§ Ian Lucas (Wrexham)I am particularly pleased to have secured today's debate because the question of shortfalls on endowment mortgages is raised regularly in my constituency surgeries. Such shortfalls are causing real hardship, often to some of my constituents who are least able to bear hardship and who are approaching retirement. The problem is of a big scale, and about 6 million householders in the UK—about 61 per cent. of mortgage endowment holders—are facing shortfalls on their endowment mortgages. The issue has been raised regularly because it is serious for those who are affected. It cuts across a large group of people.
It is necessary to remember the past position to understand some of the present difficulties. I refer back to the 1980s, when the industry was poorly regulated. Indeed, there was simply no regulation of the sale of endowment mortgages between 1982 and 1988, during which there was a substantial increase in the sale of endowment mortgages. It was a time when many people moved into the property market and purchased their own home for the first time. Some of those first-time buyers were young couples who had no experience of purchasing properties, while others were people who had lived as tenants for many years and were given big discounts to purchase their council houses. Sadly, in 2002, the chickens are coming home to roost, and the mis-selling that occurred at that time is causing real hardship.
It is important to recognise that the sale of endowment mortgages in the 1980s increased substantially. The proportion of endowment mortgages increased from 60 per cent. of mortgages in 1982 to 84 per cent. by the end of the decade, despite the fact that life assurance premium relief was abolished. That happened in 1984; I remember that particularly well because I was an articled clerk to a solicitor's firm at that time. We had a yearly panic at the time of the Budget, and that year people were rushing to secure endowment mortgages before the Budget took effect because they feared that they would lose the relief on endowment mortgages that was offered at that time. Those people felt that the loss of relief would be the death of the endowment mortgage because it could not logically continue after the tax relief given on premiums paid on an endowment mortgage was removed. They believed that the move would make endowment mortgages more expensive, and that is what happened.
During the decade, endowment mortgages became more expensive, but sales increased. Why was that? I am afraid the answer is largely due to ignorance on the part of those who bought the mortgages. A lot of money was made in the 1980s from the sale of endowment mortgages based on commissions that were paid to the people who sold them and those who benefited from them.
First, the commissions were paid to the life companies. They secured a great deal of money because the commissions paid were not disclosed to the individuals who bought the endowment mortgages. Secondly, the building societies that benefited from the endowment mortgages also received large amounts of 46WH commission throughout the 1980s. For example, in 1989, Abbey National building society received £95 million in commission payments; the Halifax building society received £113 million; the Nationwide building society received £109 million. The public were ignorant of those payments. They were not aware that many of the payments made in connection with their mortgage gobbled up all the premiums that they paid in the first year. That disgraceful situation meant that people were buying endowment mortgages that were more expensive than the ordinary repayment mortgage because the situation was misrepresented to them when they originally purchased the product.
Endowment mortgages—especially with-profits funds—were presented to people as nest-eggs. People were told that taking out a life policy at the time of their mortgage would ensure that the mortgage was paid off and provide them with the bonus of an additional sum left over at the end of the term after the mortgage was paid.
Ironically, with-profits funds were presented as the safe option. At the time, if someone wanted to take a chance on the markets, index-linked endowments were presented as more risky, but with a greater benefit in the longer term. From my experience in the 1980s, when I qualified as a solicitor, I know that with-profits funds were presented to the consumer as safe bets. Regrettably, that was entirely untrue.
The safe bets led to hardship in individual cases, which, when one hears about it from the people involved, becomes difficult to bear. A couple who came to see me recently—a manual worker and his wife—purchased an endowment mortgage in the 1980s to buy their council house. They saved £6,000 during their working lives from their small income and have now received correspondence telling them that the endowment mortgage that they were sold in the 1980s will fall short by about £3,000. Half of their life savings—money that they had put by for their retirement over 30 to 40 years—will have to be used to pay off their mortgage. That situation is not untypical.
