Later Life Lending and Vulnerable consumers
The FCA’s policy priorities on the ageing population and vulnerable consumers, product complexity, and retirement advice is shaping their current focus on equity release.
Later Life Lending
Equity release mortgage (ERMs) demand is driven by the ageing population with housing wealth but sometimes little in the way of retirement savings. The much touted statistic of the average amount saved in a personal pension is £30,000, however the over 65s have the highest rate of home ownership of around 77%. With the average UK home worth in excess of £227,000, many have more wealth in their property than in their retirement savings.
Past concerns about equity release are diminishing as it’s seen as a way of addressing some of the public policy issues related to the UK’s shortfall in retirement savings. The FCA’s most recent statements on the equity release market are cautious with the recent introduction of Retirement Interest Only (RIO) mortgages as advice standards and regulation around these are of concern.
The market for ERMs has more than trebled in size with the value of new sales recovering from a post-recession lull of £788m in 2011, to £2.15bn in 2016. The Equity Release Councils Autumn 2018 Market Report shows new customer activity has nearly doubled since the first half of 2016, driven by genuine consumer needs among the UK’s ageing population in response to wide-ranging financial challenges. Interest rates on equity release products have fallen too in recent years and equity release plays a key role in many consumers later life financial planning.
Innovation in the ERM market offers newer features addressing many of the previous concerns of consumers and regulators. The majority of plans available today offer early repayment facilities, interest payment option and the ability to draw down income over time rather than taking a lump sum. Importantly, ‘no negative equity guarantee’ (NNEG) ,features such as inheritance guarantees which ring-fence a fixed proportion of a property’s value to be passed on and protections which allow the customer to avoid early repayment charges if they choose to downsize within a given period.
Equity release and the FCA’s policy priorities
The ageing population and vulnerable consumers
The FCA first articulated its focus on vulnerable consumers in its Occasional Paper on Vulnerability, and put vulnerability at the heart of its approach to regulation with the publication of its Future Approach to Consumers document in November 2017. The regulator has also given particular attention to ageing-related aspects of vulnerability, publishing its Ageing Population Occasional Paper, in September 2017. The paper notes that consumers are more likely to experience transient or permanent vulnerabilities as they grow older and says that firms should “proactively recognise the potential vulnerabilities associated with older consumers and act with appropriate levels of care.”
ERMs are exclusively sold to older consumers, with the age of a new ERM customer averaging between 67 and 72. Given the FCA’s focus on ageing and vulnerability, these should consequently be important considerations for advisers and firms in the equity release market.
One area in which vulnerability may be of particular concern is with regards to the clauses that require the borrower to maintain the property and provide suitable insurance. In order to meet the FCA’s expectations, advisers will need to make clear the state of repair that borrowers will be required to maintain, and, as ERM loan books mature, lenders will want to consider the potential for financial strain on the borrower when enforcing contractual terms. Pressurising the borrower or taking legal action could be highly sensitive and go against the FCA’s growing stance on identifying and supporting consumers who may be vulnerable.
The complexity of ERMs means that the regulator will be looking for firms and advisors to ensure that features of the product are clearly explained and documented for consumers. In particular:
- Regulators have already drawn attention to the potential costs of ERMs for consumers, and will expect advisers to provide clear explanations of costs, including the compound nature of the interest charges and the effect this can have over long periods of time
- FOS indicates that it commonly receives complaints from family members, who are often surprised to learn how much is owed from the policyholder’s estate.
- Early repayment charges add complexity to the product and are another area of complaint highlighted by the FOS. Those moving homes or choosing to downsize are likely to incur these charges, and the FCA requires financial advisers to consider whether the borrower has plans to move or might do anything else that would put them at risk of early repayment charges, such as health considerations or moving into or away for care.
Retirement outcomes and pensions advice
A wide variety of the FCA’s recent work has focused on pensions and the advice consumers receive around retirement. The regulator recently looked at pensions transfer advice and is in the process of finalising its Retirement Outcomes Review (ROR),
Equity release is not in the scope of the ROR, and the FCA previously looked at ERM-related advice, dropping proposals to introduce a specialist equity release qualification for advisers in 2017. However, the ROR’s interim report notes that “Consumers may use other products to save for retirement and draw on those savings, such as Individual Savings Accounts (ISAs) and equity release products” , showing the FCA continues to be mindful of the wider retirement income market.
Given the growing size of the equity release market, the advised nature of the product, and its substitutability and complementarity to traditional pension’s savings, the FCA’s current focus on pensions could logically lead it to look further at ERMs in order to establish a more holistic picture of the retirement market.
The FCA’s existing ERM advice rules (MCOB 8) place a strong emphasis on the suitability of advice that anyone wishing to take out an ERM must receive. The detailed nature of these requirements provides firms with a clear guide to the FCA’s expectations, but also highlights the many areas in which the FCA sees potential for conduct risks.
Considerations for product providers and advisers
The FCA attention on the ERM industry in the context to its broader policy focus on the elderly and vulnerable, product complexity, and retirement and pensions advice. ERM provider and advisers should be mindful of how the FCA’s broad policy approach will translate to its supervision of ERM operations. In particular:
- The FCA will be looking for product providers to undertake careful scrutiny of their distribution networks and the suitability of the information they provide that can be passed on to end-consumers. In addition, they will need to demonstrate to the FCA that they have effective systems and controls to exercise suitable levels of oversight over their distributors. Firms will also need to consider how they design products to better suit the needs of vulnerable consumers, given the regulator’s prioritisation of this issue.
- The FCA will expect advisers to pay close attention to its rulebook and to ensure that the customer understands both the complex nature of product and the charges involved. The regulator will also be looking for advisers to identify client vulnerabilities, consider these as part of their suitably assessment and ensure that any vulnerabilities are continually reassessed over the lifecycle of the ERM.
- All advisers should meet a level of advice standards and vulnerability training that meet the regulators and consumers expectations.