Key findings from our exploratory work on later life lending, where we considered the borrowing opportunities available to consumers aged 55 and over, focusing on lifetime mortgages.
Who this applies to
- mortgage advisers (particularly lifetime mortgage specialists)
- consumer groups
- consumers
Introduction
There is an increasing demand for later life lending, and we have seen a significant growth in the lifetime mortgage market in recent years.
Our focus for this market is on making sure consumers are fully informed and receive suitable advice that has taken account of their individual circumstances.
Deciding to take out equity release is one of the most important and long-term decisions consumers make in later life. The consequences of their decision are likely to have a significant impact on their financial wellbeing for the rest of their lives. This makes it particularly important that firms and their advisers get their advice right.
So advisers should work with consumers, particularly those who may be vulnerable and not fully understand the recommended products, to ensure they realise the implications of these decisions. Firms also need to be able to evidence how they came to the conclusion that the product was suitable.
Where customers were suitably advised, we have seen some good outcomes where consumers ended up with an equity release product that met their long-term needs. In these cases, consumers benefited from the stability of a long-term fixed interest rate, unlocked wealth from their main or only asset, and not had to make monthly interest payments. When sold correctly, equity release products have allowed consumers to:
- repay their existing mortgage
- carry out home improvements, essential household repairs and adaptations
- consolidate burdensome debts
- reduce their working hours or fund earlier retirement
However, when consumers are given unsuitable advice, they can suffer major harm which affects them for the rest of their lives. In some cases, ending these contracts or repaying the amount owed early can be unaffordable. Some examples of poor outcomes are:
- Younger consumers not being told of their other borrowing options, such as traditional mortgages. These may 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 most cases interest rolls-up (rather than being paid monthly), meaning interest compounds over many years, so the debt can end up being several times the amount borrowed. This can be particularly damaging where consumers actually have surplus income that they could have used to repay the debts, rather than consolidating them.
- Customers paying substantial early repayment charges of tens of thousands of pounds only a few years after taking their loan, because their circumstances have changed.
- Consumers limiting their ability to release further cash or downsize in the future without repaying their equity release in full.
Consumers should make sure they fully understand both the short and long-term impact of equity release on their financial future. Some lifetime mortgages may seem similar to ‘traditional’ mortgages, but the risks involved are different. Consumers should take time at every stage of the process to make sure they fully understand the implications of their decision. But, most importantly, we expect firms and their advisers to help and guide consumers to make these decisions in their best interests.
For these reasons, we took a closer look at the sales and advice process for lifetime mortgages, reviewing a sample of case files from several firms.
Our findings
Our findings were mixed. We saw cases where lifetime mortgages were working well, unlocking equity for consumers who would not have been able to afford traditional mortgages or other sources of borrowing. However, we also saw cases where it was not clear that the advice was in the best interests of the consumer.
We found 3 significant areas of concern about the suitability of advice provided, which we consider increases the risk of harm to consumers in this market:
- Insufficient personalisation of advice
- Insufficient challenging of customer assumptions
- Lack of evidence to support the suitability of advice
Personalisation of advice
The reasons why customers consider taking equity release are diverse and reflect different personal circumstances. While different customers may end up with the same product, advisers must focus on the needs and circumstances of the individual in coming to a view that a particular lifetime mortgage is suitable.
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-filling approach to fact finding.
- Advisers not sufficiently accounting for the different financial circumstances of customers. For example, those in their 50s and still working vs those who are retired and on a fixed income, and the impact this has on the options available to them.
- 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. In better examples of advice, we saw the advisers were supplementing the KFI and taking time to ensure customers thoroughly understand these costs and implications.
- The impact of debt consolidation was not properly explored. All too often, the default assumption was that equity release would be suitable with alternative solutions discounted with little consideration. This included debts at low interest rates or with a short period remaining being consolidated without a compelling reason to do so. (MCOB 8.5A.11R[1] details factors firms must take into account when debt consolidation is the main purpose of an equity release transaction).
- The customer’s financial circumstances not being given sufficient weighting by the adviser. For example, where customers had significant surplus income recorded, this had little or no bearing on the final recommendation, which solely focused on a customer preference to make no monthly payment.
- Advisers recommending changes to property ownership, including removal of a joint owner (who was too young to meet eligibility requirements of lenders) from the title deeds, to allow equity release to take place. This was without evidence of sufficient discussion of the impact on the customers of the change of ownership.