I am proud that the Government have taken positive steps to improve the regulation of financial services and I commend them for that. It was ironic that when we were discussing the matter last week, the Conservative party was commending deregulation. I have heard from my constituents the effect of that policy on individuals' lives. If beggars belief that that policy is still promulgated.
We have taken steps to encourage the building societies and the life companies to be proactive in their approach to consumers receiving compensation, but the existing system is not satisfactory. It depends upon those who were mis-sold these policies in the 1980s themselves being able to establish that, some 15 to 17 years ago, statements were made that misled people and persuaded them to purchase products that they would not otherwise have bought. The onus rests upon the consumer, which is very unfair, as many of those who sold the policies between 1982 and 1988 are no longer in the industry. In many cases, they received no training because, at that time, they did not need it. I suspect that most of them have left the industry, and it is difficult for individuals to contact brokers who sold them their policies. It is also difficult for individuals to record details of conversations that took place 15 to 17 years 47WH ago. It is an unreasonable burden for consumers to bear. It is unsatisfactory to place on them the burden of proof—to use another legal phrase—in these circumstances.
Last week in the Chamber in answer to one of my questions, my hon. Friend the Financial Secretary referred to the expense of a full compensation scheme for endowment mortgages, referring, I believe, to a figure of £5 billion. Such a scheme would be extremely expensive, partly because the building societies, life companies and brokers benefited substantially in the 1980s from the hundreds of millions of pounds that they received in commission. The compensation would be at the levels to which my hon. Friend referred because those companies profited hugely in the past. The resulting hardship is difficult to bear for some people who come to my surgery.
I want the Government to consider reversing the burden of proof because of the money that various companies in the industry received. If someone is notified that there will be a shortfall on their endowment mortgage and makes a complaint, they should be able to assume that unless the company can establish that the policy was properly sold to them, they will receive an appropriate amount of compensation. The onus should be on the companies that made the profits to establish that the policy was properly sold. It is also incumbent on those companies to show the profits that they made in each case. Unfortunately, because of the rules at the time, people who took out the mortgages do not know how much they paid to the companies in commission. It would be a positive step if companies were obliged to disclose the commission that they received. That should extend not only to life companies, but to building societies that took the commission at the time.
The Government have taken steps, and some compensation has been paid. I know from answers to parliamentary questions to my hon. Friend the Financial Secretary that that some £151 million has already been paid in compensation. However, the scale of the mis-selling in the 1980s, and the extent of the hardship that it caused, outstrips the compensation that has been paid to date.
The obligation to compensate and to pay shortfalls does not rest with those who took out the endowment mortgages, but should be shared between those who took out the endowment mortgages and those who profited by them when they were sold. That would be fair, and it is right and proper that we focus not only on the life companies, but on the building societies and brokers who made substantial sums of money when the policies were mis-sold. I ask the Government to accept that there was comprehensive and institutional mis-selling in the 1980s. They should strengthen the scheme and simplify the method of compensation that is required to put those people who are suffering so much hardship in the position that they would have been in had they bought the right product 20 years ago.
§ The Financial Secretary to the Treasury (Ruth Kelly)I am very pleased to see you presiding over our deliberations, Mr. O'Brien. This is an important subject 48WH in which my hon. Friend the Member for Wrexham (Ian Lucas) takes a keen interest. I am sure that he is not the only hon. Member to have received many representations from constituents on this matter. Before dealing with the specific issues that he raised, I should like to say a few words on our policy towards making the market for retail financial services work better for both consumers and the industry.
The Sandler report—which was published last week and which the Government endorse—sets out a vision of a simpler, more transparent and more competitive medium and long-term savings industry. Ron Sandler's recommendations have the potential to benefit consumers and the retail investment industry and to improve the operation of the market. They will bring greater competition and efficiency and more productive investment. If we can produce, for example, simpler, safer products that consumers can understand and that are economic for providers to sell, we will be able to boost the level of saving without compromising consumer protection.
