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It’s been almost three years since the FCA last focused on equity release, with the publication in June 2020 of key findings following a review of the Equity Release Sales and Advice Process. However, the equity release market continues to grow apace and in January this year the FCA announced its thematic review of retirement income advice. Lifetime mortgage recommendations are closely linked to retirement income planning, making this an opportune time for financial advisers to refresh their knowledge of the FCA’s expectations.
Given the financial position of the typical client requesting an equity release product, the FCA is conscious that they may be financially vulnerable and that poor quality advice could result in significant harm for customers. Deciding to take out an equity release mortgage is a highly impactful long-term financial decision, so it’s important to get this right.
Increasing demand is driving significant growth in the equity release market and the FCA is focused on ensuring customers are fully informed and receiving suitable advice that considers their individual circumstances.
The regulator has seen good outcomes with equity release allowing customers to repay their mortgage, carry out home improvements, repairs and adaptations, consolidate burdensome debt, reduce working hours and fund early retirement. However, when unsuitable advice is given, consumers can suffer major harm, affecting them for the rest of their lives.
To meet the standards expected by the FCA, your process should:
- challenge customer assumptions
- deliver personalised advice
- clearly demonstrate and evidence the suitability of the advice.
Challenging client assumptions
Clients may contact an adviser assuming an equity release contract is right for them, often after seeing advertising from lenders or advisers. Without robust questioning and challenge, it could be easy to sell a product that, on the face of it, has no immediate cost (i.e. monthly payment) and releases a cash lump-sum to the customer.
This makes the role of the adviser particularly important to ensure that the long-term implications are considered. You should consider alternatives to equity release and be prepared to challenge, where appropriate, the customer’s initial request. It’s important to explore why the customer has these preferences and challenge them where there is any potential negative impact, financial or otherwise.
The FCA has said that often, where customers with substantial monthly surplus income state they do not want to commit to making monthly payments, the file seen by the regulator has little evidence that the customer understood the impact of this decision.
Advisers have also accepted, without question, customers not wanting to pay upfront fees. In one example, over the expected course of the loan, this would cost the customer 25 times the fee in additional interest, yet the file contained no evidence as to why the fee was not paid upfront.
You should challenge client assumptions and ensure their records contain the details of this challenge and the client’s response in their own words.
Personalisation of advice
In the past, FCA reviews found that firms have not always sufficiently accounted for the different financial circumstances of customers when shaping their recommendation.
Your advice process should ensure the financial position of the customer is given sufficient weight. For example, where customers have significant surplus income recorded, FCA reviews have found that this had little or no bearing on the final recommendation, which was solely focused on the customer preference to not make monthly payments. And clients with capital available to pay upfront fees should be encouraged to do so, rather than adding them to their loan.
When explaining a mortgage plan to a client, some firms rely wholly or substantially on the Key Facts Illustration (KFI) to show customers the long-term cash costs and implications of taking a lifetime mortgage. This process could be improved by supplementing the KFI and taking time to ensure customers thoroughly understand the costs and implications.
Where an adviser recommends changes to property ownership to allow equity release to take place, including removal of a joint owner who is too young to meet the eligibility criteria, the file must evidence that the adviser has had extensive discussions with the client being removed, explained the wider impact of the change of ownership, and ideally that they have taken independent legal advice. However, files often do not evidence sufficient discussion.
Firms’ Consumer Duty projects should ensure target markets for equity release solutions detail what characteristics are presented by the average working and non-working clients, and what features and structures would be appropriate for each group. Advice standards manuals should detail when clients should be advised to pay upfront fees or pay interest rather than allowing it to roll up, and robust steps to be taken when considering changes to property ownership.
Evidencing suitability
If an adviser follows and appropriately documents a robust and customer-centric advice process, the client file should naturally evidence suitability.
The use of standard generic text can lead to suitability being challenged by the regulator as it doesn’t evidence personalised advice. Such text is often used to explain why customers do not wish to consider alternatives to equity release, make monthly payments or pay the upfront fees. Having a robust discussion with the client and replaying this back in the suitability report, in the client’s own words, supports the personalisation of the advice. The FCA encourages firms to ensure the client’s voice can clearly be ‘heard’ in the file. You may need to amend your fact find, removing any questions that offer tick box responses and replacing these with a text box to record the client’s response. Focus on creating a record that contains the customer’s own language and phraseology.
How we can help
We regularly review advice processes and Consumer Duty projects, providing independent review and challenge to these and the suitability of recommendations. This gives senior managers the insight and assurance that your equity release proposition meets the FCA’s expectation.
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