Synopsis: It is often claimed, with some justification, that the biggest financial decision we ever make is when we commit to a mortgage. Any adviser considering protection should (and surely will) automatically look at the clients’ protection needs when they are committing to any large financial transaction.
It is often claimed, with some justification, that the biggest financial decision we ever make is when we commit to a mortgage. Any adviser considering protection should (and surely will) automatically look at the clients’ protection needs when they are committing to any large financial transaction. When a mortgage is being considered protection needs should be paramount but aren’t always for reasons we shall examine later.
The whole mortgage landscape has been altered by the Mortgage Market Review which came into effect just over a year ago.
The FCA say on their website, ‘It had become clear by the height of the market in 2007, that, while the mortgage market had worked well for many people, it had been a cause of severe hardship for others. The regulatory framework in place at the time had proved to be ineffective in constraining particularly high-risk lending and borrowing. The MMR package of reforms is aimed at ensuring the continued access to mortgages for the great majority of customers who can afford it, while preventing a return to the poor practices that we saw in the past.’
The key issues affecting intermediaries are:
· The removal of the requirement on intermediaries to assess affordability.
· The removal of the non-advised sales process.
· Most interactive sales (e.g. face to face or telephone) to be advised.
· An ‘execution only’ sales process for non-interactive sales (internet and postal).
· Every seller required to hold a relevant mortgage qualification.
It is no longer compulsory to provide customers with an Initial Disclosure Document (but firms can continue to do this if they want to). Instead, certain key messages about a firm’s service must be given to customers.
The Key Facts Illustration doesn’t have to be given every time the firm provides the customer with information about a product that is specific to them. Instead, it is only required where a firm recommends a product or products, where the customer asks for a KFI, or where the customer has indicated what product they want in an execution-only sale.
You will note that there is no mention of protection in these strictures and yet we have identified the need for advisers to assess protection needs because of the financial pressure a transaction of this time will usually put on the borrower(s).
I have spent a lot of time recently speaking to mortgage advisers, trade associations and experts in this field. There is a very clear consensus that anyone advising on a mortgage needs to look at how the mortgage would be able to be repaid or continue if death or severe illness intrude into the borrowers’ lives.
It is therefore a matter of grave concern that since the MMR came into force we have seen the continuance of a downward trend in sales of protection linked to mortgages.
This situation has perturbed a number of leading mortgage advisers and a few months ago, Mark Graves of Pink made it mandatory for any members of his network advising on a mortgage to ensure that they enquire how the mortgage would be repaid if the borrower(s) should experience Ill-health. Mark feels from personal experience that a mortgage should not be sold without appropriate protection cover because it exposes anyone taking out a mortgage to serious financial risk.
This is a challenge for mortgage advisers because it is quicker to sell another mortgage than to arrange protection cover for the mortgage you have just sold.
This is becoming a major issue in the mortgage industry and has been heightened by the ‘Seven Families’ campaign which has increased adviser awareness of the value of income protection. Mortgage Introducer is launching a campaign ‘IPso Facto’ to encourage advisers to follow the example set by Pink.
While this campaign will arouse debate, it will not solve the problem of what is the right advice to give to a couple who are about to buy a mortgage. I will examine that issue in my next article.
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