Endowment case may cost lenders millions

One woman's compensation struggle could unleash claims from other borrowers, says Dido Sandler

A Ground-Breaking legal battle is set to be waged that could mean mortgage lenders having to pay millions of pounds in compensation to borrowers whose endowment policies were surrendered back to insurance companies to repay some of their debts.

Lawyers for Lilly Delattre, who fell into arrears on her home in West London after she lost her job, intend to argue that she lost more than pounds 3,000 because of a decision by Bank of Scotland, her lender, to surrender her five policies.

If she wins her case, the decision could pave the way for compensation claims from thousands of borrowers whose policies were not sold on the open market, leaving them with higher debts than they might have had.

At the time Ms Delattre fell into arrears, she had five endowment policies taken out between 1984 and 1989 to repay capital on her interest-only mortgage. The policies were assigned to the Bank of Scotland, entitling it to the money in the policies if there were arrears. When Ms Delattre fell behind with her interest repayments, Bank of Scotland arranged with Ms Delattre an interest-only mortgage until her circumstances improved.

However, instead of selling the policies within the flourishing second- hand endowment market, the bank surrendered them back to Sun Life of Canada, the insurance company which first sold them, for pounds 13,391.

Ms Delattre was later told that the bank could have raised pounds 16,405, a 23 per cent increase, by selling her policies on the traded endowment market.

She said: "I'm angry because the bank lost me over pounds 3,000. I still face more problems with any mortgage and live with the threat of repossession. If they had sold the policies my mortgage would be smaller."

Norman Law, chairman of the charity, the Money Advice Association, said: "People cash in policies at times of severe financial hardship, often when facing repossession. We would expect lenders to advise on this important option. Sadly, hard-pressed borrowers are being let down by the short- sighted practices of some lenders."

Brian Foster, principal of Kingswood Mortgages Investment Services, a traded endowment "trawler" company, valued the policies on behalf of Ms Delattre and is convinced she could have received more by selling them. He calculates that many thousands of people may have suffered similar treatment and the final compensation bill could run to hundreds of millions if the court case now being planned goes against Bank of Scotland.

Stewart McCallum, director of insurance services at Bank of Scotland, said: "We cannot comment on a particular case. In general terms if something is tradeable we will trade it. In this case there will be a good reason why it was surrendered."

A spokeswoman at the Council of Mortgage Lenders, the industry trade body, said that the general policy where possible was for lenders to sell policies rather than surrender them. A lender would liaise with the borrowers to discuss the options.

But endowments can only be sold if they have been in force for at least five years and if premiums are paid up to date. In 70 per cent of cases where an endowment policy is disposed of by the lender, they are rejected by potential buyers for these reasons.

The CML spokeswoman added that a further factor is speed: surrenders can be made in 48 hours while a sale may take eight weeks. During this period interest on a debt continues to mount.

The Consumers' Association believes there should be a code of practice that obliges lenders and life insurance companies to advise customers to consider trading their endowments before surrendering them.

CA senior researcher Mick McAteer said it is best to keep the policy going if possible. But if one needs the cash, it can be partially surrendered, cashing in bonuses built up so far, but continuing to pay premiums. This maintains the policy, but future investment growth is based on a smaller amount of money.

Alternatively, for those who do not need cash immediately it is possible to stop paying but to make the policy "paid up" instead. The policy continues to grow until maturity, but on a smaller capital base.

A further option is getting a loan from the life company against a policy, with interest rates between 8.3 and 12.7 per cent.