Chip and PIN

[Ian Batten]

>
> Those are not the same regulators. And the pressures on regulators  
> are different where so many people have been defrauded;

If you believe endowment mortgages constitute `fraud' then I'm afraid  
my black helicopter reference is bang on.  Or, at best, you have to  
believe that Ladbrokes are defrauding their customers when the  
favourite doesn't come in first in the 3.10 at Kempton.

People had three choices: a repayment mortgage, which would repay  
their mortgage.  An endowment mortgage, which would repay their  
mortgage and (almost certainly) provide a large tax-free lump sum on  
top.  And a low-cost endowment mortgage, which would repay their  
mortgage if the investment gain in a fund they didn't manage was  
sufficient, and provide a tax free lump sum if the investment gain  
was even larger.  It would, however, be cheaper than a full-cost  
endowment.

Low-cost endowments been viable through the sixties and seventies  
because interest rates were low, inflation was high and --- most  
importantly --- life insurance premiums were tax-exempt.  Once the  
tax-relief was abolished, a repayment mortgage was barely more  
expensive than an endowment mortgage, and sometimes cheaper.  The  
difference was a few percent at most.  What attracted people to  
endowments was greed: the thought that they would get something for  
nothing, a tax-free bonus at the end of repaying a loan.

The bank I discussed this with in 1987 when I took out a mortgage  
explained the options, and in common with a lot of people I was  
greedy.  I'd asked about the full-cost endowment option, so I could  
hardly claim I didn't know I was betting.

By the mid-90s it was manifestly obviously that sustained 9% returns  
on investment (or whatever my policy was predicated on) were  
fantastical, so I remortgaged into a repayment mortgage.  I've kept  
the policy running --- it's now predicted to yield 16K on what was  
originally a 26K mortgage --- to pay a bit towards the kids'  
university fees.  Moreover, had I _not_ done this, I would have been  
short ten grand over twenty five years, or four hundred quid a year.   
The repayments would have dropped like a stone over that time, as  
when I took the mortgage out interest rates were about 12%.

So, I bet on the market, I'd have been short 400 quid a year and the  
repayments have dropped by more than a thousand pounds a year.  The  
reason why the endowments have failed is that real interest rates are  
lower than predicted, but that is accompanied by a drop in the  
interest rate payable on the mortgage.   The banks sold products  
based on one perfectly valid set of assumptions: that the 1990s would  
look like the 1970s and the 1980s.  They were wrong.  Anyone who lost  
money on this must have spent the proceeds of falling interest rates  
without giving any thought to the investment product sat behind their  
mortgage: how careless.

How was this fraud?  At the very most, it was misplaced optimism.

> they can't so easily marginalise the complainers as oddballs,  
> freaks and liars. Millions of people *knew* they had been missold  
> endowment mortgages,

No-one was ``missold''.  They were greedy and bought financial  
products they didn't understand.    That's a shame.  Maybe even the  
banks should have spelt things out a bit more clearly (``investments  
may go down as well as up, past performance is no guide to the  
future'').  But fraud?   What was it about ``repayment mortgage''  
that you didn't understand?

ian