Kesh Thukaram is director at Best Insurance
In her inaugural speech Theresa May pledged to tackle the concerns of workers ‘in a job but not always with job security’, people ‘who have their own home, but worry about paying the mortgage’ and those ‘who can just about manage, but worry about the cost of living’. I suspect these are the concerns of every new and existing mortgage borrower in the UK and while Mrs May’s acknowledgement of such issues is to be applauded, she gives no clues as to how she plans to alleviate this widespread angst.
While the Government identifies job security, paying the mortgage and supporting those who walk a fine line between keeping their head above water and spiralling into debt as key areas to tackle, I can’t help but wonder why MPs are not working with the Financial Conduct Authority (FCA) to make short-term income protection mandatory for new borrowers. This is the ideal solution for those with mortgage commitments.
Better serve consumers
Certainly there’s a desire for consumers to be better served by the financial services sector; last year the FCA concluded the market for financial advice in the UK wasn’t working well for consumers and called for a review into how the sector can be stimulated to deliver affordable and accessible financial advice and guidance for consumers, no matter what their life stage.
In March this year, the FCA published its Financial Advice Market Review (FAMR) recommendations, covering affordability, accessibility and liabilities/customer redress. For affordability, there are calls to make the provision of advice and guidance to the mass-market more cost-effective and a proposal for the FCA to help firms develop mass-market automated advice models.
Under accessibility the plan is to help consumers engage more effectively with advice; making information more easily available and to develop ‘nudges’ to support key life stages. Within liabilities/consumer redress, measures include an increase in clarity and transparency and how the Financial Ombudsman Service deals with complaints.
The FAMR says many people are unsure how to go about finding good financial advice or are not engaged with financial planning. I believe lenders, and in some part, the Mortgage Market Review (MMR) guidelines, contribute to this; at the very time when the customer is engaged with financial planning and likely to take on board financial advice, lenders fail to talk about the impact redundancy, an accident or illness can have on the ability to pay a mortgage, instead focusing on the borrower’s ability to repay the mortgage in the event of a rate rise.
Lenders could – if prudent in their approach – discuss protection issues, but because MMR guidelines do not require this, they do not appear to see the need.
This all seems rather lame – particularly when Mrs May specifically refers to job security and allaying fears about paying the mortgage. Short-term cover is the only mechanism that can resolve this (aside from huge amounts of savings). And it’s particularly pertinent now, given the impact Brexit appears to be having on the economy.
Commentators have revised their Gross Domestic Product growth estimate from 1.6% to 0.8% next year, the Confederation of British Industry reports business optimism is at its lowest level since 2009, the Institute of Directors says business leaders believe Brexit is bad for them and the barometer of productivity – the Markit Flash UK Composite Output Index – plummeted to 47.7 in July, its lowest level since April 2009 (a reading of 50 indicates growth).
Falling and cancelled order books, postponed projects, reduced investment, a cut in headcounts and relocation to other European cities are all cited as reasons for such pessimistic employer outlooks, generating uncertainty and angst among employees across all sectors. So why aren’t lenders stepping in to offer the reassurance and tangible support workers so desperately need?
At the height of its popularity (2000), Mortgage Payment Protection Insurance was held by one in five mortgage holders. Greed and mis-selling aside, where properly sold, the cover provided a financial safety net for both borrower and lender. And with the Council of Mortgage Lenders (CML) announcing that aspirations for home ownership are on the same trajectory, post-Brexit, as they have been for 30 years, the need to consider making short-term income protection mandatory has never been greater.
According to the recent You Gov/CML Survey, 80% of adults aspire to be home owners in 10 years time and 72% want the keys to their properties in two years. With interest rates continuing to be held at 0.5%, lending is buoyant; the CML reports June borrowing topped £20.7bn – the highest for eight years – and industry commentators suggest more cheap mortgages are soon to be introduced.
This, I fear, is a toxic mix; economic and job uncertainty coupled with increased lending and more mortgage deals on the way. Past protection prejudices (lenders) and ignorance (borrowers) is causing both parties to steer clear of a solution that could keep them financially afloat in the face of adversity and inadvertently help boost the economy with fewer delinquent loan books and a reliance on State support.
There’s talk of the political, economic and social fall-out of the referendum, but what about the protection fall-out? It’s been prevalent for the past decade or so.
If the British have such a love-affair with home-ownership, as the CML suggests, lenders and mortgage brokers should be giving them the tools to help create a solid foundation for the future – ie protecting against job losses and spiralling debt.
While the shock waves from the referendum result continue to reverberate across the country, creating uncertainty and anxiety across many markets, I would urge those in the mortgage and protection sectors to take Theresa May’s lead and get to grips with the situation we’ve created and provide borrowers with solutions that reassure and support them, calming everyone’s nerves.