Investment compliance: interest only mortgages
27 Sep 04
A reminder to financial advisers dealing with endowment-related mortgages of the standards to be met when advising clients
by Dennis J Young
Following recent developments in the advice given to financial advisers when dealing with endowment-related mortgages, I thought it appropriate to remind solicitors who undertake this type of investment business of the standards which are required to be met when advising clients in this area of work.
Endowment related mortgages have a number of features which require to be explained to borrowers – particularly the element of market risk included in the endowment product and that most endowment policies do not guarantee to repay the mortgage. You are reminded that the customer has to understand the risks they are taking - that it is a long term commitment, that they are given all relevant information which they require to reach an informed decision, and the product is suitable for the customer’s needs. A complete record must be kept of the advice and information given since this will be subject to the scrutiny of the Inspection Team during their routine visits.
Particular areas which need attention include suitability, affordability, attitude to risk, and any recommendation to include additional life insurance cover.
Your files should be clear as regards any inquiries made and to answers given regarding any existing endowment policies, the client’s intentions regarding retirement, and the client’s ability to fund increases which may be needed at a future date if the initial terms of the endowment policy prove to be inadequate as regards repaying the capital sum at the forecast date.
You should also be aware of the impact of the existing endowment products. Recommendations to increase existing payments can result in complaints regarding the original advice tendered. The Law Society of Scotland reminds its members of the benefits of being able to refer to a full client fact sheet, together with adequate records of all meetings, noting any advice tendered during meetings is important when dealing with such matters.
Above all, you are reminded of the needs to exercise the highest levels of client care in dealing with endowment-related mortgages and any associated products. The benefit of good working practices cannot be over-emphasised.
If you have any comments or enquires regarding this article please contact the Chief Accountant, Leslie Cumming, or any member of his staff.
D J Young