While the FCA noted RIOs had significantly different risks compared to lifetime mortgages, it did recognise that they presented a potential consumer detriment and proposed several safeguards.
The lending industry welcomed the proposals; lenders were already looking for new markets where extra margin could be obtained.
However, it is also true that products that benefit from additional margin bring additional risks.
Any analysis of regulatory complaints data, even focusing on mainstream products, will show that both lenders and brokers need to up their game to focus on appropriate consumer outcomes.
Although the monthly payment nature of RIO loans means that risk, to some extent, is mitigated by interest being paid monthly and there no interest roll up, this is countered by the general risks associated with older life lending.
Conduct risk remains a possible issue and is compounded by the fact that RIO borrowers could usually by nature of age or infirmity or both, be categorised as vulnerable or potentially vulnerable.
On the positive side of the balance sheet, many lenders do not give advice and their mortgage lending appetites are weighted towards intermediary introduced business.
However, lenders are often concerned about ongoing legacy risk even where a sale was made by a professional introducer; this is especially the case with later life lending, including RIO loans.
It is not surprising, therefore, that a significant, and growing, number of lenders require advisers to hold an appropriate equity release qualification.
The question lenders ask themselves is ‘what steps can we take to mitigate our risks?’.
Those steps include proving to regulators they have acted appropriately and, therefore, they seek the comfort of knowing that advice was provided by a qualified adviser.
So, one must ask why a broker would limit their client’s choice of lenders by not being able to submit cases to those lenders who require advisers to hold qualifications.
Risks for brokers
The risk for intermediaries in niche areas, such as RIOs, is further compounded by the nature of consumer behaviour.
Those of us in the industry might understand what we mean by advised or non-advised and any regulatory difference between the two.
Consumers however just understand, especially after the passage of time, ‘I needed help, I went to a professional and they solved my problem’.
The conversations that did take place between the adviser and customer are likely to be forgotten as time passes and there could be no knowledge at all where future beneficiaries are concerned.
So brokers should also focus on ensuring that clients really understand the product.
Processes should be embedded to ensure advisers:
- are aware of the importance of assessing customer understanding,
- develop practices to ensure customers understand the products they have bought,
- don’t confuse customer understanding with customer satisfaction,
- have developed systems and practices for checking customer understanding post-sale, for example, through customer contact exercises.
RIO mortgages are ideal for many customer circumstances and fill a gap between traditional and equity release products.
But if advisers are to avoid problems and penalties in the future, they must embrace risk mitigation, learning from the steps responsible lenders take.
If you’d like to hear more about RIOs and later-life lending, register for a free place at the Later Life Lending Event which takes place on Thursday 22 November in London.