21 July 2022
A lifetime mortgage is the most popular form of equity release, a product that is secured against a consumer’s home, allowing them to borrow money against the value of their home, whilst retaining 100% home ownership for life. Generally, if a consumer is over the age of 55, this option may be open to them.
A lifetime mortgage is expected to last a consumer’s whole life, with interest rolling up over time, and the option to make monthly payments if so desired. This means that the full amount, plus interest, is not due for repayment until they die or enter permanent long-term care, where the loan will then be repaid following the sale of the home.
The growth in this sector, which has accounted for around 6.9% of gross advances in total, has been driven by a number of factors: We live in a country with an aging population who are likely to have considerable equity in their property, but less in the way of retirement savings. In addition, there is an increasing number of consumers who have maturing interest-only mortgages with no clear means of repaying the outstanding capital on their loan. For others, the use of equity release provides a means of debt consolidation. But whilst this later life lending brings its benefits, there are of course a number of associated risks, which the FCA is becoming increasingly concerned about.
Following the FCA review of this sector in 2020, concerns were raised about the suitability of advice that some consumers received when signing up for a lifetime mortgage. The review highlighted that whilst for some the advice was appropriate, for others such advice was not in the customer’s best interest.
The FCA identified three key failures in respect of the advice given to consumers:
- Insufficient personalisation of advice;
- Insufficient challenge of customer assumptions; and
- Lack of evidence to support the suitability of advice.
Given the long-term consequences of making such a decision, such as increasing compound interest, reduced inheritance for family members and the possible impact on state benefits and the risks associated with negative equity, it is very important that firms provide suitable advice to reduce harm to consumers and to avoid FCA scrutiny. Thus, firms should be looking to work with consumers, particularly those who may be more vulnerable, to ensure that they fully understand the consequences of their decisions. This includes evidencing that that the advice given was suitable to the consumers’ needs and demands and ensuring that the product is affordable.
Following the impact of the pandemic, resulting in the rising cost of living and a forecast increase in interest rates, all of which may impact consumers’ financial resilience, it is possible that there will be increased demand for later life lending. In view of this, the FCA published a Dear CEO letter (29thJune 2022) further highlighting the drivers of harm in this sector. These remain unchanged from that described in the FCA’s 2020 letter:
- Potential vulnerabilities and TCF: Firms failing to recognise and address the needs and challenges facing consumers.
- Product design and product governance: Poor product design and governance leading to consumers purchasing products they do not fully understand.
- Fees and pricing: Firms imposing excessive fees and charges upon consumers or failing to make fees and charges clear.
- Relationship between lenders and intermediaries: The risk of possible conflicts of interest due to the application of procuration fees.
- Responsible lending: Lack of effective monitoring frameworks to ensure products are sold to the identified target market.
Post sales systems and controls: Failure to assess the delivery of consumer outcomes.
Given the FCA’s 2022/2023 business plan vision of reducing and preventing serious harm to consumers, and setting higher standards for firms, and with the introduction of the new Consumer Duty, firms in the equity release sector should expect to receive increased scrutiny from the FCA as part of its ongoing supervision of lifetime mortgage providers.
Firms in this sector should therefore act now to review their advice processes, including how they evidence and record suitability.
At RSM, our regulatory compliance team has a proven track record of supporting lifetime mortgage providers in assessing and developing their equity release control framework, in line with the FCA’s expectations and regulatory requirements. This includes reviewing the following key control areas:
- Product design and governance;
- Fees and pricing structure;
- Financial promotions and product literature;
- Distribution channels and the sales process;
- Intermediary management and oversight of advice;
- Responsible lending;
- Post-sales systems and controls;
- Vulnerable customer management and TCF; and
- Training and competence.
By taking a pragmatic, proactive and proportional approach, we can support your firm in meeting its regulatory obligations by designing a compliance review that is appropriate for your business.
For more information on how you can benefit from out subject matter expertise, and understand how we can work together to support your business in meeting FCA expectations in this changing environment, please contact Catherine Brittain.