What the consumer duty means for equity release

The aim of the duty, which comes into force July 31, is intended to set higher and clearer standards of consumer protection across financial services and requires firms to act to deliver good outcomes for customers.

The duty is about a shift to good consumer outcomes at all stages of the journey and for the lifecycle of the product.

Firms must be able to define, monitor, evidence and stand behind the outcomes their customers are experiencing.

Paul Neal, mortgage and equity release adviser at Missing Element Mortgage Services, says his company is well prepared for consumer duty, however he believes that many firms are not.

It’s fair to say that some firms are still working through the detail required for the July implementation date.Kelly Melville-Kelly, Equity Release Council

Neal says: “The FCA is putting increased focus on how we look after some of the most vulnerable clients in the market, no doubt increasing the workload and the need for care when dealing with these clients. 

“Many companies will be very much under the spotlight if they do not get this right and are unprepared for when this is implemented later this year.”

Samantha Bickford, mortgage and equity release specialist at Clarity Wealth Management, agrees.

The key thing she is taking from the consumer duty is, from now on, the question ‘are we doing the right thing?’ will need to be asked from the first contact with a financial services product, all the way through to a sale if one is made.

Bickford adds: “This is vital protection for our vulnerable customers but one that any good reputable and ethical adviser would have already been considering from the first point of contact with the client. 

Ensuring the clients’ best interests and ‘doing the right thing’ should be instilled in the adviser anyway not just because of impending consumer duty. 

“Those who are not making the right choices for the client now have the consumer duty regulations to answer to and I would hope the new regulations will highlight the advisers who are not acting in the client's best interests.”

The Equity Release Council recently hosted a member webinar with the FCA, which it says was the best attended of its webinars. The council is also providing support for members, which include guidance on fair value assessments.

Kelly Melville-Kelly, head of risk, policy and compliance at the ERC, says: “It’s fair to say that some firms are still working through the detail and the necessary processes required for the July implementation date. 

"We know firms are performing gap analysis and where they fall short against the higher standards set by the duty, they are putting plans in place to address those gaps.”

If a product feature changes and reduces the benefits available, the firm will need to review and update its fair value assessments.Kelly Melville-Kelly, Equity Release Council

For equity release advisers, how they monitor the total satisfaction or value that clients get from using a particular product will be vital.

For example, if a customer takes out a drawdown product but never uses the drawdown feature, it will be important to find out why and if the customer’s circumstances have changed. This might require more regular reviews with the customer, Melville-Kelly explains.

“Thinking more about product manufacture, if a product feature changes and reduces the benefits available to a particular consumer group, the firm will need to review and update its fair value assessments to account for the impact this will have,” she adds.

“For example, if a provider wanted to remove downsizing protection, which allows consumers to downsize penalty-free after certain life events such as the death of a partner, it must recognise this will limit the product’s usefulness for anyone wishing to move into alternative accommodation outside of the product criteria.”

According to Bickford, one of the main issues for advisers will be how the consumer duty regime impacts marketing for lead generation and the additional checks that would need to take place to ensure the client has not been targeted unfairly, felt pressured, or received unjustified cold sales calls.

“For advisers who rely on buying leads from lead generators, the process will need reviewing ahead of the consumer duty regulations to ensure this is safe, compliant and treating the consumer fairly.”

Marketing to clients via enticing them with a sales ad or an online quote which then captures their details, is not best practice, especially for our vulnerable customers.Samantha Bickford, Clarity Wealth Management

Therefore, advisers obtaining leads from third-party lead generation sources need to be extremely careful in ensuring there is an evidenced footprint ensuring the client has willingly requested contact. 

She adds: “Marketing to clients via enticing them with a sales ad or an online quote which then captures their details, potentially without their full authority for contact, is not best practice, especially for our vulnerable customers. 

“They may be feeling more desperate with the cost of living crisis and researching their options online; to then be targeted with direct ads and contact leading them down a path they may not have been ready for or willing to consider.

