Well endowed?

ABBEY LIFE was this week fined a record £1 million for mis-selling endowment mortgages to customers by City watchdog the Financial Services Authority (FSA). It also stands to pay out up to £160m in compensation to as many as 50,000 customers.

Lloyds TSB, which took a majority shareholding in Abbey Life in 1988 and fully integrated it into the group in 1996, has set aside £165 million to cover the payouts.

This week's ruling, while not the first time a company has been fined for mis-selling endowment mortgages, is the largest fine to date, and some experts believe it could open the floodgates. The FSA itself has warned more companies could yet be fined and ordered to pay compensation.

So if you have an endowment mortgage that could leave you facing a shortfall on the purchase price of your home by the time your policy matures, what should you do?

If your policy is with Abbey Life, advises independent financial adviser Gerry Gray, of Grosvenor Financial Consultants, the best thing to do for now is sit and wait.

"I would leave it for a fortnight," he said. "The FSA has said that the Abbey has been particularly strenuous in wishing to co-operate, and I imagine you are going to get a letter very very quickly."

If, after a couple of weeks, you haven't heard from Abbey Life, you should then write to the company's compliance manager, asking them to make your position clear, Gerry advises. If you were mis-sold your mortgage, you should stand to receive compensation.

This week's ruling, however, has implications much wider than those applying to customers of Abbey Life. Anybody who was mis-sold an endowment mortgage, whoever it was by, may stand to get compensation. Gerry believes many other companies, in the light of the Abbey ruling, will be keen to settle.

The first thing to do is to establish how much, if any, shortfall you could be facing. Your endowment company is obliged to write to you every three years advising you how your policy is doing, and estimating the position at the time it matures. If you do not know when your next letter is due, you can write yourself, requesting an update.

If it looks as though you could be facing a significant shortfall, you should then write immediately to the compliance manager of the company which advised you on your mortgage to complain. If you were advised by one High Street mortgage company but your actual mortgage was provided by somebody else, you should complain to the mortgage company which advised you. For your complaint to succeed, you will need to establish that you were mis-sold your mortgage. At the time you were advised about your mortgage, you should have been informed in writing that while if stocks and shares did well your policy would leave you with a surplus, there was also a possibility that it would leave you with a shortfall if they did not do well. If you were not told that in writing, you have grounds for complaint.

The company you complain to should reply within five days, and investigate your complaint within four weeks. If at the end of that time they reject your complaint, and you still feel you have grounds for compensation, you can then apply directly to the Financial Services Authority, which will investigate on your behalf. But you can only do that, Gerry points out, if you have already complained to the company which advised you on your mortgage, and they have rejected your complaint.

While the emphasis in this week's ruling was on compensation, Gerry points out that that may not necessarily be sufficient to guarantee that by the time your policy matures, you have enough to pay off your mortgage. It may compensate for the shortfall you face today: but if shares continue to do badly, he points out, that shortfall may continue to grow in future.

So rather than simply asking for compensation, he advises customers who were mis-sold to ask for a guarantee from their endowment company that by maturity, their endowment will pay off the mortgage.

Failing that, he says, you should ask them to make a full assessment of your financial situation, make up any shortfall and then switch you to a proper repayment mortgage. They may not agree: but it is worth trying.

If you were warned in writing at the time you took out your mortgage that there was a possibility you could be left with a shortfall when your policy matured, then you are in a less happy position. You cannot claim you were mis-sold your mortgage and cannot expect compensation. In that case, Gerry says, you should be looking now at ways of making up any shortfall. Do not simply increase the premiums on your policy, he advises: that would simply be pouring good money after bad. Instead, look at other investments, such as investment trusts or unit trusts. An independent financial adviser should be able to help you.

Details of local independent financial advisers can be found under Financial Advisers in your Yellow Pages. The Financial Services Authority's Consumer Helpline is on 0845 606 1234.

Updated: 10:44 Thursday, December 05, 2002