by Les Broad
Authorities and what governmental or quasi-governmental bodies exist to provide data on which decisions are based, to implement policy decisions and to enforce legislation?
5. What bodies exist that are answerable to no elected body, what are their roles, how do they gather information on any decisions made and how do they implement and enforce their decisions?
6. How much does each of the various bodies referred to in the answers to the foregoing questions cost annually (in pounds sterling) and what does that figure equate to per head of adult population in Wales?
7. How much reliance can be put on the answers given?
The true cost of Government is not a well-known figure, but perhaps the disinterest in politics which leads to such low turnouts on election days is partly accounted for by the absence of information such as this. Perhaps if the voter realised just what proportion of his working week was devoted to earning money to pay for Government he might be more interested in exactly who was doing the governing.
As I may have said once or twice already, other people may disagree with what I’ve said; after all, it’s a free country which gives us all the privilege of advancing an opinion. If you, as a reader of this article, feel that you should, for instance, put forward a reasoned argument for the National Assembly’s existence or you want to take issue with anything else in this or my previous article let me know. After all, my opinion is no more valuable than yours, is it?
(Written June 2003; the ludicrous institution is still there and still pontificating as if it's important.)
ENDOWMENT MORTGAGES: A TESTAMENT TO GREED?
A Personal View
In recent weeks and months the financial pages of the newspapers have been full of stories about endowment policies, intended to repay the mortgages to which they were linked, failing to live up to the promises made for them - in some cases, wildly extravagant promises. Sometimes, the subject has even crept out of the financial section and on to the main news pages. Naturally, the providers of these products, our fine and noble insurance companies, are simply shrugging their shoulders and saying, in effect, “not our fault, not up to us to put it right, nothing we can do” and similarly phrased attempts to abdicate responsibility for another mess created by the industry of which they are such an integral part.
This latest example of the financial services industry refusing to accept any responsibility for its past actions demonstrates yet again that it is populated - one is tempted to say exclusively populated – by people to whom the possession of either scruples or a conscience is an entirely alien concept and that it is ‘regulated’ by others who are woefully inadequate for their allotted task. That the industry is both unwilling and unable to put its mistakes right is, by now, quite plain.
So how did this latest mess come about, and is it entirely the fault of the industry’s profit-orientated product developers and commission-hungry sales people?
Many a long year ago buying a house, unless you were fortunate enough to be able to pay cash, meant taking on a mortgage - that much has never changed. But the nature of the package of financial products bundled together to form what we commonly know as the “mortgage” has changed; it has changed a great deal and not necessarily for the better.
In those early days you took out a loan and paid it off in monthly instalments over a period of years, chipping away at the capital so that the amount outstanding gradually decreased. If you were prudent you covered the possibility of death during the currency of the mortgage by buying life assurance and the cheapest way of doing that was by using “decreasing term assurance” where the sum you were insured for fell with the outstanding balance of the mortgage. There was nothing at all wrong with that system and it worked perfectly well.
Disaster, in the shape of the financial services industry, was just around the corner. One day one bright spark, secure in the knowledge that an army of sales people remunerated by commission (and therefore driven to sell, sell and sell again) would turn his idea into a brilliant success, realised that his industry would be a lot better off by offering an alternative. The grand plan was to keep the outstanding balance of the loan at its original level throughout its term and have the borrower pay into an endowment policy that would, at the end of the term, pay off the mortgage and put a substantial sum into the borrower’s pocket. It couldn’t fail, could it? After all, insurance companies invested in stock markets and had professional managers to make them huge returns, didn’t they? The lenders would be pocketing vast amounts more in interest and not getting their money back piecemeal over a period of decades, so they’d like the idea too, wouldn’t they?
The problem was that this great new idea cost the borrower a lot more money every month. So it wasn’t going to be the great cash cow that the industry expected. Still, it was a good idea, fundamentally, wasn’t it? So surely it could be refined a bit to make it more, well, affordable? Cue a fanfare of trumpets for the “Low Cost Endowment Mortgage”!
Endowment policies, by way of explanation for those who feel they need it, traditionally have bonuses added to their value every year, the amount of the bonus being dependent upon the investment return achieved by the insurance company, and also collect, and the end of their allotted lifespan, a so-called terminal bonus the calculation of which is not fully understood by any human being living or dead. Less traditionally, policies can be ‘unit-linked’, which is merely a different way of attributing investment growth to individual policies. The only practical difference, even if it is one that on occasion assumes monumental importance, is that if the value of an insurance company’s investments falls that loss in value is immediately reflected in the value of unit-linked endowment policies whereas a bonus, once added to a traditional policy, can’t be taken away. It’s not a surprise, therefore, that the unit-linked policies were pushed to the sales forefront, is it?
Nobody would have ever bought one of these “Low Cost Endowment Mortgage” packages if they’d known what they were actually getting, but there is a mantra in the financial services industry that says ‘sell the benefits, not the product’. As a result of consumer ignorance and commission-driven sales people, hordes of consumers got sucked into buying a package of different products which consisted of:
First, a fixed loan on which interest only was to be paid;
Second, an endowment policy with a sum payable on death set at such a level that it, plus bonuses accruing through the term of the mortgage, would pay off that mortgage: the initial sum assured would be far lower than the amount outstanding; and
Third, a term assurance policy designed to cover the shortfall between the outstanding mortgage and the amount of life assurance cover provided by the endowment policy should the borrower die during the term of the mortgage.
It’s important to get a sound grip of that second point: at the outset on a mortgage advance of, say, fifty thousand pounds the endowment policy might have a sum insured, being the amount it would pay out on death, of only perhaps twenty thousand. The difference was to be accounted for by the return the insurance company was going to get by investing the premiums that it received every month. It’s starting to look dodgy already, isn’t it?
Just for a moment, let’s take an objective look at the real situation. You, as the borrower in this hypothetical example, have spent sixty thousand on your new piece of suburban real estate and have borrowed fifty thousand to fund the purchase. In 20 years’ time you’re still going to owe that fifty thousand. You’ve got an endowment policy that’s worth exactly nothing because you’re alive but would cough up twenty thousand if you die. Why is it worth nothing? Because for the first couple of years all your premiums are going to be soaked up in charges levied by the insurance company, that’s why. That commission has to be paid from somewhere, and you didn’t really think it would be paid by anybody except you, did you? You’ve also got another insurance policy, that you probably don’t know you’ve got, that covers the difference between what your endowment policy’s worth and what you ow
e your lender. If you knew you had it, but you didn’t, you could safely bet that if you died 20 years down the line that policy wouldn’t pay up nearly enough unless the endowment policy had grown in line with those rosy forecasts that the salesman was so confident about, which it wouldn’t have done. Of course, by the time that your dull little brain works out that you’ve got a problem big enough to make you homeless the insurance company has had years to think up its excuses, that salesman has swapped his white socks for a camel hair coat and is flogging dodgy used cars or maybe second rate double glazing to vulnerable pensioners, and you are left on your own to sort the mess out.
It would have been easy to forecast steady growth in value of the endowments thus sold, and salesmen (and women, of course) had that irresistible carrot - they could say that the growth rates needed were so very conservative, they would easily be exceeded, there would be a big lump sum to go to the borrower at the end of the term. You see, you were seduced by that, weren’t you?
It might be reasonable to ask if the legal profession, whose members enjoy the benefit of generous fee income, could have done more to protect their conveyancing clients from this