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Testing time ahead

Do you support the IFAs who have lashed out at the FSA for causing an “unnecessary fear and worry” to endowment policyholders?

BC: Endowments are an investment product used as the repayment vehicle when the loan becomes due and not strictly a mortgage lending issue so I can only answer as an individual. The IFAs certainly have a point when they say that cashing in endowments early is a bad idea.

But, on the other hand, the FSA is acting in the best interests of consumers by urging them to make sure they are investing enough to cover their loan. It is in everyone&#39s best interest for any problems which may exist to be addressed now, giving borrowers the chance to build up sufficient additional investments if necessary.

MG: I most certainly would. Furthermore, I think from time to time unnecessary meddling by regulators (while it may be well intentioned) causes all sorts of problems for practitioners in the industry where no real problems exist.

For example: not all endowments are bad, not all endowments will show a short- fall. Surely the IFA is the best judge of what should happen in a particular case. The current thinking seems to be let&#39s tar everyone with the same brush.

MB: No. I would be worried if I had taken out an endowment policy within the last 10 years. The FSA is forecasting that upwards of 60 per cent of policies will face a shortfall. The vast majority of IFAs will not have a problem with this because they are regularly reviewing their client&#39s situation and putting into action corrective measures.

Any concerns over endowments are a wider financial services issue because it was the industry which took a medium-risk niche product and turned into a mass-market “low-risk” product on the back of a high-inflation/high-interest-rate scenario.

Clearly, endowments are not suitable for the majorityof borrowers who are risk-averse and, with the wildly fluctuating returns on endowments, the product does notfit into that category.

Do you think IFAs are right in saying the FSA&#39s endowment letters are flawed and the method of calculating the potential shortfalls is misleading?

BC: Putting an average figure on how to calculate the growth of an investment far into the future is an impossible task. In general, I would agree that people should take a cautious view of investment performance as over-provision is far better than a shortfall when the mortgage term finishes. I think that good IFAs should be able to treat each of their endowment clients as individuals when it comes to reviewing their mortgage repayment investments, irrespective of the percentage used in the insurer&#39s letter.

MG: Not all mortgage endowments are with the same company. It is up to the individual IFA to look at each of his client&#39s situations and decide exactly the correct course of action and what that communication to the client should contain. Looking at the relative performance of each contract and the term over which the contract was taken should do this.

For example, a contract for the same level of cover taken out 20 years ago might show a vastly different growth rate than a similar contract with the same company over the last 10 years. One might be on target, the other might not.

MB: Yes and no. Forecasting returns on endowment policies is akin to sticking a pin in a map. If in doubt, opt for a repayment mortgage.

Do you think there should be industry standards set for flexible mortgages? If so, what should they be?

BC: I certainly believe there is a lot of potential for confusion about flexible mortgages. The terminology “flexible” does not really convey the variety of conditions which the many flexible products could have.

Perhaps the industry should have chosen a name that actually explains what the product is rather than a generic term such as flexible.

The real problem is not lack of regulation but lack of consumer awareness of what the various choices are. However, I would be in favour of a minimum standard for flexible mortgages, including such essentials as daily interest calculation, the ability to overpay without penalty and the ability to make underpayments or take payment holidays.

Once these basic flexible elements were generally understood, then lenders could bring out a flexible mortgage with extra elements or even a “flex minus X”. This would make things quite clear for both borrowers and advisers.

MG: Absolutely. This is long overdue. We have decided we cannot make arbitrary decisions and have taken the line of least resistance. If the lender says it is a flexible mortgage, then it goes on the system as a flexible,whether or not it has any of the major features of a flexible or not. The major features that in my mind define a flexible mortgage are probably different to other people.

However, as a minimum,I would like to see monthlyor daily interest calculations, overpayments and underpay- ments (to any level, that is, payment holiday) allowed (without penalties) obviously underpayment and payment holidays could be limited to either the overpayments received or the maximum LTV originally agreed.

Also, drawdowns shouldbe allowed at least to the level of the overpayments or originally agreed LTV.

MB: No, absolutely not. The mortgage industry may be paranoid about compliance but we do not operate in a nanny state. Where do you draw the line? How about industry standards for:

a: Buy-to-lets – amateur “landlords” not being made aware of pitfalls?

b: Self-certification – opportunity to falsify income?

c: Sub-prime – flouting of the mortgage code with non-disclosure of procuration fees?

d: Variable-rate mortgages – the standard variable rate can seriously damage your wealth?

e: Trackers – are we talking dogs, cars or mortgages? And so on. If flexi mortgages, or any other mortgage products, are being missold, then it is the mortgage code which needs strengthening.

What do you think should be done to ease the rush for advisers to sit mortgage exams before the MCCB deadline of 2002?

BC: What rush? I thought the problem was that mortgage advisers were staying away from exams in droves.

It has been reported that 16,000 advisers are registered for exams but have not yet sat them, with a further 40,000 advisers yet to commit to exams.

However, with the whole question of mortgage regulation still in the melting pot, who can blame them from remaining on the fence for the time being? After all, 2002 is still a long way off.

MG: Nothing. It is long overdue that advisers had some professional qualification on mortgages and the sooner the better. If deadlines are extended, then the situation will drag on and on.

If anyone has got any doubt about this, come and spend a day in our call centre and listen into some of the calls we get every single day: “Your system is wrong because it shows the total amount payable on a repayment mortgage is less than on interest-only mortgage. My company want me to sell endowments. How do you expect me to do that with these incorrect figures?”

By the way, no, I am not kidding, this was within the last month. Other examples include “What&#39s an ERP?” and “If my client is not movingbut wants to change lenders, which option do I select?” Answers on a postcard please.

MB: Nothing. Cemap has been with us since January 1998 so five years in total ought to be long enough. After all, there is nothing like a deadline to concentrate the mind.

Do you think having all advisers qualified will improve the image of the mortgage industry?

BC: Without a doubt, a qualification to sell mortgages will help improve the image of mortgage advisers.

The number of mortgage lenders and wide variety of mortgage products on sale at any one time means that borrowers have a real need for good advice on the products which will best suit their needs, and applicants have a right to expect this. This is especially true in SPML&#39s own “non-standard” market sector – where applicants do not really fit the high-street lenders&#39 criteria and find it difficult to simply get a standard mortgage “off the shelf”.

The vast majority of mortgage advisers do a really good job for their clients and a universal qualification would provide a useful seal of approval for them.

MG: It cannot make things worse. The consumer and national press and television and radio programmes have spent the last couple of years slating the marketplace as being a load of money-grabbing, commission-hungry crooks. Mortgage salesmen (and by association, insurance salesmen) probably come just marginally above Tony Blair in the popularity stakes. Therefore, anything that will raise the profile and professionalism of the advisers in the mortgage market is to be welcomed.

MB: No. The vast majority of mortgage advisers provide a very good service and a qualification will make no difference to that. As ever, a small number ruin it for the rest. Qualifications will not drive out mortgage malpractice and misselling. This is a mortgage code issue and the public&#39s perception of the mortgage industry will only improve once the mortgage code has been strengthened sufficiently to weed out the sort of prac-tices that the current anom-alies of the code allow.

Bill Cherry,Managing director,SPML

Mike Green,Sales director,Mortgage Brain

Michael Bolton,Marketing manager,Future Mortgages

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