That is the short answer to article on the 4 October asking ‘Where next for equity release?’ in the wake of the Financial Conduct Authority’s (FCA) equity release market review.
The longer answer is that the equity release industry acknowledges the need for change and welcomes the opportunity to work with stakeholders to ensure all customers receive good outcomes, irrespective of their point of entry. We should also acknowledge the positive steps the industry has already made, particularly during the implementation of Consumer Duty, which were not captured in the FCA’s most recent review.
Evolution already delivered
Innovation in the equity release market has come on leaps and bounds, with lifetime mortgages now enabling customers to make ad hoc payments, and many allowing some or all of the interest to be served. More product options are on the way which will enable customers to increase LTVs and to reduce their cost of borrowing by committing to mandatory repayments.
The equity release sector has made significant changes in response to Consumer Duty, embracing the FCA’s goal to provide good customer outcomes. At Key we’ve evolved our advice philosophy to put affordability at the heart of the process and have adopted a triage process to ensure a wider range of alternative borrowing options are fully considered. Likewise, our customer communications have been independently tested and adapted to deliver balance, make clear downside risks and provide information on alternative product options.
How the later life sector must respond
However, our actions need to go further, particularly as new later life products enter the market. There is no doubt that the next FCA equity release market review will pull no punches if firms fail to successfully adapt to the dual challenges of product evolution and Consumer Duty.
The later life sector needs to focus on affordability and evidencing the consideration of a range of product options. Establishing what a customer can commit to in terms of making repayments is crucial in determining what products they may be eligible for and in mitigating the cost of borrowing. With new generations of products offering options to fully or partially serve interest, even relatively modest committed payments can have a significant impact on reducing borrowing costs.
We also need to evolve our approach to engaging customers. Currently customer awareness of all of the later life lending options is poor and that should be a concern in a £50bn market. Specialist equity release firms invest heavily to educate consumers to what is still a largely misunderstood product, but is it right that this is often the only way in which consumers can hear about these products, rather than through a conversation with their existing lender?
Low levels of product take-up pose significant challenges for specialists, particularly with the increased costs of regulatory compliance. Our experience at Key illustrates the issue, with just 4.5 per cent of the customers who initially enquire about equity release end up taking out the product.
How the wider industry must respond
As consumers adjust to a higher interest rate environment, the importance of this being an industry-wide change has never been more important. This should apply whenever a customer needs to access housing equity, either to release additional capital or mitigate the increased costs of borrowing. A focus on ensuring the journey from mainstream advisers to later life products operates efficiently is critical to ensure customers’ needs are fully met irrespective of their point of access.
Equity release lending only makes up around £6bn of the £50bn later life lending market, with mainstream lenders often having limited propositions in place for later life customers which do not cover the full range of product options. Are these institutions really having broad balanced conversations with older borrowers about all of their needs and options? What might be available to these borrowers beyond their own range of products or advice propositions?
Whilst we agree equity release specialist advisers must offer more options, the same applies very much to the mainstream lenders. If, as an industry, we can better engage older borrowers and ensure they are signposted or referred to the most appropriate solutions, then consumers will be better served.
Product options must also continue to evolve. Whilst it may pain some industry commentators, equity release products remain the most suitable, and indeed the only option for many customers. RIO mortgages are an excellent option for some customers, but only 256 were sold in Q2 2023. This cannot be attributed to lack of holistic advice or remuneration bias, but flaws in a product design where most borrowers cannot pass the required affordability hurdles. The market has to focus on delivering other product options that fill the middle ground between lifetime mortgages and mainstream mortgages to properly serve the needs our customers.
A final thought
Given the UK’s rapidly aging population, increased cost of living and lack of pension savings, more and more people will need to consider using their home equity to support their needs and wants in later life. This is a growing macroeconomic trend that will only increase in the future. All players in the industry, be it the equity release specialists, banks, mortgage networks and wealth advisers, collectively have responsibility to ensure changes are made so we can consistently deliver good outcomes for customers looking to borrow in later life.
And others in the industry are in agreement that well-advised equity release can work well, as part of a continuing evolution in the sector.
Matt McGill MD, Equity Release, Aviva said: “As the product landscape continues to evolve it has never been more important to ensure that consumers are able to access good quality advice that can fully consider the full range of product solutions that can meet their needs.
“We fully support the need for all advisers, whether mainstream or later life, to put affordability at the heart of their advice processes and to consideration of all the product options in meeting the needs of their customers”
Meanwhile, Richard Merritt at SimplyBiz said: “Following the implementation of Consumer Duty and the output of the FCA review, it is good to see that the sector recognises certain things need to change. Crucial to this is the support for advisers to demonstrate the options available across all potential products – mainstream mortgages, where many specialist lenders have excellent bespoke options for older borrowers; the RIO market which clearly needs to develop given the transaction volumes; and equity release itself, which clearly can be appropriate for many customers but needs to be advised with care.
“Evolving the way in which mainstream advisers are supported in considering the role of later life products using technology such as Air’s new Navigator Tool provide a simple and effective way to determine the best product outcome for each customer’s specific needs. This is not a silver bullet solution but alongside product development and the continual raising of advice standards, we can be more and more confident the market can and will move in the right direction.”
