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Vulnerable borrowers risk taking out unsuitable equity release products

Paloma Kubiak
Written By:
Paloma Kubiak

The rising cost of living may place older borrowers more at risk of buying unsuitable equity release or lifetime mortgage products, the city watchdog warned.

The Financial Conduct Authority said it was “particularly concerned” that consumers facing financial stress may be more susceptible to the purchase of unsuitable equity release products.

The regulator, which was updating its supervisory strategy for lifetime mortgage providers, said it expected firms which offered equity release and lifetime mortgages to consider how the cost-of-living crisis was likely to impact consumers.

In a ‘Dear CEO’ letter to firms, David Raw co-director, consumer and retail policy division supervision at the FCA, wrote poor product design and governance could lead to consumers in the later life lending market purchasing products they don’t fully understand, and which did not meet their demands and needs.

Raw said the FCA was concerned that borrowers least able to bear the rises in the cost of living will be hardest hit.

“While the headline average inflation rate is at 9% and rising, the Institute of Fiscal Studies estimates that the poorest households may face average inflation rates as high as 14%. This is in the context of a quarter of the population having low financial resilience, a figure likely to increase over the coming months,” he wrote.

The FCA said it had identified risks including poor product design and governance issues that could lead to consumers in the later life lending market purchasing products they don’t fully understand, and which do not meet their demands and needs.

It also highlighted the role of intermediaries in the sale of lifetime mortgages and equity release and noted that it was seeing evidence that equity release was being targeted at younger borrowers.

“Firms’ policies and procedures, as well as a lack of ongoing due diligence in regard to the relationship with intermediaries, particularly where these are part of the same group or have exclusive arrangements, may lead to products being offered outside their target market, ” Raw continued.

Consumer Duty

The FCA is proposing to introduce a new Consumer Duty that would set a higher standard of care that firms should provide to consumers in retail financial markets. Raw added: “The Consumer Duty would require firms to act to deliver good outcomes for customers including those in vulnerable circumstances. This reflects the positive and proactive expectation we have of firm conduct, and our desire for firms to think more about consumer outcomes and place consumers’ interests at the heart of their activities.”

The Consumer Duty would require firms to focus on supporting their customers to make good financial decisions, including those in vulnerable circumstances, and avoiding foreseeable harm and checking whether their customers are getting good outcomes.

The duty, follows a consultation and new rules and guidance will be published by the end of July 2022.

The FCA said it also identified areas where it expected lifetime mortgage providers to pay particular attention to the needs of consumers.

These include treating customers in vulnerable circumstances fairly, product design and governance, fees and pricing structure, relationships between lenders and intermediaries.

Raw said: “Our monitoring of the lifetime mortgage sector has highlighted a trend of lifetime products being increasingly sold to younger customers and with larger median loan values. We expect lifetime mortgage providers to have effective monitoring frameworks in place to ensure these products are sold to the identified target market and are delivering positive customer outcomes.”

He added: “Firms should give themselves comfort that they have sufficient sight, for example in the form of management information, to identify where this is not happening. Firms should be able to demonstrate that their customers are treated fairly, particularly given the ongoing impact of coronavirus, the impact of cost-of-living increases and any associated increase in financial vulnerability across the country.”

“We are also concerned that poor product design and governance could lead to consumers purchasing later life products they don’t fully understand, and which do not meet their demands and needs. We expect all firms operating in the later life lending market to treat customers fairly, particularly older borrowers, and to pay particular attention to signs of vulnerability. Although the majority of customers taking lifetime products do not make repayments, it is paramount that, where applicable, lenders ensure they apply appropriate affordability criteria, as inadequate affordability checks could leave older borrowers finding it more difficult to meet their financial obligations as they move into retirement.”