time bar process and the communications with consumers was wrong and fundamentally flawed.

Many customers never received shortfall letters. For those that did, the letters never mentioned the issue of a mis-sale.

The use of these letters therefore to legally start the time bar clock ticking is a disgrace. This was never fair and we believe a judicial review will find in favour of the consumer."

I wish them well with their challenge. The fact remains that the insurance companies will do whatever they can, to avoid taking responsibility for the endowment mortage scandal.

A Slice of The Pie

A Slice of The Pie

Standard Life has promised its two million policyholders a windfall payout from its £1.3BN orphan fund pot, surplus cash held in its with-profits fund.

Standard Life said that it would pay the cash to qualifying policyholders as their policies matured, rather than paying out one lump sum to all its customers in one go.

The orphaned assets are pots of surplus cash that inflate insurers' solvency figures.

Aviva, parent company of Norwich Union, will divide its £4BN orphan assets between shareholders and policyholders and Prudential is also considering what to do with its pot of surplus assets, worth £9BN.

A Standard Life spokesman told The Times:

"When other insurers, such as AXA, distributed their orphan assets, they made a one-off payment to all policyholders.

We are taking a different approach and are giving enhanced payouts when a policy reaches maturity, or when it is surrendered or transferred.

We are doing this because we want to retain some of this cash cushion over the life of our policies, some of which have decades to run."

This approach means that investors will be forced to keep their policies until maturity, if they wish to receive their share of the pot.

Stating The Obvious

Stating The Obvious

Congratulations to Baronworth Investment Services, who have stated the obvious; namely that a "degree of disillusionment" among endowment policy holders is a key factor in the decision to sell or cash-in.

Colin Jackson, director of Baronworth Investment Services, sates:

"There's a lot of adverse press about endowment policies, some of it quite justified."

No kidding!

The Cost of The Endowment Scandal

The Cost of The Endowment Scandal

The endowment mortgage scandal continues to ratchet up costs.

The Financial Services Compensation Scheme (FSCS) said that it handled 31,260 claims during the year to the end of March 2007, 21% more than during the previous 12 months.

FSCS said that 90% of the new claims it received related to endowment mortgages, with people unable to claim compensation for being mis-sold one of the mortgages because the firm or intermediary they bought it from had wound up.

Around 50% of those who complained about their endowment received compensation, getting an average of £1,900 each.

Overall the FSCS paid out £149M in compensation, around £66M of which related to claims about general insurance, with the rest going to claims over endowments, personal pensions and other investment issues.

The costs will continue to mount.

Bad Management and Inept Regulation

Bad Management and Inept Regulation

A recent article in the Daily Telegraph about the ongoing endowment scandal, hits the nail firmly on the head when it comes to the question as to why these useless products have performed so badly.

Answer:

-Bad management from the insurance companies

-High costs levied by the insurance companies for their bad management

-Inept regulation from the FSA, forcing the insurance companies to invest in under performing assets.

No wonder the hapless endowment policy holders feel that they have been screwed!

Every Cloud Has a Silver Lining

As can be seen from this article in the Evening Star, whilst the long suffering holders of endowment polices may be suffering, claims firms are doing rather well out of the endowment mortgage scandal.

Experiences Connect, of Ipswich, has seen turnover rise from £344K in 2005 to £925K in 2006 with forecasts for 2007 of £1.4M.

The firm aims to have increased its workforce by between 15 and 20 new members of staff, within the month.

As the old saying goes:

"every cloud has a silver lining".

Norwich Union's Inherited Estate

Norwich Union's Inherited Estate

Norwich Union with-profits policyholders are demanding cash rather than extra bonuses, when the insurer comes to distribute its £5BN inherited estate.

Inherited estate being money in a with-profits fund that is surplus to requirements.

Norwich Union is currently in the process of deciding how to distribute its fund fairly to its 1.1 million policyholders. Prudential is also doing the same wrt its 4 million with-profits policyholders.

Former gas regulator, Clare Spottiswoode, has been appointed to represent the interests of Norwich's with-profits policyholders.

Those affected are in two of its with-profits funds, the old Commercial Union fund and the old General Accident fund. Those in the Norwich Union and Provident Mutual funds will not get anything, because they got windfalls when the insurer joined the stock market ten years ago.

Mrs Spottiswoode has held roadshows across the country to canvass the views of policyholders, and has also commissioned a survey of their views. The results of the roadshows and surveys show that twice as many policyholders would prefer to have cash in hand, rather than extra bonuses.

Clearly the long suffering policy holders have lost faith in the concept of endowment mortgages.

Who can blame them?