Discover | PMS | December 2022

THE IMPORTANCE OF RETENTION STRATEGIES

There's so much advisers can do to help clients be as financially resilient as possible, and in these challenging times, consumers need advisers more than ever.

MAXIMISING OPPORTUNITIES IN THE BTL SECTOR

At such a challenging time, it’s vital that landlords are aware of the opportunities within the sector that can maximise their income and profit margins.

THE RISE AND RISE OF SEMI-COMMERCIAL

The world is changing, and with it, our attitudes to social, commercial and residential investments must continue to adapt.

MEET THE CHILDREN’S CRITICAL ILLNESS INNOVATOR

Children’s critical illness (CI) has come a long way in recent years. It is something that Tim Lewis, Zurich’s senior proposition innovation manager, knows more than most.

In this latest edition of Discover, our Head of Protection & GI Propositions, Emma Thomson, discusses the importance of having a robust retention strategy to help clients be as financially resilient as possible in challenging times.

Dan Owen, our Regulatory Development & Policy Consultant, broaches the challenges advisers will face when preparing for the new Consumer Duty.

As always, our magazine is filled with news and insights from across the market, keeping you up to date with the latest expert opinions on all the hottest topics.

Best wishes, The PMS team

TO THE LATEST EDITION OF DISCOVER

IN THIS ISSUE

We're All Doomed - The Importance Of Financial Advice In A Turbulent World Sesame Bankhall Group

Duty Bound Sesame Bankhall Group

Supporting You, Your Business, And Your Future... Our Industry Needs More Personal And Professional Development Sesame Bankhall Group

ICRs, Fees And Interest Rates Landbay

Deadline To Breadline Report: Exploring The Financial Resilience Of Working Households Across The UK Legal & General

When investing your capital is at risk. Your home or property may be repossessed if you do not keep up the repayments on your mortgage. You may have to pay an early repayment charge to your existing lender if you remortgage. The Financial Conduct Authority does not regulate taxation and trust advice.

This publication is issued by PMS. PMS is a trading style of Premier Mortgage Service Limited a company registered in England and Wales with number 5011650. Registered office: Aviva, Wellington Row, York, YO90 1WR.

This document is for use by financial advisers only and is not approved for use with customers. The views expressed in this publication maybe those of individual authors and do not necessarily reflect those of the Sesame Bankhall Group. Whilst every effort is made to ensure that contents of this publication are correct, we cannot guarantee complete accuracy and do not accept responsibility for errors.

No reproduction of any information within this publication is permitted without prior written consent from the Sesame Bankhall Group. © 2022 Sesame Bankhall Group.

Paul Fothergill Regulatory Engagement Manager

WE’RE ALL DOOMED – THE IMPORTANCE OF FINANCIAL ADVICE IN A TURBULENT WORLD

The current cost of living crisis means that people are tightening their belts and looking for ways to cut their spending. What does that mean for the financial services industry in the short-term, and what’s it got to do with the Financial Conduct Authority (FCA)? Well dear reader, I’m about to try and make sense of it all!

The FCA are intensely interested in the cost of living crisis, as one of their objectives is consumer protection. At a time when consumers may be particularly at risk of harm due to financial pressure, the FCA becomes particularly interested in customer interactions with firms. But how do the FCA know what the state of people’s finances is? Step forward the FCA financial lives survey. Although the FCA hasn’t issued the full financial lives survey for 2022 yet, they have teased us with a preview of the results. The highlights make for sobering reading and aren’t for anyone with a nervous disposition. They confirm what we probably already knew, that many people’s finances are in for a rough ride over the next few years.

The financial lives survey is a really useful piece of work conducted by the FCA - bear with me! It surveys adults aged 18 and over across the UK with around 1,300 questions covering all the different sectors the FCA regulates. This latest edition of the survey was conducted in May 2022 and received over 19,000 respondents. The full survey gives great insight into how consumers interact with financial services firms, the products they sell, and the services they provide. The FCA’s hand-selected insights from the full version of the survey present a bleak picture for the state of people’s financial circumstances now and in the not-too-distant future.

The key headline was that one in four of all UK adults have low financial resilience, which means these people are in financial difficulty or could quickly find themselves in difficulty if they suffered a financial shock, such as losing their main source of income. These people are usually in this position due to having little to no savings or being heavily burdened by their bills or their debts. The number of people with low financial resilience has risen since the FCA’s survey in 2020, indicating the increasing pressure that people are feeling.

Another point raised in the highlights were the number of adults who say that they are heavily burdened by their bills and credit commitments. The 2022 survey put this figure at 15% of UK adults, with the FCA expecting this number to increase. This highlights that there is a core of people who are already struggling with their finances, never mind what the future will bring in the wider economy.

So what lessons can be drawn from the survey, other than that we’re all doomed? What the advanced preview of the survey shows is that there are a lot of people out there who can benefit from speaking to a financial adviser, whether about their mortgages, insurance needs or their investments. It’s often clear when speaking to prospective customers that they need the support of advisers to fully understand the nuances of financial products and services. Anyone can do their own internet research to discover more about these things, but a little knowledge can be a dangerous thing, particularly where finances are already squeezed. Decisions made without a full understanding of the potential consequences can lead to much higher costs for customers in the long run. Factors such as ongoing charges, early repayment charges and insurance coverage are all things that could be misunderstood or overlooked by people without the relevant knowledge and skills.

