The key premise in a lifetime mortgage is that the lender has no contractual right to demand fullrepayment of the loan until the borrowers die or vacate the property. All standard mortgages have a fixed term.
The MCD exemption refers to the lender not seeking repayment of the credit until the occurrence of one or more specified life events unless the customer breaches his contractual obligations (which can include any obligation to pay interest during the term). The existing Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) definition specifically envisages situations where “interest payments may become due” and “interest payments and partial repayment of the capital may become due”. The contract remains a lifetime mortgage provided that “no full repayment of the capital is due or capable of becoming due whilst the customer continues to occupy the mortgaged land as his main residence.”
If the MCD definition is adopted, any current or future product development that includes any form of mandatory partial capital repayment in its profile will cease to be regarded as a regulated lifetime mortgage and will come within the scope of the general MCOB rules. (We have inferred from the definition that products offering the customer an option to repay capital with no obligation to do so will continue to be classed as lifetime mortgages as the provider is not “seeking” that repayment. We would appreciate confirmation on this point).
We are concerned that substantial and unintended consequences will arise from this definition. The products referred to in the FCA consultation document as “hybrid” products are not very well defined – the FCA has indicated that products which allow for repayment of capital will be considered “hybrid” products. However, no full definition of hybrid products is included with the FCA consultation document, leaving room for considerable uncertainty. It is not clear why the FCA’s definition does not include “partial repayments of capital” – which are catered for in the existing MCOB rules, as quoted above. The FCA needs to set out much more clearly what a “hybrid” product is, what standards will apply to such products, and how these standards will relate to the standards covering equity release.
Based on our current understanding of what would constitute a hybrid product, it would be relatively simple for a provider to “game” the lifetime mortgage rules –i.e. by requiring the repayment of a token amount of capital, such as £1 of capital a year – so that it is no longer considered a lifetime mortgage product, and thus removing the product from the scope of the additional protections which the UK regulator considered appropriate for this type of product when it introduced its mortgage rules in 2004. We strongly believe that this would lead to a negative outcome for both consumers and the industry.
The FCA currently regulates lifetime mortgages. The Equity Release Council has also put specific additional standards in place to protect consumers and to safeguard the reputation of the industry. The Council’s standards, agreed by all members, include that equity release products’ providers must take reasonable steps to ensure that:
- there has been full discussion as to the implications of the plans for the customer and their family and that the customer was made fully aware of such implications;
- the customer has been advised of the risks, features and benefits of the relevant product;
- the customer has considered all alternative courses of action; and
- the customer’s physical and mental health has been considered in relation to the suitability of the plan.
In addition to this:
- the Council’s members include providers which specialise in equity release products – both lifetime mortgages and home reversion plans (which are also defined specifically).
- its rules focus strongly on product design, and differ in this respect from the later MCOB rules, which have a stronger emphasis on conduct of business.
- The Council recognises the importance of product innovation in order to meet the growing and varied needs of an ageing population. It has recently amended its rules to enable members to offer products which do not completely meet the strict criteria of its own prescribed Product Standards (albeit they are still fundamentally recognised from a regulatory perspective as a LTM), provided certain additional safeguards are met and customers are made fully aware of the differences.
- The FCA may have regard to the type of product variation when it considers “hybrids” (without specifically defining them).
Equity release products sold by members of the Council also have a no negative equity guarantee, meaning that if there is any shortfall between the amount raised from the sale of the property and the amount still owed, the provider will not be able to seek repayment of that shortfall. The Council has put these standards in place to protect and safeguard consumers, who may be at a difficult time in their life when looking to take out an equity release policy and who are not used to dealing with such substantial sums of money. The safeguards also ensure that customers benefit from the skills, training and diligence of the professionals involved.
If so-called “hybrid” products are not included within the definition of a lifetime mortgage, then they will not be subject to the same regulatory regime as lifetime mortgages, and it will become much more difficult to ensure that such safeguards apply. The definition of a lifetime mortgage must either prevent the potential blurring of products that fall between different regulatory regimes but have the same apparent characteristics from a customer point of view; or the FCA must have a process in place to prevent products from being deliberately structured to contravene the spirit of the regulations.
In addition, consumers will be more likely to be advised by advisers who do not have the same knowledge of the equity release market, and who will not be required to hold equity-release-specific professional qualifications. The advice received before taking out a lifetime mortgage is required to focus on evaluating other options to raise capital, and the impact on the prospective borrower’s existing financial position. Advice in relation to standard mortgages focuses less on the need for the product, but more on the shape of the product to meet the borrowers need. It is also true that historically, there was little cross-over in terms of target market between the two segments.
This blurring of products lines creates a clear risk that consumers may be wrongly advised and sold products which cause them financial harm, and that they will not benefit from measures such as the Council’s standards and the no negative equity guarantee.
Additionally, the greater propensity for older people to carry mortgage debt into retirement means that taking out a lifetime mortgage is no longer about raising capital for some people, but merely refinancing existing borrowing. For borrowers in this segment, it is vital that they receive ‘whole of market’ advice which the existing segmented approach cannot deliver.
Along with a high probability of consumers’ being exposed to unnecessary risks, this poses a pragmatic reputational risk to the equity release industry; one which will be beyond the control of the Council to manage. The safeguards guaranteed by the Council have been built up over many years to address concerns about equity release, and have been vital in safeguarding both consumers and the responsible operators which make up the vast majority of the industry.
There could be a situation where two products with the same aim – a lifetime mortgage and a similar product which allows repayment of capital – could be put into two different categories, potentially due to the minor differences they bear, i.e. a requirement to pay £1 of capital a year. This could lead to some customers enjoying considerably higher safeguards than others, despite there being very little difference in products.
