Sounding a note of caution
MORTGAGE INTRODUCER - 21ST MAY 2005
Dear Sir,
I write in response to recent comments by Chris Cummings of the Association of Mortgage Intermediaries (AMI) who blames regulators for advisers’ reliance on mortgage payment protection insurance.
I agree with Chris’ sentiments that “advisers should not simply attach mortgage payment protection insurance to mortgage sales as a matter of course and should consider all the options available”. If nothing else, as a way to boost income, particularly as both income protection and critical illness attract commission rate of up to two years in premiums which will swell the bank balance superbly (albeit possibly temporarily).
As an advocate of properly sold, low-cost mortgage payment protection insurance, I am compelled to raise notes of caution which advisers must consider if they are not to be in breach of their duty of care to ensure that clients have sufficient financial resources to meet their mortgage repayments at all reasonable times, including a period of unemployment and disability.
1. Income protection is a brilliant product when it provides won occupation cover and a nominal excess. It does however have limitations such as it is very expensive (commission is clearly a factor) and insurers ‘cherry pick’ only healthy clients. If you are a woman, a smoker, gay or in manual work you will pay extra or may not get cover at all. The major problem however is that claims payments are paid directly to clients whereas mortgage payment protection insurance payments are paid directly to the lender. Accordingly, income protection clients become automatically ineligible for mortgage income relief from the state. This can cost an adviser dearly. I know of at least one firm who is currently being sued for not fully explaining this fact to a client.
2. Critical illness has always been a brilliant product for the life insurance industry due to the vast commissions and fees to be earned. If however an adviser fails to fully explain the complicated limitations in cover, one can expect an action in negligence. I trained as a barrister but make a good living selling mortgage payment protection insurance, whereas many of my fellows simply make a good living suing advisers. Accordingly, if one doesn’t wish to risk being sued, embrace the very reasonable FSA regulation and sell, where appropriate, the policy (i.e. mortgage payment protection insurance) that fulfils the basic duty of care requirements.
By all means advisers should consider offering additional cover. Income protection with a 12-month excess, for example, often offers excellent value but don’t offer a substitute without very careful consideration just because this alternative pays more commission.
Payment protection insurance is a vastly untapped market for advisers who can claim a share of over £5 billion in annual commissions. Safety first however must be the first consideration.
Simon Burgess
Managing director
Burgesses Limited