With people more likely to be looking at their finances, the ability to articulate the value that you can add for them is going to be an extremely important skill. To segue into some more compliance talk, it’s a great warm up for the FCA’s Consumer Duty price and value outcome, which will also require firms to consider the value that they add for their customers. As an industry, financial services has been a little bit behind the curve in trumpeting the value that we can provide to customers. With people looking to cut back in lots of different ways, showing the value that engaging with your business can provide can hopefully continue to help some of the people who need the most assistance, as well as generating more business for you.

Dan Owen Regulatory Development & Policy Consultant

DUTY BOUND

“Independence is a state of mind.”

This is a newspaper quote from one Financial Conduct Authority (FCA) notary shortly after the Retail Distribution Review changed the independence rules for investment advisers. At the time, there was widespread uncertainty as to how the ‘new’ independence rules should be met. Quite how advisers were expected to lock into this cerebral transcendence was left largely unaddressed. But, time manifests consensus and very few investment advice firms will still feel uncertain about the application of these rules.

Fast forward almost a decade and we find our sentient selves being challenged again, with one well known industry publication heralding that the Consumer Duty is designed to “fundamentally shift the mindset of firms in how they deliver for consumers.” The FCA itself has proclaimed that the Duty represents a “Paradigm shift in our expectations of firms.” Heady stuff.

So what difficulties do we face in reaching this conceptual nirvana? Primarily, as with all principles based regulation, the Duty itself (along with many of its key elements) is subjective. Principles rely on a commonly held set of values and beliefs to govern behaviour, i.e. they require consensus.

Arguably, in relation to the new Duty, we don’t have that yet. It’s perhaps also difficult for a business to be truly self-critical in circumstances where the challenge is so overtly laid against a fundamental source of pride for so many firms; what they deliver for customers.

To achieve the self-criticality required to assess where we currently are against the Duty, we could look at how we, as both professionals and consumers, might behave in certain scenarios. Take for example one of the most subjective elements of the Duty – Price and Value.

No doubt we all have family members that have used financial services provided by others. If we put ‘mates rates’ to one side for a moment, would you be comfortable charging a family member your fees, or would you be comfortable if another adviser charged your family member the same rate of fees that you charge, for the same level of service? If the answer is ‘yes,’ then you can be pretty confident that fee levels will be appropriate under the Duty. The wider value assessment can (and should) then take into account costs to serve as well as features and benefits, allowing for reasonable profit margins.

We could take the view that customers are perfectly capable of assessing value. If they didn’t think our service represented value, they wouldn’t pay for them. But our behaviour as consumers isn’t always that linear. For example, I have no idea what a crank shaft and fitting costs for my vehicle. If a mechanic tells me I need one, I will probably pay whatever he or she tells me it costs. Not because I hold a particular view on the integrity or skills of the mechanic, but because I want my car out of the garage. Although I may mumble something about the Georgian window tax, the chances of me shopping around are slim, even though I have little idea of whether or not I’m receiving value. You might do the same thing. Or you might consider this to be naïve, lazy or just plain stupid. The point is, a consumer’s willingness to pay isn’t always the best indicator of whether a product and/or service represents value. This is reflected in new Consumer Duty rules, which mean that we can’t take a customer’s willingness to pay into account when assessing fair value.

Assessment of behavioural approaches can be used across all four of the Consumer Duty outcomes of Products and Services, Consumer Understanding and Consumer Support, as well as Price and Value. For example, in relation to Consumer Understanding, how likely is it that our collective family member would read one of our disclosure documents and what would make them more engaging? Would it help them if it was provided in a format other than paper? Wherever we land on these types of questions is perhaps secondary to actually undertaking the exercise and being able to demonstrate that this has been done. The key will be to consider the requirements objectively with an open mind, further refining processes where this is needed and being unafraid to call out areas where wider change might be necessary. Time will do the rest.

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Daniel Armitage National Learning Manager

SUPPORTING YOU, YOUR BUSINESS, AND YOUR FUTURE… OUR INDUSTRY NEEDS MORE PERSONAL AND PROFESSIONAL DEVELOPMENT

At the time of writing this article, I have marked my 8th week with Sesame Bankhall Group (SBG) and what a positive, whirlwind of a time it’s been. Getting to know some of our partner businesses and internal support functions that make a difference on a daily basis, has been an honour.

When I started in financial services, all the way back when I was nineteen years old, I would never have dreamt I would be the National Learning Manager for Bankhall and PMS.

I knew back then I was working in a very people centric industry. Progressing to Bank Manager at a ripe age of twenty one, looking after a team of fifteen, I knew there was so much opportunity to help others, both clients and colleagues alike.

I started my first regulatory role in 2010 and passed my level three exams. However, with the Retail Distribution Review (RDR) looming, as soon as I passed my level three certificate in financial planning, I had to start on my level four exams.

Now, as a neurodiverse individual I love a challenge, and being dyslexic and having attention deficit hyperactivity disorder (ADHD) oh man…. it was a challenge. I grabbed my exams by the horns and passed my level four exams just in time for the implementation of RDR.

