However, Key Retirement has defended the use of percentage based fees.
In a statement, JLM argued argued that potentially vulnerable customers might be unaware of the level of fees payable for equity release deals, saying that there is “no reason why equity release advisers should not be charging a fixed-price for advice” – except in cases where “ultra-complex” advice is required.
Currently, JLM charges a fixed equity released fee of £1295.
“The practice of charging an equity release client a percentage-based fee for advice certainly doesn’t seem to be within the spirit of TCF, and we would go so far as to say it is profiteering,” said Rory Joseph, director of JLM.
However, Dean Mirfin, group and technical director at Key Retirement, said that he “fundamentally” disagreed with JLM.
“The implication that clients don’t understand is so misleading,” said Mirfin.
“You have to declare to clients the charges up front,” Mirfin continued, “and importantly, you can’t just say to a client it’s x% of the loan, you have to express it in monetary terms – our disclosure documents include an example of a typical loan, saying that if you borrow y amount, it’ll be an x fee.”
High percentage
JLM also said it has seen clients of other equity release firms paying between 2-4% in fees – which can amount to thousands of pounds depending on the loan size, in addition to the procuration fee paid to the adviser.
“Fees charged at a percentage of the loan are not suitable for equity release advice; indeed we would suggest they are only suitable for ultra-complex work, which quite frankly equity release is not,” said Joseph.
But Mirfin argued that percentages are irrelevant to the discussion, as the amount charged on a percentage basis is a reflection on the size of the loan, and the amount of work that has gone into it.
“Excessive charging is a completely different argument than charging based on percentages,” Mirfin said.
“From a TCF point of view, the first test is the methodology and rationale for how you’re charging and whether that’s fair and proportionate,” Mirfin continued, “Secondly is overall, whether you’re charging excessively when compared against your peers.”
“Bigger loans do create more work and more risks as a business,” he added, “and clients also have the opportunity to vote with their feet.”
All FCA regulated firms are required to support the FCA Sourcebook’s TCF principle, whereby firms “must pay due regard to the interests of its customers and treat them fairly”, and help customers fully understand the risks, costs, and features of a product.
Currently, Key Retirement charges the higher of either 1.95% or a minimum fee of £995.
Extortionate fees
Joseph continued: “We recently had a client where their lifetime mortgage loan amount was in the hundreds of thousands of pounds, and still they only paid £995 for the advice. If they’d gone to an adviser that charged a percentage fee, they could have been looking at a fee of £10k-plus.”
“That can’t be right – the fee should be commensurate with the work involved and no equity release adviser is carrying out £10k-plus of work,” he added.
Mirfin disagreed, however, arguing that percentage based fees don’t automatically equate to extortionate fees.
“Bear in mind that we cover a third of the market,” Mirfin continued, “up to the end of September, 60% of our clients paid the minimum £995 fee. And those who paid a higher fee didn’t have a problem with how that fee works.”
“More importantly, 79% of our clients paid less than what they would’ve if they went to JLM with their £1295 fee,” he added.
Sebastian Murphy, head of mortgage finance at JLM, also commented: “Most advisers active in the equity release market charge a fee for advice, and given the nature of the product and the work involved, that is fully understandable. However, just because this is accepted practice, we as an industry should not be charging potentially extortionate fees based on a percentage of the loan.”
“We appreciate that different adviser firms run different models, but still there is absolutely no reason why any equity release customer – who could, let’s not forget, be quite elderly and vulnerable – should be paying thousands of pounds for their advice,” he said.
Mirfin said: “If a firm is charging double what we’re charging, then you might have a fair case. And if anybody is being excessive, they should be exposed for that.”
“But I don’t find JLM’s point very poignant,” he added.
