Lifetime mortgages represent a significant opportunity for advisers. The demographics of an ageing population, decades of above average house price inflation and the decline in membership of final salary pension schemes all point to increased consumer demand.
Given this demand it is important that clients have access to high quality advice. Taking out equity release is one of the most important decisions clients can make at that stage in their life. The financial consequences can be significant and felt for the long-term.
Standards for lifetime mortgages are on the FCA’s watch list. Findings from their exploratory work in this area were ‘mixed’. Three significant areas of risk were found:
- Insufficient personalisation of advice - For example, not accounting for the different financial circumstances of customers. Clients in their 50s who are still working are likely to have different requirements to retired clients on a fixed income.
- Insufficient challenging of customer assumptions - Clients might initially be tempted by the release of a lump sum with no apparent immediate cost. However, there is a need to fully consider the merits of making monthly repayments.
- Lack of evidence to support the suitability of advice - Preferences need to be explored and understood. Suitability reports should not contain generic justifications or large amounts of standard text.
Lifetime mortgages will continue to be a priority area for FCA supervision in 2021.
What it means
We would encourage al firms active in the equity release market to review and validate their current advice process against FCA expectations. The following are just some examples of practical considerations that firms could consider adopting where appropriate.
- Fact finding - KYC does not have to be contained in one single document. Soft fact details can be provided in stand-alone supplementary file notes. The format is less important than ensuring detailed KYC covering a mix of hard and soft facts is recorded.
- Interest payments - Advice needs to demonstrate that making interest payments has been considered. Any justification needs to be robust and legitimate. Simply stating ‘I have not recommended making any interest payments because you did not want to do so’ would not be sufficient.
- Early repayment costs - Are there any reasonably foreseeable circumstances in which the client might incur these costs? If so, there should be a clear explanation why it is appropriate for the client to accept them.
- Debt consolidation - There should be a clear comparison of the different costs of retaining existing debts or consolidating into an equity release arrangement. This should not focus only on any immediate or short-term differential.
- Suitability reports - Less is more with reports. Reports that are too long do not add value from either a client or regulatory point of view.
- Demonstrating understanding - As well as providing suitable advice you want to ensure that your file demonstrates that the client has understood the transaction. This can be a challenge – each client will have their own levels of knowledge and experience. One option is to consider using a ‘Client Understanding Questionnaire’. This could be used to help to show how the client has been made aware of the features, costs and risks of the transaction.
The above is not a definitive list of all areas that should be considered. There may be other ways for each firm to achieve good outcomes in a way that is right for them and their clients. Tenet can help firms to understand where how their advice standards align to FCA expectations. We can undertake sample file reviews or a full audit of equity release advice standards and report on strengths and weaknesses.
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