Fast forward eight years, I am a shareholding partner in a regional IFA firm, and their head of learning and development. My passion is to support others in supporting their clients, and helping their dreams to come true on their mortgage, investment, pension and protection requirements.

I have a thirst for personal development, I firmly believe that “if you’re not growing, your shrinking”. I have a fascination with what makes people tick and exploring why people react differently in the same situations. With this in mind, I embarked on my journey to become a master neuro-linguistic programming (NLP) practitioner and a executive coach and mentor. This has helped me immensely, in not only my working life, but also my personal and family life (especially when you have two girls, aged eleven and sixteen, you need some real negotiation skills).

Having firmly hung up the advising ‘pen’ back in 2020, I am now solely focused on supporting you and our wider clients here at SBG. The wider team and I have been asking you what you would like in terms of learning and development in 2023, and I’m thrilled about the new and exciting ways we will be supporting you, your business and your teams in the new year. For now, I will remain tight lipped on specifics as we still need more feedback from you.

We will be sending out a training needs survey to find out a little more on the specific areas you want support. This may be, a new adviser set of workshops, more psychology of sales training, or even just more product knowledge to fill the gaps in your continuing professional development (CPD).

Next year I will be on the road presenting at a number of our events, so when you attend make sure you say hello!

If you would like to contact me directly with any of your thoughts and feelings on how we can improve our learning and development support, please feel free to contact me at daniel.armitage@sbg.co.uk

MAXIMISING OPPORTUNITIES IN THE BTL SECTOR

2022 has been a tumultuous year for interest rates, with some of the biggest interest rate rises in the last 27 years. As a result, property owners coming to the end of their current terms are facing a substantial increase in their monthly mortgage repayments.

Increased monthly payments isn’t the only issue that landlords are currently having to contend with, 40-year high inflation rates, the cost-of-living crisis and undertaking the necessary work to meet EPC requirements are all wreaking havoc with landlord’s profit margins.

At such a challenging time, it’s vital that landlords are aware of the opportunities within the sector that can maximise their income and profit margins.

HMOs and MUFBs

Demand for rental properties continues to outstrip the available stock, with growing numbers looking for affordable, quality rental options. It’s no surprise therefore that HMOs and MUFBs have risen in popularity with both tenants and landlords.

Landlords with a HMO or MUFB can benefit from increased rental yields, as the amount of rent charged to multiple tenants will be higher than if the property was let to a single household. In addition, the risk for rental voids is lower. With multiple tenancies running, the loss of one tenant does not result in a complete void, rather a dip in profits.

One area that HMO landlords will need to consider though is that HMOs tend to offer rental inclusive of bills, so will need to ensure they factor in the cost of utilities when looking at this opportunity.

Holiday-Lets

The pandemic triggered a boom in the number of Brits opting to holiday in the UK and a newfound appreciation for staycations. While the lifting of travel restrictions has made international holidays easier again, a whopping 47% of Brits are planning a UK holiday in 2022 – with a third of those looking for self-contained rental accommodation.

The benefit for landlords is that holiday-lets can deliver much higher rental yields, as the daily or weekly charge is considerably higher than a residential buy-to-let.

For example, as of July 2022, the average monthly rental of a property in St Ives, Cornwall is £795, while the average cost for a week’s holiday rental is 2.6 times higher at £2,067.

Limited Companies

In 2017 HMRC began to phase out, over a period of 4 years, the costs that landlords could deduct from their rental income when calculating their taxable profit. For many private landlords, this made their investments significantly less profitable.

Landlords, particularly those that owned a portfolio of properties, began to move their properties into a Limited Company structure.

Andrew Ferguson Managing Director

A Limited Company can allow landlords to benefit from certain tax benefits, for example instead of paying tax on rental income a landlord will pay corporation tax, which as of the 2022-23 tax year stands at 19%. Another benefit is that landlords are able to deduct certain expenses that they incur through their Limited Company.

With the cost of managing a buy-to-let property increasing, incorporation is proving to be a popular option for landlords, and not just those with large portfolios. However, there are considerations that landlords need to be aware of including no capital gains tax allowance for properties sold that are held in a Limited Company, additional costs of running a company and potentially higher mortgage rates.

Landlords are advised to seek tax advice on the pros and cons of Limited Company holdings and how they apply to each individual scenario.

Using Specialist Finance to maximise rental income

Borrowers looking to obtain buy-to-let mortgages via a Limited Company or for a HMO, MUFB or holiday-let are typically underserved by the high-street. However, specialist finance lenders are more adept at dealing with the complexities that can arise with these types of cases.

At West One, we offer a flexible approach to borrowers. Our specialist underwriting team, can consider applications from across the spectrum and work closely with brokers to find the right product for their clients.

Here are a few reasons to consider West One…

Day one Limited Company cases with no rate loading

First-time landlords for HMOs, MUFBs and holiday-lets. No BTL or holiday-let experience required

Multi-unit freehold building to 10 units (including partial blocks)

HMO up to 10 beds. Over 6 beds and up to 10 beds by referral

If you have cases to discuss or require any further information, please contact the broker support team at West One on 0333 123 4556 or email btlbrokersupport@westoneloans.co.uk

Jonathan Stinton Head of Intermediary Relationships

HOW INTERMEDIARIES CAN HELP LANDLORDS ON THE PATH TO A MORE EFFICIENT PROPERTY PORTFOLIO

Private rental properties are among the least energy efficient in the domestic housing stock, costing over £6bn in energy bills in 2018 and producing emissions of around 11 megatonnes of carbon dioxide equivalent each year1. Despite the current cost of living crisis, improving energy efficiency of our housing stock is still central to reaching net zero by 2050, and landlords, who could soon be facing legislation making these energy improvements a legal necessity, have a critical role to play.

