The recent move by the Financial Conduct Authority to relax the rules surrounding lifetime lending have been very much welcomed by the industry. The lifetime mortgages sector had previously been a restricted market with a slowdown in innovative products coming through, a lack of entrants, and a shortage of advisers.
The latest move by the FCA is in response to market confirmation that it has, up until now, restricted development and take-up in the sector. As a result, the FCA’s willingness to relax its rules has been seen by many as positive news for the industry, since lenders, advisers and consumers could all potentially benefit from the introduction of new products that cater for consumers' growing needs.
The arrival of MMR regulations in 2014 introduced affordability assessments, which require lenders to carry out affordability checks whenever interest payments are anticipated. With traditional interest roll-up plans, the interest owed gets added to the value of the loan and is only repayable when the property is sold.
Before the introduction of MMR, affordability assessment was not something that applied to interest served on lifetime mortgages.Many working within the industry said its introduction did not make sense given that this type of product allows them to choose how long to continue making interest payments with no danger of having their property repossessed if they can no longer afford them – they simply convert their plan at that stage to a standard roll-up.
However, following an announcement earlier this year that it would grant lenders a waiver to this requirement, the FCA has now confirmed it is planning to scrap the requirement to carry out an affordability assessment altogether, where interest payments are anticipated or required. This would only be available to firms where the specific lifetime mortgage allows the consumer to exercise, at any time, an option to convert the product to interest roll-up.
The affordability conundrum has been restricting entrants to this market because lifetime mortgage lenders typically only offer interest roll-up loans, and the cost of putting systems in place to check affordability has not been particularly alluring for new lenders. This has also had a knock-on effect on product innovation and has slowed the number of products coming to market.
By altering the rules on lifetime lending, the FCA has opened the door for lenders to be more innovative without compromising standards. There is now a golden opportunity for key stakeholders, including the Equity Release Council (ERC), FCA and the Council of Mortgage Lenders (CML), to galvanise behind a concerted effort to move the lifetime market on and rapidly grow it, improving customer outcomes and offering more retirement lending options.
The FCA is also proposing to make changes to its rules on how firms should calculate the length of the term in the key facts illustration (KFI) documents provided when an equity release product is chosen or recommended. These changes include how repayment information will be presented in the KFI where payments are expected at the point the product is sold, but may be rolled up in the future.
The proposed changes to KFI projections would help facilitate a more personalised picture, offering tailored illustrations that reflect individual customers' circumstances by estimating the product using a different – and more appropriate – measure to the standard mortality tables.
Many feel the FCA consultation has presented the industry with an opportunity to stimulate innovation and choice, which will in turn benefit end consumers. The FCA has taken the first steps, but it remains to be seen whether more firms will enter the market.
Lifetime lending is set to break the £2bn barrier by the end of the year and by 2020 is expected to hit £5bn. More entrants will no doubt support this growth, but that is only one piece of the puzzle. In order for the market to grow, we not only need to address supply and demand, but also make advice more accessible.
This is a market still dominated by a small number of specialist firms. The top six in the UK, with about 350-400 individual advisers between them, produce the bulk of equity release sales. If more advisers were to enter this space, more borrowers would be able to learn about the pros and cons of lifetime mortgages and decide whether they could be suitable for their particular circumstances.
Even if an adviser does not hold the necessary equity release qualification, they could still discuss the idea of a lifetime mortgage and refer the customer to a specialist advisory firm if necessary.
It would be good to see the ERC, FCA and CML, together with lenders, specialist advisers and other stakeholders, unite under a common banner to encourage greater product innovation and ensure advice remains at the heart of this sector. This is no longer a niche market; it has matured into a specialist financial planning area and the industry needs advisers, trade bodies and councils to come together to ensure lifetime lending is fully integrated into broader retirement planning strategies.
Many feel the FCA consultation paper could play a key role in encouraging more lenders and funders to enter the market, which would help to increase competition and widen the choice available to consumers. This new wave of market entrants, coupled with more advisers coming into the sector, could contribute to a tripling of the market size.
Stuart Wilson is channel marketing director at more 2 life
Key points
The FCA has confirmed it is planning to scrap the requirement to carry out an affordability assessment altogether, where interest payments are anticipated or required, on lifetime mortgages.
The affordability conundrum has been restricting entrants into this market.
This is a market still dominated by a small number of specialist firms.
