Geared Traded Endowment Policies

Posted on Tuesday 23rd November 2010

In May 2010 the Financial Services Authority censored Integrity Financial Solutions Limited, a company based in Hampshire, in respect of its direct sales of geared traded endownment policy portfolios.

This is a bit of a mouthful.  So let me explain.  Mortgage endownment policies are taken out by lots of people who decide to dispose them for one reason or another.  Usually this is because they sold the house and redeemed the mortgage which the endownment policy supported.  You can either surrender these policies when no longer required or sell them on the open market.  There is a market for these.

The product Integrity were flogging was a portfolio of these second hand policies, assigned to the unfortunate client and purchased with a loan from a bank.  So the proceeds of the endownment policies had to keep pace with the interest and provide a bit more in order for the investment to work at all. 

The problem, obvious to anyone who knows anything about endownment policies, is that the proceeds of an endownment policy, almost always a With Profits policy, are largely discretionary i.e. the life assurance company issuing the policy only pays out what it can afford to distribute.  These days that is not very much. 

It follows that these geared arrangements (gearing is a reference to the borrowing to support the purchase) had a big risk that the amount owed to the lender, including interest, would not be matched by the proceeds of the policies.

That such an arrangement was sold to the public as low risk is simply ludicrous. 

Integrity Financial Solutions Limited is in liquidation.  Even so there should be compensation available through the Financial Services Compensation Scheme if there are no insurers (which I do not know at the moment) to pick up the bill.

More interesting is the role of the lenders.  It seems to me that they have some answers to give as to how they managed to make loans to ordinary consumers underpinning such a ridiculous arrangement.

I have one such client (whose claim is going well) and I shall be interested to meet others so that experience and costs can be shared.