The government is committed to developing alternative protection products but, as debt spirals, how far away are we? Paul Walsh investigates.
The guidance stressed that firms should ensure product features reflect the needs of the consumers they are targeting, setting out the importance of identifying the target market for protection products; ensuring that the cover offered meets the needs of that target market and avoiding the creation of barriers to comparing, exiting or switching cover.
As the Economic Secretary to the Treasury, Andrea Leadsom, highlighted in her response to Love during the debate, one of the government’s measures for financial stability has been to promote saving.
This year’s Budget was a Budget for savers, she said, and a reduction in taxes for the lowest-income savers means that in April the starting rate of savings income tax will be lowered from 10% to zero, and the band to which it applies will be extended to £5,000.
She went on to say, however, that the government is also committed to curbing irresponsible lending and strengthening consumer protections, and that it wants to see firms meeting the standards expected of them – lending responsibly and offering products that meet consumers’ needs.
It was said that the mutual sector is leading the way when it comes to tackling the protection gap through the use of debt waiver in its lending. This initiative is new to the UK, but was introduced into the North American market after the Great Depression of the 1930s to restore confidence in lending.
It involves the lender offering a debt waiver facility to their customers which is written into the loan agreement, guaranteeing that should certain events arise, the instalment is covered on behalf of the customer. The lender purchases an insurance policy to transfer this risk off their balance sheet – meaning this is an agreement between two businesses.
On the Mortgage Market Review (MMR), Love put to the minister: “I am not aware that within the comprehensive discussion that is now required, any room is given to insurance products to protect the loan. I would have thought that was one way in which the regulator could ensure that at least it is bought to the customer’s attention that they should get a protection policy, so if things go wrong they can rest assured that their loan will be insured.”
Growing concern
Love’s comments reflect a growing concern across the mortgage-lending industry, including backers, that more needs to be done to offer safeguards to borrowers.
Mortgages sold through the MMR will naturally provide a greater opportunity for advisers to discuss the need for protection.
With such detailed personal expenditure taken into account before the mortgages are granted, the lack of adequate, proportionate and appropriate safeguards for risks that could have been identified at the time of purchase are worrying to those in the industry.
However, it may also be that some firms will be dealing with a large proportion of first-time buyers, rather than more experienced borrowers who already have the necessary protection in place.
To inspire Leadsom on how protection initiatives can be successfully implemented, John McDonnell, MP for Hayes and Harlington, was present at the debate and invited her to visit his constituency – home of the Plane Saver Credit Union.
Plane Saver – credit union to the aviation industry which counts British Airways among its 8,000-strong member base – was the first to introduce the debt waiver system from CUNA Mutual. As well as providing protection, he said, it has encouraged more savers to join the credit union.
Plane Saver assessed the attitudes of its members towards borrowing and found that 83% wanted a loan‑protection product in some form. Despite 90% of members qualifying for some level of sick pay, 70% would suffer from reduced pay, and members said they would find it difficult to make ends meet.
All new Plane Saver loans will now come ready-built with debt waiver protection against accident and sickness, and the cover is effective immediately.
Leadsom assured both MPs that the government was “committed to the proper development of alternative protection products, which would certainly include the debt waiver”, and that it is determined that financial services serve consumers in the right way. She also said consumers should understand the benefits of all the products, including income protection, on offer.
The implementation of debt waiver is slowly making headway. Three credit unions – Plane Saver, Clockwise Credit Union (serving members across Leicester, Leicestershire and Rutland) and Scottish Police Credit Union – are now running with debt waiver, and the first building society is due to go live within months.
With the MMR in place, regulation when it comes to high-risk lending and borrowing is high on the agenda. It aims to ensure continued access to mortgages for the majority of customers, while preventing a return to the inadequate practices of the past.
The government and the financial services know the way forward is better communication between consumers and financial services, both in terms of efficiency – ensuring loans are granted to those with the ability to repay them, and the right protection – and in terms of trust between the two sides.
Only this will alleviate the financial burden on consumers, and with lenders slowly but surely signing up to new initiatives like debt waiver.
Paul Walsh is chief executive of CUNA Mutual