New rules could mean that if landlords want to rent out their portfolio, properties will have to meet a minimum EPC Band C by 2025 for new tenancies, and 2028 for existing ones. Landlords will need to understand exactly how these rules affect their portfolios, lest they risk incurring fines, or even be unable to let or remortgage their properties.

Intermediaries have a key part to play. Their knowledge of lender’s products, advice and guidance could benefit their clients to help them understand the importance of the EPC requirements and new regulation and raise landlord awareness of environmental issues. So how, exactly, can intermediaries help?

Understand the regulations

The latest EPC regulations are still working their way through the legislative process, but these new requirements are already creating confusion. And what support will there be for landlords who can’t afford to make the changes? For example, if measures do come into effect, shaking up current minimum energy efficiency standards, intermediaries will need to understand exactly how they affect their customers and the opportunities which follow just like any other legislation.

Help clients make the right choices

Some intermediaries won’t be retrofit experts, but knowing what changes your landlord customers can make that will have the biggest impact on EPC ratings can help to cement stronger relationships between intermediary and client.

Here are just some of the issues landlords will need to consider:

Stop the escape! - Around 18% of heat loss occurs through windows alone2, and single glazed fittings are some of the worst offenders. Replacing these panes with double or triple glazing can have a big impact on reducing heat loss, but landlords must also make sure these fittings are draught proofed. This will avoid heat loss occurring around windows, which would otherwise reduce the effectiveness of these measures.

Keep it insulated - Many properties today have loft insulation, but there are other measures that can greatly benefit energy efficiency. This ranges from cavity and solid wall insulation (just 9% of properties with solid walls are insulated3) to even insulating tanks, pipes and radiators.

It’s the little things that matter - Even small insulation tweaks can have a big effect on EPC ratings and energy bills. The Energy Saving Trust estimates that little fixes, such as fitting a hot water cylinder with an insulating jacket, could save the average home around £35 in heating costs – or the equivalent of 115kg of CO2.4

Green schemes could save your clients £££

Intermediaries are often already in tune with what’s on offer in the mortgage market, and this is just as important when it comes to knowing about green schemes.

At Coventry, we offer our Green Together Reward scheme. This provides eligible customers with a £500 reward for carrying out qualifying work that improves a property’s energy efficiency, such as fitting double glazing, installing insulation or setting up solar panels.

Even knowing about some of these schemes and changes landlords can make to their rental portfolio could save them some money. But more importantly, guiding landlords on these issues and helping them to improve their properties’ energy efficiency could lead to more of Britain’s homes being friendlier to the environment too.

1 BEIS analysis, based on Energy Consumption in the UK (2019), English Household Survey (2019), National Energy Efficiency Database, and Treasury Green Book energy prices (2019).

2 https://bit.ly/2EABq0O 3 https://bit.ly/3F1jG1j 4 https://bit.ly/3VJ1CP9

Tim Newman Head of Marketing

DEDICATION IS WHAT YOU NEED

Over the course of the year, we’ve seen host of ‘record breaking’ events making the news. In July, the UK saw its highest ever official recorded temperature, with Coningsby in Lincolnshire reaching 40.3 °C (104.5 °F). The UK inflation rate then reached a record 40 year high, peaking at over 10%. And, more recently, Liz Truss claimed the unwelcome record for being the shortest serving Prime Minister, lasting just 45 days.

All this talk brings to mind the Record Breakers TV series that I watched growing up in the 80s, and particularly the late great Roy Castle with his famous singing catchphrase ‘dedication is what you need’. It also got me thinking about some recent records that have been broken in the rental market, and how the need for ‘dedication’ from BTL lenders, brokers and their landlord clients has perhaps never been greater.

In their Q3 Rent Index Report, our friends at The Deposit Protection Service (The DPS) reported on the latest trends in the sector based on their huge pool of landlord data. This showed a rapid annual rental growth of 8.68% over the last 12 months, and the five biggest % increases in quarterly rental income since The DPS started gathering data in 2007.

In fact, quarter 2 saw growth accelerating faster than ever before, up 2.47% (£21), the first-time quarterly growth has exceeded 2%, and Q3 was only just behind that with a 2.18% increase.

When it comes to regional data, rents in London stand out as they accelerated by 4.24% (£61) to £1,499 during Q3 2022. Over the past 12 months, average rents in the capital increased by 11.95% (£160).

Yorkshire, the North West, East Midlands, Northern Ireland, and the East of England also saw rent increases of more than 2% during Q3 2022.

Across the UK, flats saw the greatest percentage rent increase between Q3 2021 and Q3 2022, up £79 (9.52%), from £830 to £909.

In addition to increasing rents, interest rates are also on the up. Although they are yet (thankfully) a long way off record levels, the volatile funding market is causing issues for lenders, brokers and landlords alike. At Zephyr, we’re not immune to these issues, but we’ll always do everything we can to give you as much notice as possible when we reprice our rates, so there are no sudden shocks if you’ve got a case in progress.

