Several leading UK insurance companies could face heavy fines for having mis-sold endowment policies related to mortgages, the UK's finance watchdog has warned.

"We have already fined Winterthur Life [�500,000]," a Financial Services Authority (FSA) official told Reuters. "Some of the fines will be higher than that."

The regulator has identified a number of well known insurance companies which systematically mis-sold endowment policies by mis-pricing them, the source said.

One or two firms would be named and shamed by the autumn, with more to come later on, the FSA said.

Profitable investment?

The insurance industry is well aware that there may be trouble ahead, so it has already set aside more than �320m to compensate about 200,000 customers.

When endowment policies were in vogue during the late 1980s and early 1990s, they were seen as an ideal way of paying off a mortgage.

At the time, high inflation pushed bond yields up, which made it easy for salesmen to tell policy holders that their investments would both pay off the capital sum of their interest-only mortgages, and provide them with hefty lump sum bonuses as well.

But in the event, inflation - and therefore bond yields - fell, along with share prices, making it hard for the policies to provide sufficient return to pay off the mortgages.

Shortfall

The warning of the fines came soon after figures from the Association of British Insurers (ABI) revealed that a majority of people with endowment mortgages might have to find thousands of pounds extra to pay off their home loans.

The figures showed a sharp rise in the number of homeowners facing a shortfall.

"[Policyholders] should not panic [but] should take appropriate action," said the ABI's head of media and political affairs, Alan Leaman.