THE City watchdog yesterday ordered insurance companies to inform homebuyers about compensation.

The Financial Services Authority also told insurers to give customers with underperforming endowments more information about the complaints mechanism.

The move came as chief executives of four groups, Aviva, Legal & General, Prudential and Standard Life, came under more criticism from the Commons Treasury Select Committee over their failure to warn consumers of the risks of endowments.

In March a report from the Select Committee criticised insurers for not explaining the time limits for complaints.

The report said: “The time limits should be extended while the rules are spelt out explicitly to all policyholders.”

Under the present rules, homeowners with an endowment mortgage who think that they were mis-sold the mortgage have three years to complain to the firm and then to the Financial Ombudsman Service.

The clock starts ticking once they receive a “red letter” giving notice that their endowment policy could show a shortfall.

From June 1 all insurers who operate time limits on complaints will have to write to customers six months before the deadline to remind them of their rights.

Endowment mortgage holders face a shortfall of £40 billion, according to the Treasury Select Committee.

The Consumers’ Association said that up to five million policyholders might have been mis-sold an endowment.

The Association of British Insurers (ABI) stated that about 430,000 policyholders had already been awarded more than £673 million as a result of mis-selling claims reported to the Financial Ombudsman Service.

Insurers will also have to highlight details on how to make a complaint in every projection letter.

The ABI said yesterday that all lenders must “introduce a new warning box containing extra information about how and when to complain”. It also instructed firms to make the projection letters easier for customers to understand.

A spokeswoman for the ABI said: “We have made substantial differences to the layout and language of the letter, and the way it is worded is much clearer.”

The ABI also changed its guidelines so that from June insurers will be required to explain why they do not use red ink “or a similarly striking colour” to highlight any shortfall to endowment customers.

In March, MPs said that “red” projection letters “should always have the key section printed in red, analogous to the format used in overdue bills from utilities and others”.