We welcomed the main conclusions of the review. It contains important proposals that will be of benefit to consumers, the industry, and the economy as a whole. I will be asking my officials to begin work on designing standards for those, consulting the Financial Services Authority, the industry and consumers. The FSA has indicated that it, too, will be consulting on other aspects of the review such as, for example, the reform of with-profits policies. By increasing the level of investment and channelling it towards productive uses, we can drive higher levels of growth across the economy, while at the same time ensuring consumer confidence in the financial services required to operate in the modern world. I am sure that that is an agenda to which we can all sign up.
I should like to point to a couple of recommendations in the Sandler report that bear closely on what my hon. Friend said. First, Ron Sandler commented on commission and how it is disclosed by financial advisers to consumers when they borrow on financial products. He recommends that during that process consumers should be advised up front as to what commission is paid, if it is to be paid. If financial advisers label themselves as independent, they would not be able to charge commission for their services. He also suggests that when simple, transparent products are sold to consumers, there should be a system of warnings that flag up the fact that investments products that invest in the equity market may not be suitable for someone who wants to pay off a specific liability at a specific date in the future. As he rightly says, we have to restore consumer confidence in the savings market.
Consumer confidence is a prerequisite for progress. Trust is the most important commodity that the retail financial services industry can possess. Pension mis-selling is a scandal that still reverberates around the financial services industry, and rightly so. Some 1.7 million pension mis-selling cases have been examined. Offers of redress, totaling £11.5 billion, have been made in more than 1 million cases. That represents a serious breach of trust and it is understandable that concern has spread to other areas, such as endowment mortgages. The problems consumers have experienced with endowments have undoubtedly shaken the essential bond of trust on which financial services depend.
49WH I should like to set out first the background to the endowment issue, and then the actions the FSA are taking to address it. The Government have been successful in achieving low, stable inflation. Low inflation has meant that nominal forecast returns from investments have fallen. Industry and others no longer need to pay out a premium to investors for economic uncertainty. But the wider benefits that lower inflation has brought include, for many borrowers, welcome reductions in their monthly mortgage payments as the interest element has fallen.
The recent falls in financial markets globally have also had an impact, although it is important to keep these in perspective. Endowments are a long-term investment and should be judged against long-term trends. Lower cash returns on investments have meant that, in some cases, the return on the endowment is no longer enough to cover the outstanding mortgage at the end of the term. That is unwelcome news for any homeowner, and I can certainly understand the concerns that have been expressed and the hardship experienced by my hon. Friend's constituents.
However, there are three points to bear in mind when comparing the problems with endowments with, for example, the scandal of personal pensions mis-selling. First, a shortfall does not necessarily mean that someone has been mis-sold a product or an endowment, provided that the risks were clearly explained and the investment forecasts used to illustrate the investment reasonable. Unhappily, in many instances, that was not the case or the policy was manifestly unsuitable. I shall outline later the steps that the FSA is taking to ensure that people can claim any redress owed.
Secondly, even where there is mis-selling, there is not necessarily financial loss. This is a hard point to grasp, but falling interest rates have meant that endowment holders have often done better overall than those who took out the alternative of a repayment mortgage.
Thirdly, because the FSA has taken swift action, endowment holders not due redress can take remedial action themselves by increasing their payments or renegotiating their mortgages now, so that they will not face a terrible outcome when their policy matures.
None of that should downplay the seriousness with which we take the problem of mis-selling; it merely puts it in its proper context. Problems with endowments emerged in the late 1990s. After discussion with the FSA, the Association of British Insurers developed a code of practice to ensure that adequate premium reviews were undertaken. The ABI began to send reprojection letters to policyholders, setting out the status of their investment.
A further round of such letters has started, showing shortfalls in more cases, and the issue has returned to prominence. Included in the reprojection letter to endowment holders is a fact sheet that explains the background to the endowment issue and sets out how to complain. The FSA has taken the view that the right way to address the problem is to tackle directly the pockets of mis-selling and to give other endowment holders the information that they need to complain and secure any redress that is due.
