In an increasingly uncertain world, should buying protection when arranging a mortgage be made a mandatory requirement once again?
Tackling the issue in this week’s Market Watch are:
Ian Smart, head of product development and technical support at Bright Grey
Sue Anderson, head of member and external relations at the CML
David Hollingworth, head of communications at London & Country
Ian Smart, head of product development and technical support at Bright Grey
It may seem an odd thing to argue from the point of view a protection provider, but I don’t believe that it should be mandatory to purchase protection as part of a mortgage.
Everyone’s circumstances are different and consequently we each need a different flavour of protection to meet our particular needs.
After all why would a young single person with no dependents need life cover?
Their first priority should be income protection, as they will have a much greater chance of becoming ill and being unable to work than they will of dying.
When protection was mandatory previously, this was more about lenders generating extra income and providing additional security for themselves than genuine concern for the client’s circumstances.
And in some cases, inappropriate cover would have been purchased purely to secure a particular mortgage deal.
It could also reduce competition and remove an element of choice for the consumer.
We have seen this most recently with payment protection insurance, where lenders sold this alongside the mortgage with no explanation that alternative cheaper products may be available and, in some cases, not even checking that the client was eligible for the cover.
What should be mandatory is an explanation of the risks that the client is running by not taking out appropriate protection and of the products available to mitigate that risk.
This could be a generic booklet produced by the ABI or Money Advice Service that lenders and mortgage brokers would have to give to the client before the mortgage is arranged so that an informed decision can be made about what cover is the most appropriate.
Whilst there are some leaflets available already these do not go far enough.
Making these mandatory with a fuller explanation can only be a positive step.
Sue Anderson, head of member and external relations at the CML
Protection should be compulsory for mortgage borrowers and allowing them to borrow without it amounts to irresponsible lending, according to Mortgage Solutions reader “Ticktock” last week, who observed that “someone should tell the CML”.
Ticktock was commenting on Ross Bowen’s thoughtful piece arguing that lenders, as well as borrowers, benefit from mortgage protection, since it ups the chances of the mortgage being paid even if something goes wrong.
Ticktock does have a point. The trouble is so do opponents.
For every person who argues that full protection helps the borrower, there will be someone else who argues that the real beneficiary will be the insurance salesman, given that most people will never need to make a claim.
In fact, this has exercised the CML for many years.
Back in the 1990s, we were at the forefront of promoting a comprehensive set of minimum standards for mortgage payment protection insurance. Thanks to regulatory aversion, this is now very difficult to sell and little trusted by consumers, despite its very positive track record on claims.
The reason we have never argued for compulsion is simply because borrowers’ circumstances differ so much.
Some can rely on employer schemes, family members, savings, equity or other assets to offset some of their risks.
Others take a sliding scale view of the risks they are prepared to take depending on whether they are single or have dependants.
It has never been straightforward to identify which borrowers (if any) should be compelled to take cover, with the costs it entails.
Surely then, that is where the value of really good advice comes in.
After all, in a world of compulsion and one-size-fits-all, where would an adviser add value?
David Hollingworth, head of communications at London & Country
This is a question that does tend to crop up on a regular basis.
There is certainly an argument that can be made for a return to the days of mandatory protection.
It would certainly counter the reduced penetration levels of the current protection market, which would help reduce the number of borrowers that are so poorly protected should the worst happen.
However, I think it is difficult to make a move back to a market where borrowers are compelled to take protection after that requirement has been removed.
It also poses a lot of questions about what would be deemed an acceptable level of protection and what form that should take.
There is a need for a much more rounded conversation to take place around protection and which products would suit the client’s individual circumstances.
For example, should we insist that the young, single first-time buyer with no dependents should be compelled to take level term assurance to cover their mortgage? Might that only prevent a further, more constructive conversation around income protection and critical illness?
Although a return to compulsion would certainly make life easier for advisers to sell protection products, everything is geared more to the education of consumers about the need to protect and the product suite that is open to them.
Broker focus on protection has improved significantly from the peak of the market and it is important that continues even when the mortgage market improves.
The improved processes that are undoubtedly now in place should develop customers understanding of the need to take protection seriously and initiatives, such as Aviva’s recent campaign, will help.
If anything is to be made compulsory, perhaps it will now need to be around the broker ensuring that the client has been made fully aware of the need to consider the protection of their mortgage and the possible ramifications if they don’t.