Dedicated to specialist BTL lending

As a specialist BTL lender, at our heart is broad criteria on a range of property types for individuals, limited companies, and portfolio investors. What you may consider as being complex, such as large portfolios, could be our bread and butter. And, with manual underwriting, provided by underwriters you can speak with, and a dedicated BDM to give you a helping hand, you will have peace of mind knowing your case is in safe hands.

So, as we look ahead to the next set of records making headlines in the national news or closer to home in the property marketyou can be sure that Zephyr will remain dedicated to the specialist BTL market and are ready to help you with any possible cases.

To keep up to date on the latest news from Zephyr, please follow us on LinkedIn and register for emails via our website.

Have a read of the full Q3 2022 Rent Index report and regional summaries: www.depositprotection.com/news-insights/dpsrent-index-q3-2022-regional-summaries/

Sally Wright Head of Intermediary Distribution

THE RISE AND RISE OF

SEMICOMMERCIAL

In the wake of Covid-19, the UK has seen some considerable changes, not least to high streets and commercial premises. Accelerating a trend that was already changing the face of the British high street, online shopping has become the norm, and retail businesses – from local shops to household names – have faced the consequences. Meanwhile, we are all too aware of the impact of lockdown on even the most popular pubs and bars.

However, it is not all negative; for example, where people are working from home more, access to local commercial hubs has become increasingly important. Consumers may be doing their shopping online, but they are looking for social and leisure spaces closer to home. In turn, two years spent in lockdown has led Brits to surge back to support those hospitality businesses that made it through.

In addition, commercial spaces have a potential role to play in addressing the UK’s ongoing housing shortage. The potential for more mixed-use properties, combining commercial and residential,

could not only help provide much-needed private rental space, but also feed into this newer, more sociable next phase of British high streets.

According to a report published in January 2022 by the Local Government Association (LGA), the “resilient high streets” of the future, able to withstand both pre- and post-pandemic challenges, will be those that offer “experiences that go beyond purely retail or functional-oriented activities.” The report goes on to outline the importance of taking the local context into account and building community engagement.

This means providing much-needed residential properties, while continuing to create central hubs that provide for the changing wants and needs of the surrounding communities – all of this paves the way for yet more growth in the specialist semi-commercial market.

A lucrative opportunity

A semi-commercial property is one that holds a mix of commercial and residential uses, such as a retail or hospitality business with residential flats above. These properties are split, but more often than not held on the same freehold title.

From an investment perspective, these types of properties can hold considerable appeal. A savvy landlord will always be on the lookout for ways to diversify their portfolio and increase yield, particularly in the face of increasingly restrictive regulation, rising costs, and inflationary pressures.

Compared with the standard buy-to-let property, semi-commercial can offer higher yields, with the British Landlords Association (BLA) positing a typical 7.6% return per annum. In turn, just as a house in multiple occupation (HMO) offers the added security of avoiding void periods across an entire property, having income generated by two entirely different sources, one commercial and one residential, provides a certain added stability. This is particularly important, as we have all learned just how quickly unforeseen events can influence a market, and the benefits that can be had from spreading risk.

Nevertheless, there are also drawbacks that must be considered. For example, the commercial property market tends to offer less scope for capital growth than residential. On a practical level, mixed-use properties also mean more than one type of tenant, which can make for more management on the part of a landlord, or the increased need for an agent, with implied fees.

For those who understand this balance, and the importance of partnering with the right lender, this could be an exciting investment area.

On the right foot

To this end, HTB has this year revamped and enhanced its semicommercial criteria. With a revised commercial to residential ratio of 50:50, from 40:60, maximum lending up to £25m and 75% loan-to-value (LTV), with no minimum income or maximum age requirements, HTB has listened to broker feedback and adapted in order to open the door for even more semi-commercial opportunities.

Our extensive experience and flexible approach to underwriting means we are able to cater for complex assets – including pubs and offices – while also lending to limited company SPVs, expats, trusts and foreign nationals. HTB is also one of the few lenders in this market who can consider the commercial as well as the residential income when considering the affordability for these semi-commercial assets.

The world is changing, and with it, our attitudes to social, commercial and residential investments must continue to adapt. For many property investors looking to stay ahead of the curve, the future may well include semi-commercial as part of their portfolio.

Liza Campion Head of Corporate Accounts

There weren’t many areas of UK society that were unaffected by COVID-19, including the country’s job market.

One group of workers that was hit more than most by the pandemic were the millions of people who work for themselves.

After two decades of steady growth which saw the number of selfemployed workers peak at more than five million at the end of 2019, a combination of less work and reduced income as a result of successive lockdowns saw more than 800,000 leaving the sector and returning to employed work, retiring or losing the business they’d worked so hard to build up1

And while numbers have slowly started to creep up again over the past year2, a recent report by the London School of Economics has found that incomes and profits remain below pre-pandemic levels3

The report goes on to say that the current cost of living crisis is exacerbating the challenges already faced by self-employed workers who’re still to fully recover from the pandemic shock.

One of those challenges is finding a residential mortgage in a market where lenders often view the self-employed with suspicion, often deeming their circumstances as being too complex or their income as too unpredictable.

