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In September the FCA published high level findings of their latest review of lifetime mortgages, the UK’s most popular type of equity release product.
It’s fair to say that equity release has had a bumpy regulatory ride over the past decade. However, with property often constituting the lion’s share of people’s wealth in later life, and at a time where employer preference for Defined Contribution pensions mean people must save for their own retirements, these products look set to have an increasingly important role to play. It’s therefore crucial that regulation provides the proper safeguards that give people assurance and comfort. Sound and balanced advice is vital.
The FCA’s 2022/23 business plan set out work to be undertaken to ensure the equity release market is working well. This included following up on their findings from 2020 which summarised quality advice was poor. A further review was planned to check that standards among intermediaries have improved, as equity release products can be complex and are often recommended to customers with a higher risk of being vulnerable.
The verdict from the regulator in their latest review reveals a number of flaws in advice processes. The FCA stated that it was “disappointed” at what was found, and concluded that firms have not acted on their previous findings. Specifically, the regulator found that: borrowers income and expenditure was poorly considered; discussions around alternative ways to raise capital or generate income were limited, sales were being incentivised at the expense of quality advice and customer outcomes and clients were being steered towards lifetime mortgage products. In a recent article, we set out three broad areas that firms might develop in order to address these issues. Firstly, challenge the assumptions that customers might have formed, secondly deliver advice that is personalised to an individual’s specific circumstances and needs, and lastly, clearly demonstrate and evidence the suitability of the advice given on lifetime mortgages.
The regulator’s assessment of financial promotions for lifetime mortgages was equally bleak, citing: inaccurate and misleading promotions, poor descriptions of benefits balanced against risks and firms’ use of FCA regulated status in a promotional manner.
With Consumer Duty now in force, all firms should focus on putting consumers at the heart of their business and delivering good outcomes. Firms should assure themselves that they are complying with the rules and observing the Consumer Principle, which requires them to act to deliver good outcomes for retail customers.
In light of the new regulatory approach, the combination of the Consumer Duty and the FCA’s handbook rules mean that lifetime mortgage advisers must now address the following:
- Consider the information needs of consumers and communicate in a way which is clear, fair and not misleading, so that consumers are likely to understand communications.
- Assure themselves that consumers get appropriate information about the overall proposition, in a timely and understandable format, to enable them to make effective decisions.
- Gather all relevant information to tailor advice to the consumer’s needs and circumstances ensuring recommendations are suitable.
- Ensure balanced conversations and disclosures of the availability of alternative options.
- Ensure that commission received from providers is not prioritised over customers receiving good value. Any advice or arrangement fees should provide fair value to consumers and not cause the overall transaction to be poor value.
- Have appropriate processes to manage potential conflicts of interest and the risk of bias.
- Monitor and regularly review the outcomes their consumers are experiencing in practice and take action to address any risks to good customer outcomes.
- Scrutiny on advice and promotion of lifetime mortgages is rightly high. As such, all firms should regularly review their processes, ideally undertaking an independent assessment against regulatory expectations to ensure that an objective, external view and challenge is applied.
Lifetime mortgages offer older people the potential to tap into the accrued wealth within their property. For many it can provide a vital source of income and regulation that helps improve access for these individuals and their families should be embraced. The advice profession has a leading role to play and through application of Consumer Duty can further build credibility and confidence in the market.
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