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City regulator finds multiple equity release advice failings

Paloma Kubiak
Written By:
Paloma Kubiak

The Financial Conduct Authority (FCA) has slammed significant failings in advice practices within the equity release market.

The regulator said it found cases where it “was not clear the advice was in the best interests of the consumer” and that advisers had largely taken a “form-filling approach to fact finding”.

Borrowers were confronted with suitability letters of more than 20 pages, relying on significant volumes of standard text, and some case files showed inadequate evidence to demonstrate the suitability of advice.

The findings were the result of a probe into the equity release sector launched last year where it reviewed case files from a range of firms.

The FCA did not reveal the firms sampled but said it was addressing the findings with those firms, adding it will be undertaking further work to review the suitability of advice in the lifetime mortgage market.

Overall it said the results were mixed, noting that lifetime mortgages were working well for some consumers who would not have been able to afford traditional mortgages or other sources of borrowing.

But it found three significant areas of concern about the suitability of advice provided, which increased the risk of harm to consumers in the market:

  • Insufficient personalisation of advice
  • Insufficient challenging of customer assumptions
  • Lack of evidence to support the suitability of advice.

The FCA emphasised that poor quality advice in this market was “unacceptable” and was likely to create “significant harm for customers who may be vulnerable”.

It added: “Since the completion of our review, the coronavirus 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,” it added.

Poor fact finding

The regulator said it was disappointed to find evidence of advisers largely adopting a form-filling approach to fact finding.

Examples included advisers not sufficiently accounting for the different financial circumstances of customers, such as those in their 50s and still working compared to those retired and on a fixed income.

The impact of debt consolidation was not properly explored and advisers also recommended changes to property ownership without evidence of sufficient discussion of the impact.

Absence of robust advice

The FCA highlighted in the absence of robust advice, it could be easy to sell a product that, on the face of it, had no immediate cost and released a cash lump-sum to the customer.

This made the role of the adviser particularly important.

However, it found that some advisers were acting as order-takers, relying solely on customers’ initial stated preferences without taking sufficient steps to assess whether the product was appropriate.

In some cases customers with substantial monthly surplus income stated they did not want to commit to making monthly payments, but there was little evidence the adviser had explained the effects of this.

Not paying upfront fees went unquestioned, despite the fact it could result in a sum 25 times larger as a result of interest roll-up, and similar situations were found for short-term debt consolidation.

Areas of work

Moving forward, the FCA said all firms should ensure their advice processes, including how they record the suitability of advice, are sufficient.

It highlighted:

  • Firms need to ensure 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 they collect and retain the necessary evidence to support that assessment of the suitability of advice and how it was determined.

David Burrowes, chairman of the Equity Release Council, said equity release makes up fewe than 2% of complaints about home finance products, and of 38 complaints to the Financial Ombudsman Service in the last year, only two were upheld.

He said: “The combination of FCA regulation and Equity Release Council standards provides three levels of protection for customers, including independent legal advice alongside regulated financial advice and clear product safeguards. The requirement for customers to receive independent legal advice is unique among mortgages and helps to ensure customers understand the product and are under no duress or coercion to enter into the contract.

“It is vital that customers are supported to consider both long- and short-term needs when deciding whether equity release is right for them, as well as potential alternatives now and in future. The FCA’s findings will inform our ongoing work to support advice standards across the market.”