The pandemic has only compounded the problem, with the stricter criteria many lenders imposed making it even more difficult for those who work for themselves to get the mortgage they need.

So where do you turn if you’re approached by a self-employed worker who’s struggling to find the mortgage they need on the high street?

How Kent Reliance for Intermediaries could help

As the home of handcrafted mortgage solutions, we know that every case is unique.

Our strength lies in our common-sense approach and the ability to see the potential in an application when other lenders may not be

able to help. With a willingness to consider cases that fall outside of standard criteria and the ability to be flexible with our income multiples, we could provide solutions for even the most complex of scenarios.

We can support a wide range of client types, including self-employed workers. Whether they’re a sole trading electrician with years of experience under their belt or an entrepreneur in the early stages of establishing their business, we could help.

We accept self-employed applicants with a minimum of one year’s accounts and we can work on a projection for year two based on an uplift of up to 30% of the first year’s figures.

What’s more, thanks to our flexible manual underwriting, we can accept 100% of a second income that’s sustainable and held for a minimum of 12 months.

We also accept contractors with no minimum income, as long as their application can evidence at least one contract renewal, with a minimum of 12 months of sector experience. And as long as their contract has been renewed at least once and there’s at least six months to run, we can also accept clients on a PAYE contract basis too.

To find out more about how we could help, speak with your business development manager www.kentrelianceforintermediaries. co.uk/bdm-finder, call our broker liaison team on 01634 835791 or contact us via Live Chat. www.kentrelianceforintermediaries. co.uk/contact-us

Paul Brett Managing Director, Intermediaries

ICRs, FEES AND INTEREST RATES

We all know the mortgage market has been in a state of flux since the disastrous mini-Budget on 23 September with rates spiking and lenders pulling products.

The situation is a little calmer now since Rishi Sunak became the new Prime Minister but uncertainty still persists and the economy remains fragile. Mortgage products are returning to the market but are much higher than a couple of months ago. The reality the mortgage market face is that this is now the new norm.

Bank of England base rate has risen eight times in a row to a 13-yearhigh of 3% and swap rates have been escalating all year. This has caused a dilemma for lenders trying to price mortgage products. The simple fact is we can’t provide mortgages at a loss so have no choice but to raise rates.

But buy-to-let lenders are faced with another quandary, which is the Interest Coverage Ratio (ICR), a regulatory requirement set by the Prudential Regulatory Authority (PRA).

Although many non-bank buy-to-let lenders, like ourselves, are not regulated by the PRA, we nevertheless follow all of the regulations set. This is important for our integrity and means we can work with funders who are PRA regulated.

Lenders vary their typical ICR margins between 125% to 145% based on a client's tax position. This is then stressed against the prevailing mortgage interest rate plus a margin or a nominal set interest rate.

It is the ICR which is causing such a headache in the market as it is this which dictates the borrowing potential for a landlord.

With the rise in interest rates, this means that in order to meet the ICR, the rental requirements will also be higher. This is likely to be an issue for some landlords remortgaging as the higher rates may mean they no longer meet the ICR.

As lenders we have to be make sure the ICR calculations fit for both us and the borrower. One way to do this is to charge a higher fee

upfront fee in order to have a lower interest rate, as the lower the mortgage interest rate is the lower the rental stress rate is.

Essentially the total overall cost will be similar over the initial offer period if the fee was lower and the rate higher (albeit adding the completion fee to the loan will erode their capital if not managed correctly and cost a little more over the initial offer period in interest on the fee itself).

ICR calculation

This example illustrates the difference in ICR rental requirements from earlier this year to now.

In March 2022, a £150,000 five-year fixed rate mortgage at 2.99%ICR at 125% requires a minimum rental income of £467.

In November 2022, with a rate at 6.59%, the minimum rental income is £1,029.

Impact on ICR of different fees and interest rates

Varying the fee and interest rate on a £150,000 five-year fixed rate mortgage would require the following minimum rental income to meet the ICR:

Fee 4% - 6.49% rate = rent required £1,014

Fee 3% - 6.69% = rent required £1,045

Fee 2% - 6.89% = rent required £1,076

Landlord borrowers will not only have to pay higher rates when they remortgage or purchase a property, they must also be mindful of the rent they charge in order to secure a mortgage. The impact this has on yields could be significant for some landlords and although they can still make a profit, it might not be as much as it was a few months ago.

DEADLINE TO BREADLINE REPORT: EXPLORING THE FINANCIAL RESILIENCE OF WORKING HOUSEHOLDS ACROSS THE UK

The new report from Legal & General assesses the financial stability of households by looking at how long someone could cover their basic living costs if they lost their job.

In our 10th anniversary edition, we spoke to a range of employed and self-employed consumers aged 18 to 65 about their financial situation. We’re continuing to uncover detailed insights into UK consumers to help you understand how this could affect your client conversations.

Our latest research uncovers: How long it would take someone to reach the ‘breadline’ if they lost their income

What’s preventing your clients from engaging with their financial plans

How client buying behaviours are changing in response to the cost of living crisis

Key findings

The latest research revealed:

• Households are only 19 days from the breadline, down 21% since 2020, from 24 days

• 60% of households have less than £5,000 in savings, and 16% having no savings at all

• 2 in 3 (67%) prefer to save for an unforeseen event rather than insure

How has your clients’ financial resilience changed?

