The Financial Conduct Authority has made lifetime mortgages exempt from the Mortgage Credit Directive, introducing two statuses in the process, rather than the one definition, following industry concerns.
The regulator had previously proposed one new definition of a lifetime mortgage to reflect the European Union rules, but in its consultation paper found that this would exclude products requiring capital repayments during the term.
Andrea Rozario, chief corporate officer at Bower Retirement Services, previously warned that changes to the definition of a lifetime mortgage would have far-reaching implications for new product development and could erode safeguards around equity release mortgages.
The mortgage credit directive paper, published last week, agreed that a single definition could potentially harm consumers, as individuals would be unlikely to receive the standard of advice expected for equity release.
The FCA instead introduced two statuses, one covered by the MCD with capital repayments and the other one exempt and without them.
Those covered by the MCD must now be offered alongside a European standardised information sheet, while the exempt lifetime mortgage will require a key facts illustration and enhanced advice needing an additional qualification.
“This is not a particular issue at the moment because lifetime mortgages requiring repayment of capital are not a feature of the current lifetime mortgage market, but such products might be developed in the future,” the paper read.
Providers will be required to comply with the new rules from 21 March 2016.
Ms Rozario told FTAdviser that whilst there is the risk of confusion with two statuses of lifetime mortgage, she was pleased to see the FCA responding to industry concerns over the potential loss of safeguards around future products that may have fallen outside the definition of a lifetime mortgage.
“The continued requirement for qualified advice and the regulatory framework of equity release will continue to ensure customers are protected which is in the best interests of all concerned.
“As innovation develops and new products come to market we need to ensure the whole industry is aware of the requirements for both the MCD lifetime mortgage and a standard lifetime mortgage.”
The finalised rules warned that this change in approach to the lifetime mortgage definition will mean new costs to firms in the short term as it was not aware of any products currently available which would qualify as an MCD lifetime mortgage.
“Any firms providing these products in future will incur some general set up costs from having to develop appropriate systems to comply with the MCD, including the ESIS and development of the additional disclosure will form part of this,” stated the FCA.
“However, through the continued disclosure of the specific risks of lifetime mortgages, there are likely to be benefits for consumers because of the ability to take informed actions (relative to a position where such disclosure was not required).”
The paper added that there was potential for new equity release product variants to be developed, in addition to the recent launch of some ‘hybrid’ lifetime mortgages that facilitate the payment of interest during the mortgage term.
“To foster innovation that serves consumer interest we are interested in talking to firms developing new lifetime mortgage products so we can consider how we may need to adapt our regulatory approach, whether through future rule changes, or through individual waivers or modifications,” it added.
peter.walker@ft.com
