The plague of endowment claims vultures

By Sarah Modlock

10 May 2006

The best things in life are free. And that includes getting help if you are stuck with a mis-sold endowment. It amazes me that our newspapers and TV screens carry endless adverts for companies offering no-win, no-fee services to help policyholders pursue claims. These are particularly pernicious elements of the burgeoning compensation culture, worrying people and taking money for doing something which is available free through official channels.

To re-cap, millions of endowment policies were sold in the 80s and 90s as investments to grow alongside interest-only mortgages. But instead of delivering enough cash to pay off the mortgage capital at the end of the term, these policies were hit by poor stock market returns and so have not grown as they should. This leaves many home owners with a shortfall in the amount of cash they need to pay off their mortgages - often by several thousand pounds.

In the last five years, the companies that sold the endowments were told by finance watchdog the Financial Services Authority (FSA) they must contact policy holders and warn them of the potential shortfall. The letters offered advice on how the problem could be averted, for example by setting up a new repayment mortgage. They also prompted people to claim for compensation if they had been wrongly or negligently advised when they bought the policy.

Generally speaking, if the adviser failed to highlight the risks attached to the stock market-linked endowment or failed to establish whether you were content with the risk, then there was a chance to claim compensation. Crucially, the system in place for companies to examine and process any claims is completely free. Customers can complain directly to their insurer and if they are unhappy with the result appeal to the Financial Ombudsman for free, where they can be confident of receiving a fair hearing. The FSA also provides plain English factsheets designed to clarify the problem and next steps. You don't need to be a financial expert and you certainly don't need to pay one. You just follow the process.

Time bar

Endowment companies are legally able to to ignore complaints made more than three years after the warning letters and this could see many claims time-barred by the end of this year. Not all firms plan to use the time-bar but those that are - such as Standard Life, Scottish Widows and Norwich Union - must warn you in writing six months before they do so. You must then complain in writing before the cut-off date.

The compensation vultures are aware of the added pressure on policy holders this year and clearly want to make money before the door closes. There are now more firms than ever chasing after the same cases. Most will charge a cut of your compensation settlement - typically between 15 and 30%, although some demand as much as 40%.

'They use very in-your-face techniques to reach people,' says Teresa Fritz at campaigner Which?. 'We want to encourage people to make a claim, as long as it is valid, for free, by doing it themselves. The point of getting compensation when someone has been mis-sold and there is a shortfall is to pay off the mortgage. But after a third-party complaints handler has taken its slice, there is still a shortfall. It is important to remember the deadline is not for completing investigation of a case but to register a complaint - all you need do to register it is write to the adviser or company that recommended the endowment,' she advises. Which? has launched its own investigation into complaints companies and is advising policyholders to think very carefully before signing up.

Thanks but no thanks

In its latest leaflet to eight million policyholders, the FSA advises customers to 'Think carefully about the likely costs and benefits' of using such firms and warns that success fees can mount to hundreds or even thousands of pounds: 'This is money which you obviously won't then have available to put towards any endowment shortfall or to help pay off your mortgage'.

The Financial Ombudsman, Walter Merricks, is concerned that the claims handlers are grabbing as much as 50% of any compensation award. 'We make clear to consumers that no one should need the help of a third-party company to bring a complaint to the ombudsman,' he says.

One claims company says that the 'majority of claims made fail to achieve the maximum level of compensation possible because individuals are not fully aware of the complex financial regulations that insurance companies and financial advisors should have complied with'. But it is not clear how this stacks up when the Ombudsman states in his recent annual report that the outcome in cases handled by the compensation firms is no different from the outcome in cases that consumers bring direct themselves.

High street bank Bradford & Bingley wrote to endowment complaint handlers recently to tell them it would not enter into any further dealings with them in respect of complaints. The move goes a step further than the Prudential, which in April said it would no longer pay redress to third parties, only direct to the customer. Other companies such as Zurich and Phoenix , previously Royal & Sun Alliance, have also said they will no longer send compensation payouts to the claims companies but will send all the information to the clients. 'The main aim of our new policy is to ensure that customers are aware of the free complaints service available to them if they feel they have been mis-sold and the free Financial Ombudsman Service if they are not happy with the final decision,' said a spokesperson for Bradford & Bingley.

If none of that puts you off, remember that endowment claim firms are not regulated - although it is hoped that this will change once the new Compensation Bill becomes law. In the meantime, there is nowhere to go if you don't like the service you get from them and no comebacks if they mis-handle your case. Unlike the free Ombusdman system, you will not be entitled to any explanation if your claim fails. And rumour has it that once their endowment business runs out, they are going to target with-profit bond holders. Caveat emptor.

If you need help or information about your endowment policy then contact the FSA helpline on 0845 6061234 or log onto the website: www.fsa.gov.uk. The Which? website also has useful information at www.which.net/endowmentaction .