With household costs increasing significantly by a record 54% in April 2022, and more businesses under pressure, this has raised concerns that many people across the country could be especially vulnerable to financial shocks should the worst happen.

Jeff Woods Head of Intermediary Development

The increased cost of living has made cutting back the new normal for many households, with 69% reducing essentials, and 81% cutting back on luxuries. Even households with no debt and a higher annual income of over £50k are being more cautious, with 61% cutting back on essentials.

The research found that workers aged 55-65 are overconfident in the time they can pay for essentials with no income. This is a concern as older households have less time to build their savings back up before retirement and typically find it harder to find new roles following redundancy.

More worrying still is the fact that nearly 2 million adults have no money left at the end of each month – a rise of 330,000 since 2020. For those who earn under £20,000 per year (5 million people in the UK), the average household has no financial safety net if they lost their income.

Protect your client’s financial security

Download our new report to uncover more insights into UK consumers and understand how this could impact your interactions with clients.

https://adviser.legalandgeneral.com/l/689583/2022-09-12/ x99b8

Tim Lewis Senior Proposition Innovation Manager

MEET THE CHILDREN’S CRITICAL ILLNESS INNOVATOR

Children’s critical illness (CI) has come a long way in recent years. It is something that Tim Lewis, Zurich’s senior proposition innovation manager, knows more than most.

He has been instrumental in driving real change in children’s CI cover (CIC) across the industry. In recognition of that, he was this summer named CIExpert’s Most Innovative Critical Illness Product Designer of the past decade.

How has children’s CIC changed in the past ten years?

It’s seen a lot of innovation. When it was first added to policies in the 1990s it provided the same cover that an adult had but with a lower payout amount. Around ten years ago, providers started to innovate around children’s critical illness cover. The cover now looks significantly different and there’s a lot more choice and flexibility. Providers started adding conditions that children specifically suffer from. The first one was hydrocephalus, which is a build-up of fluid on the brain shortly after birth.

Conditions like spina bifida, muscular dystrophy, cerebral palsy and Down’s syndrome are now commonly covered. Another development is around congenital conditions and coverage from birth or sometimes from 24 weeks of pregnancy. In the past, claims were only possible from a baby being 30 days old.

So, cover is more comprehensive. Has that bumped up premiums?

As it’s evolved and become more innovative and more specific and offered more coverage, the relative cost of that portion of coverage has increased in relation to the overall premium. If we go back ten or 15 years, the proportion would probably be 1-2% of the overall premium. Whereas now, with all the features I’ve described, it could be up to 10% of the overall cost for a policy with £100,000 of adult cover. As a result of that evolution, some providers – Zurich among them – now offer the choice to add it or not.

Children’s critical illness cover is irrelevant to a lot of people so why

should they pay for something they will never need? Whereby it is an optional extra, you only pay for the cover that is relevant to you.

What makes Zurich’s children’s cover stand out in the market?

You have choice and flexibility with our product. You can choose to have a standard policy or an enhanced policy. If you add children’s cover to a standard policy, and one of your children is diagnosed with any of the conditions covered by the policy, we pay up to £25,000 per claim per child.

Cancer is still one of the main causes of claims for children. Our standard children’s critical illness cover, like all products in the market, covers cancer. If you have an enhanced policy, you can opt for enhanced children’s cover.

Speaking about children’s CIC isn’t easy. How should advisers approach conversations with clients on the subject?

Historically, when customers didn’t have the choice to add children’s cover or not, advisers weren’t compelled to have a conversation about it. It’s not a nice thing to speak about: have you thought what you’d do if you child became ill?

The need for children’s critical illness is very different to need for adult critical illness. I need critical illness cover because if I get cancer or have a heart attack or a serious stroke, I want my mortgage to be paid off. If my child becomes seriously ill, I need time off my work to help make my child better. I would do anything to make my child better.

The evolution of children’s critical illness has focused on the need –how much we pay out and the conditions covered has been borne out of putting ourselves in the shoes of a parent of an ill child. We want to better meet our customers’ needs. Our ultimate objective is to continue to improve customer outcomes.

THE IMPORTANCE OF RETENTION STRATEGIES

Cost of living challenges are affecting us all both personally and professionally. We know advisers are worried about how to talk about protection with customers in this challenging market, as well as being concerned about how many policyholders may choose to cancel their cover. It should not be viewed as all doom and gloom though.

Consumers need advisers more than ever to support them through this economic downturn, helping them to make the right choices for themselves and their families. Protection insurance is a key part of this, providing a valuable financial safety net in case death or illness strike.

Given the current climate, it’s more important than ever for adviser firms to have a robust retention strategy. However, the insurer Guardian recently conducted an adviser survey and their findings showed that 47% of advisers do not have any retention strategy in place which is a worrying statistic. A further 23% said they had a retention strategy, but had not adapted it in response to the current economic situation. There are a number of aspects to consider when thinking about how to retain customers and we can support you with this.

Proactive communication with customers is really important at this time, reminding them about the cover they have in place and the value of those policies which could be through a variety of methods such as telephone reviews or emailed mailers. Protection provides a great opportunity to keep in touch with mortgage customers, especially those who opted for a five year fix; contacting them during this five year period helps you to secure their future mortgage custom as well as ensuring they have valuable protection cover in place.

