When a person applies for a mortgage loan to buy a home, the person will generally be required to take out mortgage protection insurance. In most cases, a lender is legally required under section 126 of the Consumer Credit Act 1995 to make sure that a mortgage applicant has mortgage protection insurance in place before granting a mortgage loan.
This is an important statutory provision which is designed to protect the borrower's dependants and their home should the borrower die before the mortgage has been repaid. However, the Act also recognises that in certain cases such protection is not necessary or would be inappropriate and it provides for a number of limited exemptions to this statutory obligation such as where the borrower belongs to a class of persons which would not be acceptable to a life insurer, or would only be acceptable to an insurer at a premium significantly higher than that payable by borrowers generally.
In such circumstances, there is no statutory requirement on a mortgage lender to arrange for mortgage protection insurance and it is then a matter of the lender’s own internal policy to decide on whether or not it wishes to ensure that such a policy is in place. This will be a commercial decision as opposed to a statutory requirement for an individual mortgage lender, and it is not possible for me to instruct lenders on their individual lending policies.
However, if a person is not satisfied with the way a regulated mortgage provider has dealt with them in relation to an application for a mortgage, or they believe that the regulated entity is not following the requirements of the Central Bank’s codes and regulations or other financial services law, including the requirement for the regulated entity to act with due skill, care and diligence in the best interest of its customers, the consumer can also complain directly to the regulated entity and, if they are not satisfied with the response from the regulated entity, the response to their complaint from the regulated entity is required to include details for the borrower on how to refer their complaint to the Financial Services and Pensions Ombudsman.
With regard to any intervention by the State to provide insurance in these circumstances, I would be cautious about the introduction of a State-backed insurance scheme in this jurisdiction generally, for a number of reasons.
Firstly, any State insurance scheme would be required to comply with the same prudential rules under the Solvency II Directive as private companies, thereby meaning that the cost would still have to reflect the risk involved.
Secondly, there is no reason to believe that the State would be any better at managing risks than private firms, and therefore be in a position to provide insurance more affordably.
Thirdly, such an approach could actually decrease competition, with insurers potentially discontinuing certain lines if there is a view the State will insure these risks instead.
In conclusion, any such proposals for State intervention, while well intended and which may appear as representing an easy solution, are likely to lead to unintended consequences. Accordingly, I am not convinced that a State-backed insurance scheme would be a solution to either the cost or availability of mortgage protection insurance.
