But what if mortgage deals came with improved terms or product rates for customers according to their level of protection, or indeed, whether they have protection in place at all? Is this something that would be looked upon favourably by lenders, or would the Financial Conduct Authority view such agreements as incentivised selling?
This week we’re asking our panel of experts whether they think there is a case for introducing such an initiative and, if so, how it could work in practice.
Terry McCutcheon, CEO of The Finance Planning Group, argues that protection advice should be a key part of every mortgage broker’s advice remit and intermediaries should not need further incentives to encourage clients to take out cover.
Andy Philo, director of IFA distribution at Vitality, says that while protection-linked mortgage terms and rates would not be unethical per se, advisers would need to ensure customers are opting for the deals most suitable for their needs, rather than those with the most attractive headline offer.
Esther Dijkstra, director of strategic partnerships, Lloyds Banking Group, believes that while the industry may not be ready for such a move, brokers should continue to integrate clients’ specific needs into their protection advice.
Mortgage and protection advisers should not really need further incentives from the lenders to encourage mortgage borrowers to take out protection. Likewise, I would question how appropriate it is for lenders to be offering better deals or more favourable rates to borrowers who are fully protected and were able to repay their mortgages in the event of death, critical illnesses, unemployment, or long-term sickness.
A great idea in theory and of course better for the lenders, as it will help reduce their repossessions, but the FCA and MCD policymakers are likely to frown at any type of incentive schemes.
One idea would be for lenders to insist on protection being in place before the mortgage offer was sent out. As this is unlikely to happen, what is the answer to this industry-wide problem of borrowers not taking out sufficient protection?
The clear answer is that offering borrowers advice on protection should be an integral part of every mortgage and protection adviser’s application process.
At Finance Planning we care enough about our clients to feel responsible for what happens to them after they move into their home. Our advisers understand the social and moral responsibility of ensuring our clients are protected if something unfortunate were to happen to them. Our advisers will discuss “it won’t happen to me” scenarios, and use real life examples such as the recent tram crash in Croydon to emphasise the point that these things do happen.
Good protection advisers will help their clients to understand the risks of not taking out sufficient protection and persuade their clients to protect themselves without the need for further incentives.
It is widely accepted that protection is sold rather than bought. If you also agree that it is undersold, as the trillion-pound protection gap suggests, then there is clearly a lot of work to be done at the point of customer contact.
Protection can often be an afterthought. There is a paradox that when mortgage lending is more freely available, protection sales reduce and vice versa. So on the face of it incentives and favourable rates seem to have merit in terms of moving protection to a front of mind purchase. The idea isn’t unethical in itself, but it’s important that it’s communicated through advisers to ensure people are buying the right protection product for their needs, not just the ones with the best deal attached to it.
Distributors have a professional and moral responsibility to provide protection advice. I would question whether, in the future, if a client hasn’t been advised properly about protection, advisers may be leaving themselves exposed to future mis-selling claims, or ‘non-mis-selling’ in this case. It looks like there will be a time limit on PPI mis-selling and you have to wonder what the next ‘opportunity’ for legal action will turn out to be.
However, lenders too should take a greater responsibility to insist protection advice is taken when they are lending. I’m not suggesting compulsion as this could mean lenders putting packages together for ‘simple’ products and cutting out advisers, and we do not want that outcome. We have a professional adviser market that can offer comprehensive advice. So, while some form of incentives may help to make the product more attractive to the customer and therefore aid the sale, the most important task is finding the right product for their individual needs, which is a service that an adviser is best-placed to provide.
Esther Dijkstra is director of strategic partnerships, Lloyds Banking Group
Protection is a key decision people should consider, regardless of whether they have a mortgage or not. Everyone will have individual needs depending on their personal and financial circumstances and preferences.
Buying a property – whether it’s a first home or a step up or along the property ladder – is a big event and a good time to consider what type of protection they may need for themselves and perhaps their family.
The mortgage broker plays a key role in this part of the process with their clients, by explaining options and giving advice on the most appropriate way for the customer to cover their needs accordingly. Because of the varying level of protection needs from borrower to borrower and also different risks from a health perspective, linking protection and mortgages to make the protection sale conditional on obtaining a better mortgage product may not be the best option for all borrowers at this point. However, there is definitely merit in ensuring a discussion around the borrower’s specific protection needs forms part of the mortgage advice process, and this will also help generate a better awareness of the bigger picture – longer term financial security.
It is important that people are considering protection at key stages in life, and in particular when they commit to buying a home. It is where mortgage brokers play a key role in supporting customers by helping them understand their options and what can be a relatively small investment which will protect their future and their family should the worst happen. If they do find themselves in that situation, we as a lender can help find solutions that may be suitable for them, such as payment arrangements and term extensions.
Helping to put borrowers in a more informed position around appropriate financial protection, especially as Support for Mortgage Interest benefit – the current welfare mortgage safety net – is changing. No-one wants to get that call from a customer, but we’ll sleep better if we know our customers are protected.