Friday, August 31, 2007

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?

Thursday, August 30, 2007

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."


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!

Friday, August 24, 2007

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
-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.

Monday, August 20, 2007

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?

Tuesday, August 14, 2007

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.


"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.

Tuesday, August 07, 2007

Time Bar Challenge

Time Bar Challenge 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, 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.

Friday, August 03, 2007

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.