MCD: Second charge protection in the spotlight

From yesterday, March 21 all mortgage advisers have to mention the option of a second charge mortgage for customers looking to extend their borrowing.

Those wanting to describe themselves as “independent” must also include second charge mortgages within their scope of service.

These are just headlines, however, compared to the fundamental change the Mortgage Credit Directive (MCD) delivers for this market: bringing all secured loans in line with first charge mortgages. That means aligning affordability checks, stress tests and all the other requirements with the primary market. But it also means firms should go further. If the second charge market is to be aligned with first charge market, protection advice should be as well.

The protection insurance gap is widely recognised. Legal & General’s “Deadline to Breadline” research shows working age families would be left reliant on the state, family or friends in just 14 days without the salary of the main breadwinner. Any loan secured on the home potentially adds to this vulnerability, and that applies equally to second charge mortgages – perhaps even more so.

Such thinking is central to the FCA’s new approach. Its consultation on implementing MCD in the second charge market back in 2014 stated: “[Second charge] consumers are subject to similar, and in some areas heightened, risks compared to those in the first charge market, particularly given the predominance of second charge mortgages taken to consolidate debt.”

Arrears rates in the secondary market (much higher than for first charge mortgages) illustrate this, it added.

Regardless of the regulatory change, then, firms have a moral responsibility to look at clients’ protection needs – not only life insurance, but income protection and critical illness cover, too.

It means looking at the full range of options: whether extending or increasing existing cover (if possible); taking a fresh policy to cover all the debt; or just adding a new, top-up policy for the new loan. There is no single answer: It will depend on the existing policy, the current state of the market, and the changes in the client’s age, health and other circumstances, as well as range of other factors.

Considering protection needs is not just an obligation on firms, however; it is an opportunity. Brokers face fierce competition from market disruptors offering convenient, low cost, online services.

By broadening the markets in which they operate, and offering advice across the full range of products, advisers can build a more resilient business. It allows them to offer a genuinely holistic service that meets the full range of clients’ needs and develop strong relationships. Of course, the breadth of the product ranges that must be considered means it may take time and effort to build this offering. By the same token, however, such a business will not quickly be dismantled.