Hit with €11,000 shortfall on €28,000 endowment mortgage

I wonder can you give me any advice regarding an endowment mortgage, which was sold to me by Norwich Union in 1990. The mortgage was for €28,000 and it predicted a surplus of €5,000. It is now held by EBS and they say there is a shortfall of €11,000 and that I owe this figure.

Mr KO'R, Cork

It’s so long since I have seen a query regarding endowment mortgages I had assumed there were none of them still active. Clearly I was mistaken.

I am surprised, however, that this has come as such a shock to you. Back in the early 1990s, shortly after you took out your mortgage and when issues relating to it were more likely to show up on your radar, there was huge publicity for a report by Eddie Hobbs on the issue, which fundamentally undermined the business of selling endowment mortgages.

That report made Hobbs’s name. It followed warnings in the UK – which is generally ahead of us in these things – as far back as 1988 that endowment mortgages might not be all that they had been promised to be.

Certainly by 1992, UK advisers were calling for “early warning” signals to alert mortgage holders if their endowment products were not on track to deliver on the repayment promise.

The fundamental problem is that those who were selling endowments were far too optimistic in their projections for investment gains over the 20-25 year lifetime of these products.

In the 1980s, when they were all the rage, stock market returns were just about able to support projections but these were very good years for the markets. It quickly became apparent in the 1990s that those returns were unsustainable and that many, if not most people, would face an unpleasant surprise when there policies matured.

And that is exactly what has happened. So much so that in 2005 former minister of finance Ruairí Quinn raised the predicament of endowment mortgage holders in a parliamentary question with then minister for finance Brian Cowen.

Mind, you, the scale of your losses – an €11,000 shortfall on a €28,000 mortgage compared to a predicted surplus of €5,000 – throws the reality of the endowment fiasco into stark relief.

So, what can you do?

The route to the Financial Services Ombudsman is closed off to you. The Central Bank and Financial Services Authority of Ireland Act 2004 says that a consumer is not entitled to make a complaint if the matter involved occurred more than six years before the complaint is made.

Clearly that rules you out, given that your mortgage goes back to 1990.

However, there is nothing to preclude you resorting to the legal route and it would be worth looking up the case of Kilmartin v Bank of Ireland, which was widely reported and details of which can be found online.

Essentially, Louis and Margaret Kilmartin claimed in the Circuit Civil Court that they lost more than €22,000 over the 15-year lifetime of their mortgage. Their lawyers said they incurred the loss as a result of negligent advice by the bank to the effect that endowment mortgages offered superior security and return compared with standard annuity (repayment) ones.

The then president of the Circuit Court, Mr Justice Matthew Deery, ruled in their favour in 2010, and awarded them €16,000. Bank of Ireland which had arranged the mortgage in 1991 initially said it would appeal but later chose not to.

Of course, legal proceedings can be very daunting. However, the first step is always a complaint to the institution concerned and the precedent of the Kilmartin case could prove very useful in making your case to EBS.

You do not give details of your case but essentially you would be looking to ascertain mis-selling of the original policy. There is a general view in legal and financial circles that a large proportion of endowment policies sold in the 1980s and 1990s were inappropriate for the customers who bought them.

Grounds for claiming to be a victim of mis-selling would include that the lender:

failed to clearly explain the product being sold;

failed to clearly explain its terms;

sold a product that was not suitable for the consumer’s needs;

made misleading statements about the product;

failed to explain relevant charges and penalties, such as for early termination;

failed to clearly explain issues like a cooling-off period and right to cancel.

The Kilmartins succeeded because of Mrs Kilmartin’s very clear recollection of events – the judge said he found her a convincing witness – and the failure of the bank to provide written proof that they had warned of any downside to the investment, Clearly any paperwork you have dating back to the original mortgage would be relevant, although it would be up to the lender to produce proof that it had advised correctly.

From your point of view, you are currently facing an €11,000 bill. Given the tarnished reputation of endowments from that era, I’m a little surprised that EBS has issued such a bald letter. If that is what they have done, it could be a bit of a try-on. In any case, you have little to lose by making a complaint either yourself, or through a solicitor and there is no shortage of those specialising in this area.

Send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara St, D2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.