Snared by EBS endowment mortgage

My parents had taken out an EBS endowment mortgage when purchasing our house. In recent years, the bank contacted them to say that they had an outstanding balance on their mortgage as the endowment policy had not returned any revenue.

My parents consulted a solicitor who told them to wait it out and let EBS chase them. However, they have been charging interest over this period and as things stand they owe them €14,000 on a policy that initially cost £33,000 so they almost owe just as much 25 years later.

EBS are saying they want the full amount and have sent out solicitors letters and contact information for Mabs.

Surely this can’t be allowed? It’s a scam selling people these mortgages and then coming after them 20 years later saying they actually owe a large proportion of the mortgage. I would really appreciate any advice or help that you might have.

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Ms N.M., email

It’s easy to forget sometimes that people are still wrestling with the financial fallout of the disaster that was endowment mortgages.

For anyone in this age of tracker mortgage scandals who has never heard of endowment mortgages, they were effectively the previous mis-selling scandal carried out by lenders on mortgage customers and others.

In the 1980s and early-1990s, endowments were as popular as tracker subsequently became. They offered nirvana: rather than bear the financial burden of an annuity mortgage, customers paid only the interest on their loan. They also paid a sum towards an endowment policy with an insurer, arranged through their lender. This was invested and promised to pay a sum on maturity that would not only repay the mortgage capital but offer additional surplus financial return.

Too good to be true? Of course it was. The assumptions on investment returns were wildly overoptimistic. By the late-1980s, UK banks and regulators were growing alarmed at the failure of the insurance policies to deliver anything like the returns required.

Not that that stopped Irish lenders continuing to sell endowments, which they did into the mid-1990s.

A couple of things stand out here. First, it seems odd that the bank – AIB now owns EBS following the carnage that was the financial crisis – would only have been in touch on this issue in recent years.

Good practice

As far back as the early 1990s in the UK, it was accepted as good practice that lenders should get in touch as soon as practicable to let endowment customers know if their policies were falling short of the investment path needed to meet their intended debt repayment.

You say the policy was between 20 and 25 years old – that means it was taken out in the mid- to late-1990s. I thought endowments had disappeared from the market by the latter half of the 1990s. You might check if it was a 25-year loan – 1994 would have been a more likely date.

I’m also a little taken aback at the reported advice of the solicitor from whom your parents sought advice – to sit it out until the lender came gunning for them. It’s an “interesting” and somewhat high-risk approach that could sit well only with someone who’s not on the line for the financial bill that will follow.

Frankly, if that is what the solicitor advised, apart from being irresponsible it’s also wrong, not least because putting off action could leave your parents’ statute barred from taking action.

There has been a big issue with mis-sold endowments and, though it has not been something that can be pursued through the financial services ombudsman as it is restricted to issues arising only within the past six years, legal action may remain a possibility.

Misguided

There are two things that are relevant here: first, was the policy mis-sold at the outset; and second, how long your parents have known about it.

Just because an endowment does not deliver the gains expected does not necessarily mean it was mis-sold. Your parents would need to prove that they were misguided by the lender back when they agreed to the loan – ie they were told that it would pay off the loan.

To do this, they would need to unearth the original documentation from the time they took out the mortgage. If that documentation contains sufficient caveats in the small print to suggest they were informed of the risks, they have no case.

Even if they have a case, a second issue revolves around time. In general, there is a six-year limit on taking legal action in many of these cases. However, unlike the Financial Services Ombudsman where the clock starts ticking on the six years from the date the contract was signed back in the 1990s, for legal action, the six years generally commences from the point where you realised there was a potential issue.

That is why it is important to check when EBS first alerted your parents that there might be a problem. It is also why I would expect any lender with the benefit of sensible legal advice to notify borrowers of potential shortfalls as soon as they become evident, not just before the policy matures.

If EBS has evidence that they sent your parents an advisory letter on this more than six years ago, they are out of options and, apart from appealing to the bank’s sense of fairness, are stuck with finding ways to meet the shortfall. And given lenders are still nursing their balance sheets back to health, they are likely to pursue debt they are owed.

Six-year window

If you do fall within the six-year window, however, you might be able to avail of a landmark judgment in the Irish courts – Kilmartin v Bank of Ireland – which found the bank liable for mis-selling an endowment mortgage. The trouble is that this ruling was in 2010, which your parents’ solicitor would have been expected to be aware of before suggesting they sit back and do nothing.

Of course, legal action is expensive even if it is possible, and it comes with no guarantees.

And if you are statute barred as a result of the advice of the solicitor, then you may be forced to consider pursuing them. That, too, is a potentially very expensive and uncertain path.

First things first, your parents need to respond to the EBS, challenging their position that money is owing. They also need to get professional advice – and they might try talking to a different solicitor this time.

Yes, endowment mortgages were, in many cases, a scam but that was not necessarily evident at the time the policy was sold – albeit you might argue it should have been, given the earlier awareness of the situation in Britain which is hardly a million miles away and with which we share so much in terms of legislation, professional regulation and models for financial products.

But customers, too, have a responsibility to monitor investments and the progress of debt repayment. It would strike me as odd that no communication over the past 20 or 25 years would have made fairly clear that the endowment performance was dramatically undershooting initial expectations.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice.