Memorandum by Citizens Advice
December 2003
1.Introduction
1.1Citizens Advice is the national co-ordinating body for Citizens Advice Bureaux (CABx) in England, Wales and Northern Ireland. CABx deal with nearly 6 million problems raised by the people who contact them each year from over 2,000 outlets including GPs’ surgeries, magistrates and county courts, and community centres. Of these enquiries, 1,455,735 concern consumer and debt problems (including insurance problems) and 1,668,456 concern social security problems
1.2.Citizens Advice welcomes the opportunity to give evidence to the Treasury Select Committee’s inquiry into long term savings. This submission covers CAB clients’ experience of dealing with projected endowment shortfalls only.
1.3.Dealing with an endowment shortfall is a particularly acute issue for CAB clients for three reasons:
- Our clients are generally on low incomes or benefits do not have the resources to pay projected endowment shortfalls;
- Many of our clients have limited financial capabilities and could have ended up choosing an endowment mortgage as a result of high pressure sales tactics and poor information;
- There is a lack of accessible financial advice for people on low incomes.
1.4.We will examine each of these issues in turn:
2.Clients on low incomes
2.1.Our clients are particularly poor and disadvantaged. Research by MORI in 1999 showed that our client profile is skewed towards social groups DE (unskilled manual workers and those in receipt of benefits). This finding is confirmed by more recent research by MORI for Citizens Advice which found that 40% of unemployed people in the sample had sought advice from a CAB, and that 42% of social groups DE compared to 25% of AB’s were likely to seek advice from a CAB about financial difficulties.
2.2.Because many of our clients are poor they do not have the resources to repay projected endowment shortfalls. This is a particularly acute problem for people who are approaching retirement or who have already retired:
A 66-year-old man working part-time sought advice from a CAB in Essex sought advice about a projected endowment shortfall. He and his wife had been advised in 1985 to take out an endowment mortgage by an independent financial adviser. When the client was informed about the shortfall he also realised for the first time that the policy would not finish until he was 72 and his wife 68. As a result of what the client felt was misleading advice, both he and his wife would have to continue working well beyond retirement age.
A couple sought advice from a CAB in South-East Wales as they had been informed they had a projected endowment shortfall of about £8,000 with 7 years left to run on their mortgage. The clients had contacted the FSA, who had referred them to a specialist solicitor. The solicitor’s advice was to increase their monthly payments for three years. However the clients could not afford the increased repayments, as the husband’s wages were £750 per month and the wife was in receipt of long-term incapacity benefit. Neither were able to increase their income due to their age (57) and their circumstances.
A 69-year old man sought advice from a CAB in Surrey about a projected endowment shortfall of nearly £10,000. He had been sold the mortgage in the early 1990s, as a result of advice from the salesman that the payout from the policy would cover the mortgage when the term expired in 2016 as long as he maintained the payments. The client was extremely worried as to how he could pay the shortfall as he was now in receipt of the minimum income guarantee which included payments towards the interest on his mortgage. As the client was already paying £84 per month out of his minimum income guarantee to keep up with payments on the mortgage, and had no savings, he did not know how he would be able to pay the endowment shortfall.
2.3.In some cases, they may have relied on the assurances of endowment mortgages salespeople that the policy would perform well enough to provide for a substantial lump sum over repayment of the mortgage:
A married woman who had retired sought advice from a CAB in Yorkshire about a projected £10,000 mortgage shortfall, when the mortgage finished in five years’ time (when her husband was due to retire). The client had been given various options on how to pay the shortfall, but was confused as to what to do. She told the CAB that they had been originally told that they would get an £18,000 lump sum when the policy matured, and they had been relying on this money for their retirement years.
2.4.CABx also report that particularly acute financial difficulties are experienced by homeowners who are notified of an endowment shortfall towards the end of their mortgage term:
A CAB in Cornwall reported that a couple in part-time work were informed about a projected shortfall on their endowment policy a year and three months before the end of their mortgage term. The insurance company asked them to increase their premium from £300 per month to £1200 per month, but due to their income the clients could not afford such an increase. The clients told the CAB that they were given insufficient information at the time they took out the mortgage, and the letter notifying them about the shortfall does not suggest any alternative other than paying the increased premium.
A 67- year old man sought advice from a CAB in Warwickshire. His mortgage term had just finished, but he had been told that the endowment policy payout had left a debt of £7,000, even though he had been told two years earlier that the policy was on course to meet the debt. The client was struggling to make payments out of his retirement pension.
A couple of pensionable age sought advice from a CAB in Kent a month before the end of their mortgage term. A couple of years earlier they had asked their endowment company whether their policy would cover the mortgage, as they had read a lot of articles in the press about endowment shortfalls. They were told by company representatives that there would be a surplus of £13,000. Subsequently they had received verbal assurances from the company that they had nothing to worry about. The clients have recently been informed that there would be a £15,000 shortfall on their endowment. As a result the clients would have to use all their savings and cash in part of their occupational pension to meet the shortfall.
3.Financial capability
3.1.Many people have poor financial literacy skills. As a result they may make ill-informed decisions on financial matters. In our experience, financial illiteracy is consolidated and perpetuated by limited or poor quality consumer information, poor advice and high pressure sales tactics . From reports from CABx all these factors would appear to be present in sales of endowment mortgages:
A CAB in Essex reported that a Chinese woman was persuaded to take out a 25 year endowment policy in 1988 as a savings scheme. The salesman, who was Chinese, coldcalled her at the restaurant the client jointly owned with her husband. He told her that the policy would pay out £50,000, but did not mention the possibility that the plan might not reach its target. The client had recently received a letter from the insurance company that the shortfall could be as much as £18,000. As the client did not speak English well, she felt she was vulnerable to the salesman who was able to speak her language.
