Equity Release Market Under the Spotlight
Yesterday the FCA published its key findings from exploratory work involving "later life lending". This type of lending is broadly where consumers 55 and over use borrowing to access cash in later life. One of those options is equity release which was the focus of the FCA's work. The FCA's focus on equity release appears to have resulted from an initial review of the broader later life lending market, at which time the FCA identified some "poor outcomes" in equity release sales.
The FCA's publication notes that deciding to take out an equity release product is one of the most important and long-term decisions consumers make in later life and the decision can have a significant impact on their financial wellbeing for the remainder of their lives. The FCA also acknowledges that those making these decisions are often vulnerable and although not explicitly referenced may well have capacity issues when it comes to making a decision.
Good and poor outcomes
The FCA's review of the broader market identified some "good outcomes" where consumers benefitted from the stability of a long-term fixed interest rate, unlocked wealth from their main or only asset (their home) and did not have to make monthly interest payments. However, some consumers received unsuitable advice in the FCA's view with the following "poor outcomes" identified:
- Younger consumers not being told of their other borrowing options which may have been cheaper and more flexible;
- Short term benefits, such as consolidating debts and freeing up cash, being wiped out by the long-term cost of equity release. Interest roll-ups operate by compounding interest over many years so debt ends up being several times the amount borrowed. Interest roll-ups were specifically highlighted as being particularly damaging where consumers had surplus income that could have been used to repay debts rather than consolidating them;
- Consumers paying substantial early repayment charges only a few years after taking the loan as their circumstances changed;
- Consumers limiting their ability to release further cash or downsize in the future without repaying their equity release in full.
Given the "poor outcomes" identified and a potential issue that consumers did not understand the short and long term impact of equity release and/or the differences in risk to traditional mortgages, the FCA took a closer look at the sales and advice process of lifetime mortgages reviewing a sample of case files from several firms.
The FCA's equity release findings
The FCA says that its findings from file reviews were "mixed", with 3 significant areas of concern identified:
- Insufficient personalisation of advice
- Insufficient challenging of customer assumptions
- Lack of evidence to support the suitability of advice
Personalisation of advice
The FCA notes that to give high quality, suitable advice, advisers need to know their customers well, and understand their circumstances, requirements and motivations. "… We were disappointed to find that evidence on file indicated advisers had largely adopted a form-filing approach to fact finding…". The publication provides the following examples:
- Advisers not sufficiently accounting for the different financial circumstances of customers. For example, those in their 50s still working vs those who had retired;
- Advisers relying wholly or substantially on the Key Facts Illustration (KFI) to show customers the long-term costs and implications of taking a lifetime mortgage whereas "better examples of advice" involved advisers supplementing the KFI and taking time to ensure customers thoroughly understood the costs and implications;
- The impact of debt consolidation was not properly explored including alternative solutions where, in particular, customers had debts on a low interest rate or with a short period remaining being consolidated for no compelling reason;
- The customer's financial circumstances not being given sufficient weighting by the adviser for example where customers had significant surplus income recorded;
- Advisers recommending changes to property ownership to allow equity release to take place without sufficient discussion of the impact of that.
Challenging customer assumptions
The FCA implies that customers sometimes contact advisers with a product bias towards equity release. The FCA says "… When giving advice, advisers should consider alternatives and be prepared to challenge, where appropriate, customers' initial requests, rather than simply take customers' orders or preferences without question…". The FCA refers to advisers that did not explore why customers had certain preferences or consider any potential negative impact. The FCA also refers to examples where a customer's desire to refinance debts into a product with no monthly repayments was accepted without any advice on the impact of consolidating those debts.
Evidence of the suitability of advice
On reviewing files the FCA found inadequate evidence to demonstrate suitability of advice, including examples of generic text to justify why alternatives were not considered. The FCA "… encourages 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…". The publication notes that most verbal interactions were not recorded and in those cases, good written records were vital. Further, although suitability letters were not a requirement, the FCA found some ran to 20 pages or more and these are said to run the risk that important advice is not picked up by customers.
What next for the FCA in light of its findings?
The FCA is addressing its findings with firms within the sample and it will be undertaking further work to review the suitability of advice in the lifetime mortgage / equity release market. If the FCA finds breaches of its rules, it warns it will take necessary supervisory action.
The FCA says that firms should ensure that their advice processes are sufficient and highlights the following areas:
- Firms need to ensure that they take reasonable steps to obtain sufficient information from customers to provide advice;
- When giving advice to enter into an equity release transaction, firms should ensure the advice given is suitable;
- Firms should ensure that they collect and retain the necessary advice to support that assessment of the suitability of advice and how it is determined
For customers, the FCA notes that equity release should be considered a long-term transaction and if a customer is unsure or does not full understand, they should not progress until the adviser has explained things clearly. For customers who are unhappy with the advice they have received, the FCA points them in the direction of the firm and FOS.
Current statistics suggest that there has been an increase in the take up of equity release products during the Covid-19 pandemic with customers using their home to release cash perhaps to help themselves or family members. However, taking out an equity release product has a long term impact and the FCA appears concerned that that long term impact is not fully understood by customers. A number of the FCA's findings and comments sound very similar to those we have reported on in relation to the defined benefit pension transfer market – to make sure that the advice is personalised to the customer, to include lots of personal information about the customer, not to use "tick box" approaches as the advice must reflect the personal circumstances of the customer, to challenge customers' initial instructions / objectives if they are unrealistic and suitability letters should not be long for the sake of it.
It appears that some supervisory action may come off the back of the FCA's file reviews, whether that is past business reviews or via section 166 skilled person reviews is unclear, but it looks like the equity release market will remain a focus for the FCA.