Three suitability concerns in equity release advice

The regulator said findings from its exploratory work on later life lending were mixed, with cases where lifetime mortgages were working well and many others where it was “not clear that the advice was in the best interests of the consumer”.

In particular the financial watchdog highlighted three significant areas of concern about the suitability of advice given, which it said had increased the risk of harm to consumers.

1. Insufficient personalisation of advice

The FCA said it was “disappointed” to find evidence on file that indicated advisers had mostly used a “form-filling approach” to fact-finding.

It cited examples of advisers who had not sufficiently considered the different financial circumstances of customers, such as those in their 50s who were still working, and those who were retired and on a fixed income, and how this affected the options available to them.

It pointed to problems with determining the impact of debt consolidation, saying all too often the default assumption was that equity release would be suitable with alternative solutions discounted with little consideration. 

Some advisers had also not properly considered a customer’s financial circumstances so a customer's significant surplus income had little or no bearing on the final recommendation, the regulator said.

The regulator also found instances where advisers had relied “wholly or substantially” on the Key Facts Illustration document to show customers the long-term costs and implications of taking a lifetime mortgage.

Additionally, the FCA found examples of advisers recommending changes to property ownership so that equity could be released, such as removing from the title deeds a joint owner who did not meet lenders’ age requirements.

The watchdog said this was done “without evidence of sufficient discussion” of the consequences of changing ownership on customers.

The regulator said: "The reasons why customers consider taking equity release are diverse and reflect different personal circumstances.

"While different customers may end up with the same product, advisers must focus on the needs and circumstances of the individual in coming to a view that a particular lifetime mortgage is suitable.

"To give high quality, suitable advice, advisers need to know their customers well, and understand their circumstances, requirements and motivations."

2. Insufficient challenging of customer assumptions

According to the FCA, advisers may be contacted by customers with the assumption that a lifetime mortgage is the right solution for them.

It said that advisers should consider alternatives to a lifetime mortgage and “be prepared” to challenge customers’ initial requests where appropriate, “rather than simply take customers’ orders or preferences without question”.

The watchdog said failing to do so amounted to ‘taking orders’ from customers without taking sufficient steps to assess whether a lifetime mortgage was suitable with regard to each customer’s specific needs or circumstances.

The FCA said: "In the absence of robust advice, it could be easy to sell a product that, on the face of it, has no immediate cost (ie monthly payment) and releases a cash lump-sum to the customer.

"This makes the role of the adviser, to ensure the long-term implications are considered, particularly important."

The FCA said it had uncovered instances where there was “little evidence” that customers, with a substantial monthly surplus income, had understood the impact of their decision not to make monthly payments.

The regulator also found that some advisers had accepted that customers did not want to pay upfront fees “without question”.

It gave one example where over the expected course of the loan, this decision would cost the customer 25 times the fee in extra interest. However, the case file “contained no evidence as to why the fee was not paid upfront”.

3. Lack of evidence to support the suitability of advice

While reviewing case files the FCA said it had found cases where there was “inadequate evidence” to show that the advice was suitable.

The regulator found a number of files that contained standard generic text to justify why customers did not want to consider alternatives to equity release.

The FCA said: "We encourage firms to ensure that the customer’s voice can clearly be ‘heard’ in the file. By this, we mean the customer’s own words, phrases and explanations are noted, and not just responses recorded in the form of tick boxes or selected from a list of options.

"Having a record that uses the customer’s own language and phraseology, and contains soft facts that add context, helps show how the advice relates to their individual circumstances.

"Similarly, exploring and recording the reasons behind a customer’s preferences can help to show how these preferences were factored into the advice."

The FCA found that most customer interactions were not recorded either on tape or digitally by firms and advised that in the absence of audio recordings, "good written records of discussions" were important not only to evidence the suitability of advice but also to assure a firm on the advice given by its advisers.

All of the firms looked at by the FCA had provided suitability letters to their customers, despite not being mandatory.

The FCA said if used appropriately these could be helpful to explain the advice.

However, it said it had seen examples of suitability letters that ran to 20 pages or more, containing "significant volumes of standard text".

It warned: "This runs the risk that important advice will not be picked up by customers."

It added: "If warnings or implications are clearly explained and the case file records the customer’s response in their own words, this can provide good evidence that the customer has been made aware, understood the potential impact on their personal situation, and also that the product recommended/advice given is suitable."

chloe.cheung@ft.com