In his June 2001 Report, the Chief Ombudsman had strong words about the endowment mortgages problem:

During the course of last year, complaints to the ombudsman about the mis-sale of mortgage endowments – which in the previous year numbered only 3,135 – reached over 9,000. We had to react rapidly to this influx of work. Once the Financial Services Authority (FSA) decided, for understandable reasons, not to order a wholesale industry review along the lines of that required for personal pension mis-sales, the burden was inevitably going to fall on the ombudsman.

Yet four or more years ago, many observers of the financial services industry had been warning that the advent of low inflation and low investment returns would surely spell trouble for holders of endowment mortgages. Many endowment holders were unaware of the situation, having been assured that their endowment would not only pay the mortgage debt but also provide a substantial nest-egg on top. Under the conditions of endowment policies, a policyholder is not legally entitled to know whether the investment is on track to repay the debt, and only on final maturity might this become apparent. After some pressure by the FSA, providers agreed to inform customers where they stood, by way of a phased programme involving the despatch of over ten million “re-projection” letters. Not surprisingly, when, on receiving their letter, some people discover that their endowment may not repay their mortgage debts, they complain.

A complaint can be upheld only if people were misled about the nature of the product and its risks. As we and the regulators have already discovered, mis-selling – in the sense of selling unsuitably risky products – turns out to have been remarkably common. Even more common was exaggerated sales talk which did not correspond with the very limited commitment contained in the written product terms. The background is all too familiar. Sales staff were incentivised with generous bonuses to sell endowments: there was no bonus for compliance with the “know your customer” and “suitability” requirements. Once again, even in a period of “conduct of business” regulation, the reward structure within the industry was totally at odds with the objectives of regulators, and has led to a debacle involving millions of pounds in compensation and an immeasurable toll of anxiety, distress and loss of confidence among the purchasers of financial services.

Most of the complaints we have upheld involved policies sold in the late 1980s and early 1990s, well within the memory of those currently in senior positions in the organisations responsible for the mis-selling. Was there collective amnesia, or did the industry hope it would all somehow go away? Did they think inflation would return to cover up the problem? Given their knowledge of the sales practices at the time, and the downturn in inflation, it is difficult to believe that no one could have predicted that an explosion of complaints was inevitable.

Are there other combinations of poor sales practices, opaque products and market factors which are liable to generate similar surges in complaints, and of which industry professionals are already aware? Or can we be sure there are no more skeletons lurking in the cupboard?