Challenging customer assumptions
Customers may contact advisers assuming that a lifetime mortgage is the right solution for them.
In the absence of robust advice, it could be easy to sell a product that, on the face of it, has no immediate cost (ie monthly payment) and releases a cash lump-sum to the customer. This makes the role of the adviser, to ensure the long-term implications are considered, particularly important. 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.
Some advisers appeared to rely solely on customers’ initial stated preferences and to be effectively ‘order taking’ without taking sufficient steps to assess whether the product was appropriate in light of each customer’s specific needs or circumstances. Often, advisers didn’t explore why customers had these preferences or, where there was any potential negative impact (financial or otherwise), challenge these views. We reported similar findings as part of the Thematic review of the quality and suitability of mortgage advice[2] in 2015.
We found examples where:
- Customers, with a substantial monthly surplus income, stated they did not want to commit to making monthly payments. There was little evidence that the customer understood the impact of this decision.
- Advisers accepted, without question, customers not wanting to pay upfront fees. In 1 example, over the expected course of the loan, this would cost the customer 25 times the fee in additional interest, yet the case file contained no evidence as to why the fee was not paid upfront.
- A customer’s desire to refinance debts into a product with no monthly payments being accepted by advisers without explaining the impact of consolidating short term debts into a long-term loan.
Evidence of the suitability of advice
When we reviewed some case files we found inadequate evidence to demonstrate the suitability of advice. For example, a number of files contained standard generic text to justify why customers didn’t want to consider alternatives to equity release.
We encourage 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. (MCOB 8.5A details our rules around suitability and recording how that conclusion was reached)
Having a record that uses the customer’s own language and phraseology, and contains soft facts that add context, helps show how the advice relates to their individual circumstances. Similarly, exploring and recording the reasons behind a customer’s preferences can help to show how these preferences were factored into the advice.
We found that most customer interactions were not recorded (eg tape/digital recordings) by firms. 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. Good records also help show that the recommendations made are in customers’ best interests.
Although not a mandatory requirement, the firms in our sample all provided suitability letters to customers. If used appropriately, these can be helpful in making clear the basis for the recommendation. However, we saw examples of suitability letters that ran to 20 pages or more, containing significant volumes of standard text. This runs the risk that important advice will not be picked up by customers. Firms will be aware that Principle 7[3] sets out the requirement that they must communicate information to their clients in a way which is clear, fair and not misleading.
If warnings or implications are clearly explained and the case file records the customer’s response in their own words, this can provide good evidence that the customer has been made aware, understood the potential impact on their personal situation, and also that the product recommended/advice given is suitable.
Our next steps
Where necessary we are addressing our findings with the firms in our sample.
As part of our ongoing supervision of mortgage intermediaries we will be undertaking further work to review the suitability of advice in the lifetime mortgage market.
Poor quality advice in this market is unacceptable and is likely to create significant harm for customers who may be vulnerable. Where we find breaches of our rules we will, in line with our general approach to supervision, take the necessary supervisory action.
Since the completion of our review, the coronavirus (Covid-19) pandemic has placed new pressures on people’s finances and there is anecdotal evidence of more interest in equity release. The ongoing situation does not change our conclusion or findings. Indeed, it reinforces the importance of advice reflecting the needs and circumstances of the individual.
Actions for firms
All firms should ensure that their advice processes, including how they record the suitability of advice, are sufficient. While MCOB sets out our expectations in detail, as a result of this work we particularly noted the following to bring to firms’ attention:
- 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 (for the first or subsequent time, including making amendments to existing equity release products), firms should ensure the advice given is suitable.
- Firms should ensure that they collect and retain the necessary evidence to support that assessment of the suitability of advice and how it was determined.
Guidance for customers
You should think of equity release as a long-term transaction (it can be expensive if you change your mind). Consider whether it will be right for you both now and in the future, as well as how much it will ultimately cost.
You may find it helpful to discuss your plans with a friend or family members and remember they can accompany you to appointments.
If anything is unclear check with the adviser or independent sources, such as the Money and Pensions Service[4].
If you are unhappy with the advice you have been given or the way your transaction has been handled, you should contact the adviser or their firm first to follow their complaints procedure. If you’re not happy with the response you get from them, then you may be able to ask the Financial Ombudsman Service[5] to get involved.