“This may make marketing more difficult for lots of advisers who use this source to generate leads.” 

Another issue could be how well the clients understand the roll-up interest feature within equity release and throughout the lifecycle of the policy.

Bickford says it is vital that this is reviewed not only at the time of the recommendation, but also regularly throughout the client’s lifetime mortgage.

If the client intends to make the monthly interest payments to prevent or slow the roll-up of the interest, this needs to be affordability assessed to ensure that this is viable now and throughout the term of the lifetime mortgage.

Equity release should be very much part of an IFA arsenal.Paul Neal, Missing Element Mortgage Services

She adds: “Regular contact should be kept to ensure that making the payments is still affordable for the client so they are fully aware at all times the effect this is having on their lifetime mortgage. 

“For example, a client [who was making] full interest payments, five years later decides to stop as it is no longer affordable. If no regular adviser contact is made, the client may not be fully aware of the implications of the interest starting to compound for the remaining term and the effect this will have on the equity remaining in their home, as it would have been five years since this was last discussed."

Before consumer duty, Bickford says some advisers may have discussed the option for the client to make the interest payments, and subject to a review of their ability to afford this now, recommending this is affordable for them to do so now and the lifetime mortgage set up on this basis. 

In line with taking "all reasonable steps to avoid causing foreseeable harm to customers", Bickford stresses that it is vital that the affordability for this is assessed now as well as for the lifetime of this mortgage. 

Bickford adds: “Clear conversations surrounding at what point in the future the client may feel it is no longer affordable and may stop making the payments, and then what the impact would then be if the interest is then rolled up, is vital so the client clearly understands their product and how this looks now, in the future, and at the outcome at the end of the lifetime mortgage.”

In May 2022 a report by the Financial Services Consumer Panel found that many policyholders had bought equity release products they did not understand.

More can be done for IFAs to pair with equity release specialists to offer a more holistic advice approach.Samantha Bickford, Clarity Wealth Management

At the time Rob Sinclair, chief executive of the Association of Mortgage Intermediaries, said the report was "heavily skewed towards looking at the vulnerable", but he acknowledged that it gave brokers something to think about.

With demand set to grow for equity release offerings, specialists in this sector say that IFAs who do not advise on equity release need to consider this as part of the proposition they offer – in-house or in partnership with a specialist.

Increasingly, homeowners are releasing equity from their home to support their rising cost of living rather than to pay for luxury or leisurely activities.

According to Neal and Bickford, IFAs who do not advise on equity release need to consider it as part of their advice process, as it can help with tax planning.

Bickford says: “Clients may come to them to withdraw funds from their pension, however reviewing the tax implications of this versus turning their bricks and mortar into tax-free cash is also an option that should be considered.

“More can be done for IFAs to pair with equity release specialists to offer a more holistic advice approach ensuring all options have been considered for the client.”

Neal adds that although equity release should be taken with qualified advice and as a last resort, when used properly it can be a fantastic product.

Equity is very quickly being eroded as is many people’s inheritance.Paul Neal, Missing Element Mortgage Services

He adds: "It should be very much part of an IFA arsenal, especially when it comes to reducing a person’s estate for tax planning or even releasing equity for investment purposes.

"With the best market rates still being 6 per cent plus, equity is very quickly being eroded as is many people’s inheritance. The vast majority of complaints with equity release come from those left behind who were not informed that their family’s estate could be worth considerably less than they hoped."

Last year the equity release market saw record activity with 93,421 new and returning customers choosing to access their property wealth via equity release products, up 23 per cent year-on-year – the highest rate of growth since 2018, according to ERC figures.

By the fourth quarter, activity dipped as market disruption following September’s "mini"-Budget prompted rate rises, reduced product availability and shook consumer confidence.

Despite December being the quietest month since before the Covid-19 pandemic as customers took stock at the end of the year – with loan sizes reduced in Q4 – since the beginning of the year enquiries have started ticking up again.

Ima Jackson-Obot is deputy features editor at FTAdviser