Nick Ralph (left), principal associate, banking and regulatory and Tom Black, principal associate, litigation and disputes management examine the issues raised in the recent FCA report on the equity release sales and advice process.
A recent FCA review of the equity release sector has highlighted some areas of concern that the FCA says increases the risk of harm to consumers. FCA regulated businesses operating in the equity release sector – including both advisers and lenders – should be aware of the FCA’s findings and think about whether their business practices could fall foul of the issues raised by the FCA.
What were the main areas of concern? The FCA review found that:
- advice to consumers didn’t always take sufficient account of their personal circumstances;
- consumers’ reasons for considering equity release were not always challenged by firms, particularly where there might be cheaper or less onerous finance options available to them;
- not all firms could provide evidence that the advice they gave was suitable for their customers, or in their best interests given their personal circumstances.
The review was undertaken by the FCA as part of exploratory work on later life lending, where it considered the borrowing opportunities available to consumers aged 55 and over, some of whom may be more vulnerable, and particularly in the current climate with job losses and strained personal finances for many as a result of the pandemic.
The consequences of a decision to take an equity release product are likely to have a significant impact on consumers’ financial wellbeing for the rest of their lives and some of the costs can be less obvious but significant. It can also affect the level of inheritance a consumer can leave for their family. In particular, the FCA highlighted the costs of compounding interest over a long period of time, which can make equity release an expensive way to meet a short term borrowing need, while the costs of ending these contracts or repaying early if personal circumstances change can also be significant.
Examples of unsuitable advice
Examples of poor outcomes or unsuitable advice were given, which included:
- Younger consumers not being told of their other borrowing options, such as traditional mortgages that could be cheaper and more flexible, given the difficulty in predicting consumers’ future circumstances and needs for 30+ years.
- Short-term benefits, such as consolidating debts and freeing up cash, being wiped out by the long-term cost of equity release. In particular, the effect of compounding interest wasn’t always adequately explained.
- Customers paying substantial early repayment charges on existing mortgages (in some cases many tens of thousands of pounds) only a few years after taking their loan, because their circumstances have changed.
- Limiting the ability of consumers to release further cash or downsize in the future without repaying their equity release in full.
Why was advice found to be unsuitable? – three key areas
The FCA found three main areas of concern about the suitability of advice provided, which it considers increases the risk of harm to consumers:
- Insufficient personalisation of advice
- Insufficient challenging of customer assumptions
- Lack of evidence to support the suitability of advice
Personalisation of advice
The FCA wants advisers to focus on the needs and circumstances of the individual in coming to a view that a particular lifetime mortgage is suitable. This means advisers need to know their customers well, and understand their circumstances, requirements and motivations.
The FCA found that advisers had “largely adopted a form-filling approach to fact finding” and were not sufficiently accounting for the different financial circumstances of customers, such as those in their 50s and still working compared to those who are retired and on a fixed income, and the impact this has on the options available to them. The FCA also felt there was too much reliance on the Key Facts Illustration (KFI) to show customers the long-term costs and implications of taking a lifetime mortgage, with insufficient time to ensure customers thoroughly understand these costs and implications.
Challenging customer assumptions
The FCA was also concerned that some advisers placed too much reliance on customers’ initial preferences, without a full assessment of whether an equity release product was the most appropriate for their circumstances. For example, customers with a substantial monthly surplus income were found to have stated that they did not want to commit to making monthly payments, without understanding (or advisers explaining) the impact of compounding interest and how an equity release product would cost more in interest than some alternative finance products with monthly repayments. Another area of concern was around upfront fees – which customers are often reluctant to pay – but without realising the increased cost of the fee if added to the loan and this differences (sometimes up to 25 times) not being clearly explained to customers so they could make an informed decision.
Evidence of the suitability of advice
The FCA wants to encourage firms to ensure that the customer’s voice can clearly be ‘heard’ in the file, and to avoid reliance on generic text and statements or tick box options. This might mean re-designing some fact-finding proformas so that they capture the customer’s own words, phrases and explanations.
The FCA considers that these “soft facts” add context and help to show how the advice relates to customers’ individual circumstances. The FCA noted that many customer interactions were not recorded, but noted that in the absence of audio recordings, good written records of discussions are important not only to evidence the suitability of advice, but also to enable the firm to gain assurance over the advice given by their advisers.
In relation to suitability letters, although not a mandatory requirement, the FCA saw some suitability letters that ran to 20 pages or more, containing significant volumes of standard text, so that important advice is “lost” and not picked up by customers. The FCA reminded firms of their Principle 7 obligation to communicate information to customers in a way which is clear, fair and not misleading.
So what does all this mean for firms advising customers on equity release products?
The FCA review highlights some areas where firms may wish to review their advice processes, particularly around suitability. Following MCOB rules to the letter will not always be enough. It is important for firms advising on ER products to:
- ensure they gather sufficient information from customers to provide suitable advice, and avoid allowing customer assumptions to dictate too much of the advice parameters at the outset, when they may have limited awareness of alternative finance options or how equity release products work over their lifespan;
- when giving advice to enter into an equity release transaction (for the first or subsequent time, or when making amendments to existing equity release products), firms should ensure the advice given is suitable. It needs to reflect customers’ circumstances, requirements and motivations; and
- collect and retain the necessary evidence to support that assessment of the suitability of advice and how it was determined. Avoid box ticking or generic statements – and allow your advice process to capture the customer’s real preferences and requirements and ensure that these are appropriately recorded.
The FCA say that they will be undertaking further work as part of their supervision of mortgage intermediaries to review the suitability of advice in the lifetime mortgage market, so this is almost certainly not the last we have heard from the FCA on this topic!
Looking to the future – litigation risk
We have seen a significant rise in mortgage based “mis-selling” claims over the past 12 months which often focus on the advice provided by intermediaries and lenders under MCOB 4. We anticipate continued growth in this area as claims management companies and solicitors seek to find new revenue streams to exploit as the “new PPI”.
Presently such claims usually target mainstream mortgage lenders/intermediaries but the FCA’s review and increased lending is likely to draw their attention to the equity release market. Many of the claims we deal with at present relate to mortgages arranged over 10 years ago and, whilst limitation defences can be raised for claims over six years old, there are exceptions that claimants can rely on to bring claims over six years after advice was provided.
Lenders and intermediaries should prepare for claims of this nature by:
- Reviewing processes and implementing necessary changes to account for the FCA’s findings;
- Ensuring detailed records are created of the advice provided to customers and all customer contact;
- Retaining records (particularly of fact find discussions and advice provided) for at least six years but ideally up to 15 years after the start of the equity release contract.
The views of contributors are not necessarily those of the Equity Release Council.
To read an article from Graham Evans on the FCA report click here. Graham sits on the Council’s standards board, is head of compliance at Equity Release Supermarket and is a chief examiner for the London Institute of Banking and Finance.