A CAB in Yorkshire reported that a 53-year old man sought advice about how he might pay a £15,000 projected shortfall. The client told the bureau that at the time he bought his house, the lender persuaded him to take out a unit-trust linked policy together with life assurance that he did not want, without telling him about the risks of such a course of action. Although the client was working, he was worried that he would not be able to meet the increased mortgage repayments and keep his house.
A CAB in Lancashire reported that an unemployed man sought advice about a projected mortgage shortfall. It transpired that four years after the client had taken out a repayment mortgage, he had been persuaded by his lender to change it to an endowment with the promise of a hefty surplus upon maturity. The client did not recall being told about the risks of this course of action.
4.Financial advice
4.1.Financial capability requires that everyone should be able to access appropriate independent advice on financial issues. This is particularly necessary for those consumers facing projected endowment shortfalls, as they need expert advice to help them understand and evaluate the options open to them to address a shortfall.
4.2.However, there are particular difficulties for those on low income in accessing suitable financial advice at a low cost. Distrust of financial advisers, not knowing how to find a suitable adviser and the cost of financial advice are significant factors for many consumers to put off seeking professional independent financial advice. As a result they may be prey to unscrupulous advisers, or they may have to rely on the limited advice given by the endowment insurance company or lender:
A CAB in North-East Wales reported that a client was informed two years previously that there would be a shortfall on his endowment policy at maturity. At the time the client was advised to take out a top-up endowment policy, which he did so. The client sought advice when he received notification that neither policy would be sufficient to pay the mortgage on maturity.
A 65-year old man sought advice from a CAB in Suffolk as he had recently been advised by his mortgage lender that there would be a shortfall on his endowment. They suggested switching his mortgage to repayment. The client was concerned about the implications of taking this advice, as he was worried about losing if he and his wife became unable to repay the mortgage due to ill-health and infirmity.
A CAB in Greater Manchester reported that a client had been asked to contact his mortgage lender, was told that funds in his endowment policy were unlikely to cover his mortgage. The lender advised him to take out an ISA to cover the difference and switch from an endowment to repayment mortgage. The client signed what he thought was the necessary paperwork on the spot, but later received paperwork about a remortgage. The client told the CAB that he had never intended to take out a remortgage and did not recall signing papers for one. When the CAB contacted the lender and their solicitors, it transpired the lender had made a mistake. However the client was confused and upset by the error and felt the lender had tried to mislead him.
A CAB in Hampshire reported that one of their clients was given a leaflet in the street for a company offering “no win no fee” help getting compensation for endowment shortfalls. The CAB was concerned that the leaflet had no company heading or contact except the local representative’s evening phone number, and there was no indication that the company or its advisers were regulated or qualified to give financial advice.
4.3.There is also the issue that most independent financial advice seems to be targeted at people with substantial incomes, and financial advisers are unlikely to have experience of relevant issues for those on low incomes, such as how the benefits system treats savings products:
A CAB in Wiltshire expressed its concerns about the advice many endowment shortfall victims are given to take out ISAs or other investment products to top up their endowments. The CAB was concerned that if any of these people subsequently had to claim means-tested benefits, the ISA or other investment might be regarded as capital, and therefore would reduce or exclude them from entitlement to these benefits.
4.4.Research for the FSA shows that consumers trust advice agencies such as CABx to provide information on financial services more than they would any other provider of financial advice. However, CABx are not authorised by the FSA to give financial advice. The guidance given in the Citizens Advice Information System which is used by all CABx to give advice on all subjects to clients, states:
“The bureau’s role
Bureaux are not authorised under the Financial Services and Markets Act 2000 and so must not be involved in giving clients financial advice. They should be able to advise clients on where to obtain financial advice and where to complain if they have a problem. They can also advise on the sorts of redress and compensation which may be available.”
4.5.In relation to endowment shortfalls it states:
“If a borrower has been told that her/his endowment policy may not cover the whole of the loan at the end of the term, s/he should consult an independent financial adviser before making any decisions about how to proceed.”
4.6.As a result, CABx find it very difficult to help those clients who need help to evaluate the options for dealing with projected endowment shortfalls:
A CAB in Yorkshire reported that they were unable to give much help to a woman seeking advice about a projected endowment shortfall. The client, a lone parent student on income support, told the CAB that she and her former partner had taken out an endowment mortgage, after being reassured that an endowment mortgage was not like “stocks and shares”. The client was on a low income at the time and had to use all her savings for the deposit on the house. The client had commenced a complaint via the Ombudsman and needed help completing a form which her mortgage lender had sent her. The client had to complete the form within seven days and had been advised that she needed an IFA to help her pursue matters. As the client had no money to pay an IFA, she came to the CAB for help. She told the CAB that she could not understand the form and she was worried that an IFA might try and sell her financial products. The CAB had to tell the client that as they were not authorised to give investment advice, they could not give her this help.
4.7.Citizens Advice sees a significant need for the Financial Services Authority and Government to develop a strategy for meeting consumers’ needs for ready access to high quality independent, affordable financial advice. In this context ‘affordable’ must include free advice and information for consumers on low incomes who would be unable to afford the costs of advice provided by the market.
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