The key thing is to maintain a strong relationship with customers. Some firms send out bespoke annual statements, others might send out more general quarterly newsletters. Promoting the range of added value services available with insurance policies such as 24/7 virtual GP access and counselling is also beneficial as this helps them to get tangible value from their cover; customers using these services and benefitting from them will reduce the risk of them cancelling.

Keeping in contact with policyholders will also encourage them to call their adviser if they are having any financial difficulties or have any questions about the continued suitability of cover, rather than simply cancel their direct debit. It's much easier to help a policyholder before they decide to cancel cover than once they've made that decision to do so.

The adviser can then talk through the different options which may be available as opposed to just cancelling cover. For example, taking advantage of the payment break options that insurers have, reducing the sum assured and for income protection plans, extending the deferment period could also be a consideration to help the policyholder save money. There are a number of ways of reducing the premium which is better than simply going without cover at all.

We contributed to two retention guides produced collaboratively by the Protection Distributors Group, the Income Protection Task Force and the Association of Mortgage Intermediaries, three industry

Thomson Head of Protection & GI Propositons

organisations of which Sesame Bankhall Group are members. The guide designed for advisers (and produced by advisers) provides a wealth of practical retention-focussed information, and there is a simpler consumer version (which can be shared with customers) that urges consumers to talk to their adviser or at least their insurer before cancelling to explore what options are available.

Whatever good advice can be given by advisers though, there will still be some customers that experience real difficulties, so we are also encouraging advisers to signpost these customers to organisations that can help, such as the charity ‘Turn2Us’. Turn2Us helps consumers identify if they could be entitled to state support as well as other helpful information about money matters. Their website, to find out more, is www.turn2us.org.uk

There's so much advisers can do to help clients be as financially resilient as possible, and in these challenging times, consumers need advisers more than ever. If you’d like help in developing a retention strategy for your business, please do speak to your Regional Key Account Manager.

Emma

Alun Beynon Protection Distribution, Scottish Widows Protect

CONSUMER DUTY: HOW PROTECTION CAN COVER YOUR BUSINESS AS WELL AS YOUR CLIENTS

Start planning now to make sure you’re ready for the new regulations

Brokers are well versed in adapting to new rules – it’s an ongoing part of your work. The Consumer Duty is the next big regulatory change and, while it shouldn’t unduly concern you, it does require some thought and preparation.

But don’t worry. It doesn’t need to be burdensome and it will ultimately benefit your clients and your business.

What is the Consumer Duty?

The Consumer Duty has been introduced to improve how firms serve consumers. It will set higher and clearer standards of consumer protection across financial services.

The three overarching rules are to:

• Act in good faith

• Avoid causing foreseeable harm

• Enable/support retail customers to pursue financial objectives

More specifically, advisers must consider the needs, characteristics and objectives of their customers – including those with characteristics of vulnerability – at every stage of the journey.

As well as acting to deliver good outcomes, you’ll need to understand and evidence whether those outcomes are being met. Consumer Duty is set to come into place from 31st July 2023 but there have been rumours of an extension to the timeline for advisers.

However, now is the time to consider how this legislation will impact the services and support that you offer your clients, along with how you can ensure (and document) better outcomes for them. One way could be by providing protection advice to mortgage clients or referring them to a trusted specialist.

The role of protection

The regulator isn’t prescriptive about how you meet its Consumer Duty rules, so it isn’t the case that protection advice must become part of every mortgage broker’s toolkit. However, it’s clearly one

way to ensure clients have good outcomes and make risk-based financial decisions.

A mortgage is the biggest debt they’re likely to take on, so protecting that debt is one way to avoid causing foreseeable harm. Talking to them about the likelihood of not being able to meet their mortgage repayments in the event of illness, job loss or an accident ensures they have a good understanding of potential risks.

Ongoing support

Regular protection reviews with your client are another way to meet the Consumer Duty rules. Our income, family circumstances and health change as we move through life, so it makes sense to regularly check if your client’s cover remains suitable. Regular reviews also mean you can remind them to make the most of any wider benefits included in their policies, from access to private GPs to mental health support. Importantly, you’re also able to assess your client’s vulnerability if you check in with them annually, for example. A client who wasn’t vulnerable when they took out their mortgage and protection could become so for a wide number of reasons, from health issues to bereavement.

Access to advice

The Consumer Duty doesn’t require mortgage brokers to give protection advice. Although bringing protection into your client conversation could demonstrate you’re working within the new rules. But you don’t have to go it alone. There are plenty of reasons why mortgage brokers may not want to make the leap into protection advice. It’s your business and your choice. If that’s the case, consider a referral arrangement. Not only are you able to raise protection with your clients, and document it, you can signpost them to a trusted specialist to help them with their protection needs.

A referral arrangement shows you’re acting in good faith to ensure good customer outcomes, avoiding foreseeable harm and helping your client make informed, risk-based, financial decisions. It will also boost your income without you having to become an expert in a new area. And, with Sesame, advisers have access to nine trusted protection partners.

It’s time to rethink protection. Not only can it help you fulfil your Consumer Duty obligations, it’s good for your business and even better for your clients.