It is unlikely that retention products will satisfy client suitability principles in the post Mortgage Market Review (MMR) environment, according to Personal Touch.
Neil Hoare, head of lending at the mortgage distributor, said the MMR puts advice at the heart of the business model both in terms of affordability and future income but the current mortgage retention model has the potential to create a conflict between the role of the lender and the adviser.
He said: “How can a lender offer a retention product without understanding how the client’s circumstances may have changed since the advice was first given?
“The client may have a great payment record over the past 18 months and have a good score on rating agencies, but this is not an indication that they can comfortably achieve a further two years of meeting affordability requirements. We know the lender has to absorb the risk of the mortgage – whether the client reverts back to the standard variable rate or not. But the current retention process contradicts the fact that the client initially needed professional advice and had the intention of getting further advice in two years’ time to reflect any change in circumstances.”
Hoare believes there are some important issues and questions outstanding which the industry and the regulator needs to address before the implementation of MMR:
- Should advisers be highlighting to clients that their advice is only valid for 18 months and if they choose to take advantage of a retention product then the liability for ‘suitability’ moves to the client?
- For most advisers the client with a mortgage in place is still a client and helping them through the retention process would just be a normal part of the overall service, but does product retention without advice go against the spirit of the MMR?
- The question over retention letters should not be whether the client wants to save themselves a few pounds by avoiding falling onto an SVR, it should be do they need advice? If the answer is no then a retention product could be right and it should carry the appropriate risk warnings. If it’s a yes, then the adviser who has the full picture of the client’s circumstances should be the first port of call.
Hoare added: “As an industry we are too proactive in tempting clients to make decisions purely based on price and an assumption that nothing has changed in their lives since we last saw them.
“The mortgage market review promotes advice, expertise, constant review and assessment of affordability now and in the future. How the retention process fits into this culture has yet to be seen.”