When we talk about mental capacity, what we really mean is the ability for someone to make decisions.
As Mind cites: “Your mental capacity means your ability to understand information and make decisions about your life. It can also mean the ability to communicate decisions about your life. Your capacity to make a decision can vary depending on the time that the decision needs to be made and the type of decision you need to make.”
According to the Mental Capacity Act, a person must be able to do four things in order to make a decision:
- They have to be able to understand relevant information;
- They have to be able retain it;
- They have to be able to apply it;
- They have to be able to communicate their decision back to you.
If they can’t meet one of these requirements, then they are deemed to lack capacity.
The difference between vulnerability and capacity
Now, many advisers will place capacity and vulnerability into the same bracket. And I can understand why. Because there are, of course, some close similarities. However, whilst mental capacity is indeed related to vulnerability, it should actually be seen as a different concept, and indeed, assessed differently too.
Vulnerability is a regulatory concept and is enforced by the Financial Conduct Authority (FCA). Mental capacity is a legal concept and is therefore covered by the Mental Capacity Act.
To help assess capacity in equity release clients, the two-stage test should be used. The first part of the test as outlined in the Mental Capacity Act (2005) asks a question; is there an impairment to the functioning of the brain? It is important to note that the act does not ask for a diagnosis, rather the presence of an impairment. The difference between the two is important as a diagnosis is a label we give to a set of symptoms, but a person will be experiencing the symptoms before they get a diagnosis, whereas an impairment refers to something not working correctly.
By means of an example: In the case of someone aged over 55, who may look to equity release, we may likely see a greater incidence of cognitive decline. An obvious impairment could be memory loss or confusion, but until that manifests into something such as dementia, they will not have a diagnosis.
If this initial question finds that there is no impairment, then we look to the first of five key principles outlined by the Mental Capacity Act and presume capacity. If, however, an impairment is found, we jump to the second stage, which is to determine whether can they understand, retain, communicate, and apply relevant information.
The Act also describes a third scenario, whereby an impairment is identified, but isn’t found to affect that client’s ability to retain or communicate relevant information. If this is the case – if there’s no causative nexus – then again, we have to presume capacity.
Whilst the Act has outlined the two-stage test as starting with a question about an impairment of the mind or brain, more recent caselaw has suggested that a better way to look at it is to start with the second part of the test and explore whether there is an issue with the person’s ability to understand, retain, weigh up and communicate relevant information. And, indeed, if there is, to try to identify a link to some sort of impairment such as memory loss. For advisers, this reverse process should be much easier.
If there is no issue with the person’s ability to understand, retain, weigh up and use and communicate, then we again presume capacity.
No shortcuts
Some may argue that the above is complex enough already, but I am afraid there is an additional complexity, and that is the threshold of understanding.
The issue is that what one needs to understand in order to release equity is very different to what they need to understand in order to make a will or buy a car. This threshold of understanding is what a person needs to be able to understand, retain, weigh up and use and communicate in order to demonstrate their capacity.
It’s also what makes capacity item-specific. You can’t simply say that someone has capacity or lacks it. We must determine whether they have capacity to make a certain decision.
But the question of what that threshold of understanding should be is one of the major issues surrounding capacity, particularly for equity release. We can’t expect everyone to know everything, so what should we expect the average client to understand?
It’s easy to see why this is so complex. But only once we understand what the client needs to understand can we then know what questions to ask, and ultimately, determine how to assess their capacity.
Nothing to worry about
Ultimately, there’s no one-size-fits-all when it comes to assessing capacity and the process can be complex.
But the capacity assessment landscape needn’t be something financial advisers should fear. After all, it’s there to enable them to carry out their work effectively and prioritise their clients’ interests and wellbeing.
As always, staying ahead of the curve when it comes to justifying decisions will be much easier if advisers employ the right technology, seek the right tools, and stick to the right processes.
