Q. As the Financial Conduct Authority concludes its review into equity release advice, what have we learned?
A. Demand for later life lending has grown in recent years and equity release is proving increasingly popular.
However, equity release can lead to harm when customers do not fully understand the transaction or seek to exit the contract early.
As a result, the FCA is showing increased interest in this market and has published key findings from a review of a sample of files from companies selling and advising on lifetime mortgages.
The FCA findings were mixed. There were some examples of lifetime mortgages working well and other cases where it was not clear the advice was in the client’s best interests.
The FCA picked up on three areas of concern that represent the foundations of suitable advice, not just in the lifetime mortgage space, but across all sectors of the market.
The reasons why a customer might enter into a lifetime mortgage can be varied.
However, there is concern that some advisers continue to adopt a form-filling approach to the know-your-client process, and therefore do not always properly understand their customer’s circumstances and requirements.
The FCA highlighted several poor practices:
• Not accounting for a client’s different personal financial circumstances.
• Over-reliance on the key facts illustration to evidence costs and implications of taking a lifetime mortgage.
• Not exploring the impact of debt consolidation.
• Restructuring legal ownership of properties to meet eligibility requirements.
On the face of it, a lifetime mortgage may appear to be a very attractive solution, given the ability to release a cash sum with no monthly payments.
However, the FCA reminded advisers not to be ‘order takers’ and emphasised the importance of challenging the preferences of customers to assess whether the product is right for them given their needs and circumstances.
With lifetime mortgages, costs can often be hidden, and it is important to discuss and challenge a client’s views on how and when they pay charges and the impact of consolidating and paying debt over a longer period of time.
The FCA was also concerned about the use of standard generic paragraphs to discount alternatives to equity release.
Instead, the FCA is encouraging companies to ‘ensure the customer’s voice can be heard on the file’, by keeping a record of customers’ own language, using soft facts to add context, and recording reasons behind customer preferences.
The regulator emphasises the importance of good written records where customer interactions are not recorded.
The FCA found suitability letters with significant volumes of standard text and running to more than 20 pages, which meant important messages may have been missed.
When drafting suitability letters, companies should be aware of the ‘fair, clear and not misleading’ requirements.
The FCA intends to undertake more work to review the suitability of advice in the lifetime mortgage market.