That strategy has had considerable success. First, the FSA has identified, and required firms to resolve, a number of areas of significant consumer detriment 50WH caused by pockets of mis-selling and mis-pricing of products. As a result, to date, 20 firms have agreed proactively to compensate policyholders who were mis-sold their products. That involves about 218,000 policies, and total compensation of about £315 million is currently due. Public enforcement action has been taken against two firms so far, and investigations are continuing into a number of others where there is evidence of potential mis-selling. Where mis-selling is established, steps will be taken to ensure that consumers receive appropriate redress. Disciplinary action against the firms may also result.
Secondly, as a result of the first reprojection exercise, firms have received just over 100,000 complaints since April 2000. That represents about 1 per cent. of all policies. The firms upheld about a third of the complaints, with an average redress of £3,000. Consumers who are not satisfied with how firms have dealt with their complaint have a channel of complaint through the financial ombudsman service. In the past two years, some 23,000 complaints went to that service, 45 per cent. of which were resolved in the consumer's favour.
My hon. Friend suggests that the onus is on the consumer to prove mis-selling. However, if a consumer complains to the financial ombudsman service, the firm, not the individual, must provide the paperwork, which makes the process much more straightforward for the individual. Although the ombudsman's ruling is incumbent on the firm, if the consumer still feels dissatisfied, they always have the right to take the matter further, to the courts. Various options are available if people feel that their complaint has not been satisfied straight away.
My hon. Friend mentioned the £5 billion figure, but that is the administrative cost of running a full-scale review, rather than the cost of tackling pockets of clear mis-selling. Administrative costs come before any potential compensation, which, because of the greater number of holders of endowment policies, will be much greater than the £2 billion costs for the administration of the pensions mis-selling scandal.
The FSA's strategy strikes the right balance between informing consumers to help them to take the right decisions and ensuring that firms do the right thing. Learning from the past should help us to build for the future a more efficient system with proper processes of consumer protection and redress in place.
§ Paul Flynn (Newport, West)Many reputable high-street companies have decided not to sell endowment mortgages, but the less reputable ones continue to sell them. The Financial Secretary talks about the future, but is it not worrying that, in the first quarter of this year, one in 10 of all mortgages were still endowments?
§ Ruth KellySome categories of consumer may decide to invest in the equity market, despite the fact that they have to pay and cover their liabilities at a certain date in the future. Such consumers may be prepared to accept the risk. However, that is clearly inappropriate for the vast majority of people when they have no other sources of finance to cover them. I shall not comment on the precise number of endowment policies sold at the moment, but some people, perhaps with other sources of 51WH finance or funding alongside their endowment mortgage, might want to invest in the stock market as a means of paying off their mortgage. I would not say that endowments are never appropriate for consumers. The vast majority of consumers, however, clearly want to pursue another option. Ron Sandler's report sets out a variety of simple and transparent products with warnings about when they may be inappropriate. We endorse his general vision of the future.
§ Paul FlynnIs it not more likely that endowment mortgages are still being sold in such large numbers because of pressure from the salesmen? As we know from the past, salesmen profited hugely from endowment mortgages because they gained seven times the rate of commission than they would have gained from a redemption mortgage.
§ Ruth KellyMy hon. Friend is right to point to commission as an incentive to make sales, which is why Sandler's proposals have strict caps on charges and are sold free of the previous regime's dependence on commission. We must try to restore confidence and trust in the financial services industry, which plays an important and valuable role in allowing people to save and allocating savings efficiently across the economy. We have a shared interest in encouraging individuals to take responsibility for their own future, increasing their levels of saving and employing the savings pool to enhance the productivity of the UK economy. We need to create a virtuous circle of saving, investment in economic growth and enhanced incentives to save.
Consumer protection will remain a top priority for the Government. The FSA will continue to act in the public interest, protecting and educating consumers, policing the retail market and ensuring appropriate mechanisms for review and redress when things go wrong. The market will continue to be responsive to consumer concerns. Reputational risk has assumed a much greater importance these days. Firms know that if they want to prosper in the future, they cannot afford to repeat the problems of the past.