Dáil Éireann Debate, Tuesday - 23 November 2004
230 Ms Harkin asked the Minister for Finance if the Irish Financial Services Regulatory Authority and the relevant insurance companies will establish a compensation fund, similar to that in the UK, through which holders of mortgage linked endowment insurance policies with shortfalls can be enabled to deal with their mortgage obligations. [29946/04]
View answerThe Irish Financial Services Regulatory Authority, IFSRA, is studying the matter of endowment loan shortfalls having commenced a survey earlier this year to determine whether and to what extent there will be difficulties for customers. It would be inappropriate to reach any conclusions in advance of IFSRA's consideration of the outcome of the survey. I will continue to review the adequacy of the relevant legislative framework as information from IFSRA becomes available.
No reliable data exist on the overall numbers of cases where there may be a shortfall. However, endowment loan approvals in the last five years represent just 3% of the overall mortgage market, although it has been considerably higher in the past. Since 1989, a total of 90,000 endowment loans were approved, roughly 10% of total loan approvals since 1989. These types of mortgages operate on the basis that instead of making capital payments on a mortgage, the client pays only the interest. Therefore, the capital amount owed does not decrease. However, the client also makes an investment with a life assurance company the aim of which is to cover the mortgage and, possibly, provide some additional benefit beyond that. The products provided additional benefits, for example, in the form of higher tax relief, which were attractive to borrowers. These products inherently require customers to take some risk whereby they are exposed to market fluctuations as with any market based life assurance investment. The fact that a person does not gain as much as expected is not in itself an indication of any inappropriate practices on the part of the bank or insurance company concerned.
The consumer director of IFSRA, Mary O'Dea, has encouraged people to come forward if they are worried about the possibility of having been missold an endowment mortgage. They should complain in the first instance to the company from whom they bought the policy. The UK did not establish a compensation fund for the payment of compensation to holders of mortgage linked endowment insurance policies with shortfalls. The financial services compensation scheme in the UK is a statutory fund of last resort to administer and pay compensation to eligible investors when a firm falling under its ambit is unable to fulfil its financial commitments to its clients. As regards endowment mortgages, our understanding is that the relevant UK authorities have set down guidance for financial institutions in relation to dealing with policyholders where mis-selling may have occurred. This guidance was based on the findings in cases brought before the courts and ombudsman schemes and given in accordance with long standing powers available to regulators in that jurisdiction.
There is already a substantial volume of legislation in place to address these products. For example, the Consumer Credit Act 1995 requires that all endowment loan application forms must contain a prominent notice to the effect that there is no guarantee that the proceeds of the insurance policy will be sufficient to repay the loan in full when it becomes due. The Act also obliges the provision of ongoing information on the performance of the policy, as do the Life Assurance (Provision of Information) Regulations 2001. The Central Bank and Financial Services Authority of Ireland Acts 2003 and 2004 established the IFSRA and considerably strengthened the regulatory environment. The Acts include an enhanced structure for dealing with consumer complaints about financial institutions.
