by Les Broad
tortuously hybrid arrangement. Did nobody in that profession bother to ask his clients if they actually understood what they were doing before pocketing a big fat fee?
One can imagine the scene in the office of the expensively remunerated genius who dreamt up this arrangement on that late spring day - for surely it must have been spring, that season of unjustified optimism - as he foresaw the profits rolling in for decades to come. But he didn’t take into account the simple fact that he was asking a huge number of potential customers to put their faith in anonymous, faceless fund managers and in their ability to manage huge sums invested in the stock markets of the world in such a way that the predictions on which their complex ‘mortgage’ products were based would become reality. He didn’t take into account the simple fact that markets go up and down, and sometimes they go down a long way over a long time. He similarly didn’t take into account that anyone managing a fund which represents a sizeable chunk of a stock market, and whose investment decisions in consequence affect that market, simply would not be able to protect his profits in a falling market; it simply isn’t possible to liquidate a billion pound fund, just like that. So, when stock markets fell, so did the value of those precious endowments. The chances that thousands, even millions, of customers would be left facing a financial black hole, which were unacceptably high when this horror product was first devised, increased with every downturn. A messy, unpleasant outcome became even more inevitable.
Not content with this horrific bit of financial meddling, the industry started linking mortgages to all sorts of things as alternatives to the endowment policy, which it was finding very unexciting. Once your mortgage is tied to a politically generated, here-today-gone-tomorrow product, like Personal Equity Plans, disaster is only just over the horizon. Mortgages linked to pensions are no better; the fact that when the mortgage deed is executed the borrower has a pension plan that provides a lump sum on retirement out of which the mortgage is to be repaid might be so at that time, but politicians are notorious for changing rules. There is no guarantee that the predicted lump sum is ever going to be received, even disregarding the rather obvious problem that pension funds are invested by insurance companies just like endowment funds and are susceptible to the same market forces.
It might be thought that the villains of the piece are the insurance companies who rake in the premiums, collect massive profits but aren’t actually very good at looking after customers’ money. But the lenders must take their share of the blame because, firstly, they sold these arrangements like there was no tomorrow (presumably unaware at the time that there was indeed not to be) and were paid handsomely for doing so, and then they covered themselves in glory by failing to make any sort of check that their borrowers were actually paying the premiums. It’s all very well having an insurance policy assigned to a lender, but if the borrower doesn’t pay the premiums, for whatever reason (and when times get a little bit hard it‘s easy to decide not to pay the endowment premium for a month or two but very difficult to remember to restart the payments), the assigned policy is merely a worthless piece of paper. There are thousands of mortgages in existence for which the lenders fondly believe a fund is being built up, at least in theory and subject to the skills of the insurance companies to deal with the vagaries of stock markets, out of which the debt will be repaid but which, in reality, have no current repayment vehicle. It is another disaster waiting to happen.
Nor should the consumer escape criticism. Seduced, as we have already seen, by sharp-suited salesmen (far too many of whom do indeed wear those tell-tale white socks) into thinking that by simply signing on a couple of dotted lines a huge wad of cash will drop into their hands at a future date, they allowed greed to crush any remnants of common sense into the carpet. Now facing the harsh reality of what a combination of ignorance and greed can do they look around, desperately searching for someone - anyone - on whom the blame can be pinned.
Despite all that has already been said about insurance companies (an appropriate collective noun for which should perhaps be “robbery”, as in ‘a robbery of insurance companies’) there is such a thing as taking responsibility for one’s own actions, even if this is an unfashionable, even outdated, view in our burgeoning compensation culture. It’s rather like miners fighting tooth and nail to keep pits open, then suing the Government (or more accurately you and me, the taxpayers) because they’ve got health problems when it has been obvious for decades that working in a coal mine is injurious to long term health. Those people who now scream about their mortgage problem are in that position because they signed up for a product they didn’t understand, seduced by the vague promises of riches in the future.
The Courts have a term for it - ‘contributory negligence’.
Blame must still rest mainly with the insurance companies, firstly because they released into the world sales people who probably didn’t understand how (or why, it‘s not the same thing) their products worked (or didn’t, as it’s turned out) because they weren’t trained properly, and, secondly, because they created this horror hybrid just to make money for themselves. It’s a classic case of creating a solution to a problem that didn’t exist. But the buyers must accept partial responsibility. By and large too dim to realise the extent of their own ignorance, their pupils in their eyes turned into pound signs as the sales patter washed over them. Did any of them bother to find out exactly what they were being sold? Of course not!
To answer the question posed in the title, yes, these accursed things are a lasting monument to greed, that of the insurance companies who wanted ever-greater profits, that of the sales people hungry for every extra pound of commission and to hell with the consequences, and that of the consumers selling their souls for that bag of gold at the end of the rainbow.
There’s a follow-up question, of course, which is this: what should be done about it? The first thing to be made clear is what shouldn’t be done. The cry has gone up “the Government should do something”. No, it shouldn’t, at least not in the way these strident voices want. There is no argument to justify the great mass of the population paying taxes to make the dreams of these gullible souls come true. All that any Government can do is to ensure, by legislation if necessary, that traders deal fairly with their customers.
It tried, with the Financial Services Act and all the associated bits and pieces, but it was a miserable failure because it relied on the innate honesty of the insurance companies, other financial services organisations and the staff of these entities. But there is a limit to how far even Government should go to protect the individual from his own gullibility. The answer really must be that those who profited from the sales of these nasty hybrid products must take responsibility, subject to what has already been said about the apportionment of blame, and that means the insurance companies, mortgage lenders and all those intermediaries who did so nicely out of selling the things. It would hit profitability, of course, and that will affect those investing in these businesses. But anyone making an investment should be aware of the downside risk of that investment and that includes being aware that an entity that creates or sells products with a long life, such as products that are mortgage related, can be made to pay for its misdeeds long after committing them.
So there we are. It just goes to show that if you dangle the promise of money under somebody’s nose he’ll lose his rationality, assuming he had any in the first place. The seller knows it and should proceed cautiously; not to do so is indefensible but the indefensible has happened. Greed met greed; chaos resulted.
(Written in 2004 but long before that year and many times since the financial services industry has shown its incompetence and woefully uncaring vattitude to its customers.)
ABOUT THE AUTHOR
Les Broad is originally from the deep south eastern corner of England but insists that at least a quarter of him - the left arm, perhaps including the shoulder - is by historical accident Welsh. He says that his affection for the written word has its roots in a schooldays Frenc
h lesson one wet winter Wednesday: that lesson included an introduction to the writing of Albert Camus and it has been but a short step, accomplished in a mere four decades, from that point to becoming a writer himself.
His first love might be science fiction, albeit the sub-class of the genre that he calls 'believable sci-fi', but he has on occasion strayed into other areas and even into quite serious matters.
The point has been reached in his life where, whenever he is passed by a big, slow-moving, black, estate car, he asserts that he actually feels quite jealous of whoever is lying down in the back. If, therefore, he is to attain his ambition of being an answer to a crossword clue in one of the better Sunday newspapers he really needs you and all your friends to buy copies of this book!
Until the point arrives where he actually gets his ride in that big black car he expects to carry on living in North Wales, where his life is dominated by a wife and lamenting the loss of his border collie bitch.