This could also lead to a major shrinking of the lifetime mortgage industry, as providers move towards products which are excluded from the lifetime mortgage definition, and thus have more flexibility and less regulation (and cost). Furthermore, it could also reduce incentives for financial advisers to gain the qualifications needed to provide advice on equity release – currently only a small number of advisers hold these qualifications.
We strongly believe that the Government and the FCA should take steps to address these potential unintended consequences through clarifying the definition of a lifetime mortgage and a hybrid product, and ensuring that sufficient regulatory standards apply to all products of this type.
If the FCA is adamant that “hybrid” products should be considered separately to lifetime mortgages, then there is a need to consider what additional safeguards should be put in place to protect consumers and the industry. As part of this, there is a need to reflect whether it should be possible for financial advisers to get a broader qualification which covers a range of issues relating to “later life”. Otherwise, given the lack of qualified advisers holding specific equity release qualifications at present, there is the possibility for consumers to be pushed down a specific path without having the opportunity to consider all their options.
Summary of potential risks resulting from the new definition of a lifetime mortgage
- There will be a reduction in consumer choice. Customers seeking the option of making partial capital repayments will have to choose between a standard mortgage and an interest roll-up lifetime mortgage.
- The capital repayment route under a standard mortgage may not be available to many older consumers, as many conventional lenders are not prepared to lend to customers who are approaching or who have reached retirement age and stricter affordability criteria may be prohibitive. The funding models for equity release specialist providers and mainstream mortgage providers (typically, banks and building societies) are very different and it is possible that a number of equity release specialists would be forced to exit the market if their products were restricted to a narrower range of interest payment/roll-up only products.
- There is the potential for mis-selling arising from unqualified advice: the existing MCOB rules require those advising on the sale of regulated lifetime mortgage contracts to have a prescribed professional qualification. If such requirements do not apply to products which are not considered lifetime mortgages – while having many of the features of lifetime mortgages – consumers risk being advised by individuals who do not have (or need to have) sufficient expertise or experience in selling lifetime mortgages.
- It will also become harder to find advisers with the relevant qualifications to provide advice on equity release. Overall, this will mean that fewer consumers are able to get clear information on the risks of lending into retirement.
- The lifetime mortgage Key Facts Illustration (KFI) was specifically designed to reflect the different features of a lifetime mortgage, and sections 6 & 7 include information on the benefits and risks associated with the product being considered by the customer. If the MCD definition is adopted, a number of products which have hitherto been treated as lifetime mortgages will be treated as “standard” mortgages and be subject to the provisions of the “standard” KFI – which was not designed to accommodate their specific features.
- Some customers may be misled into believing that the fact that the KFI they receive is less detailed than a KFI designed specifically for lifetime mortgages means the product they are considering is less complex and therefore less risky. They may also find it very difficult to compare and contrast different products if some are treated as regulated lifetime mortgages and others are treated as standard mortgage products.This issue will be further exacerbated by the forthcoming implementation of the EISIS via the MCD to replace the UK defined KFI for the standard mortgage arena.
- There is also the potential for the removal of the risk warning from financial promotions: The existing warning, which refers to the specific nature of lifetime mortgages, has been in place since 2004 and it is not clear why adoption of the MCD necessitates removal of what the Council regards as a simple but effective warning to customers. The Council is very concerned that the proposed new MCOB 3 no longer includes any prescribed risk warnings but rather replaces them with a general requirement to make clear to customers that credit is secured against the property.
Conclusion
As we have outlined above, the implementation of the Mortgage Credit Directive has the potential to significantly impact the equity release industry. In general, it seems that the consequences for consumers of the potential exclusion of many products from the definition of a lifetime mortgages have not been fully considered. They will not benefit from measures such as the no negative equity guarantee and the right to stay in their property until they die or move into long-term care.
If products fall outside the future definition of “regulated lifetime mortgage” without a clear definition of what a “hybrid” product is, then they will simply be covered by “mainstream” mortgage regulation, and it is likely that the lenders providing these products will not be members of the Council; therefore there will be reduced consumer protection available from the Equity Release Council. The Council’s standards will apply to a smaller and smaller number of products. There will be a major reputational risk for the industry, which it will not have any control over – as products which are very similar to equity release avoid the regulation and safeguards afforded to equity release products.
While the Equity Release Council has discussed this issue with the FCA, HM Treasury’s consultation document and impact assessment suggest that the Treasury needs to consider the potential consequences of these changes in greater detail. Further work is needed by government to make sure that the implementation avoids unintended consequences for both consumers and industry.
We would make the following recommendations to address the concerns outlined in this response:
- The FCA should provide clarity on what they perceive to be their definition of a recognised ‘hybrid’ product, to allow the Council to review and consider its own set of enhanced standards that could underpin and safeguard the evolution of the marketplace as it does now.
- The FCA should reconsider the decision to specifically separate the partial interest and capital payment profile features from the definition of LTM.
- The FCA should consider extending/enhancing the qualification requirements on ALL mortgage advisers to reflect the ever increasing need for the industry to have a number of differing complimentary features in their products and a recognition of the need to consider the holistic elements for an ageing population.
- The FCA should introduce a revised financial register structure that extends across all levels of adviser to have a classified entry ensuring that the consumer has the access and the means to validate the qualified and permission status of whomever they may be receiving that advice from.
- In any event, the FCA should invite the Consumer Panel to consider the potential consumer detriments set out in this document.