Reimagining later life mortgage advice for better consumer outcomes – Hogg

If downsizing isn’t an option, then the way to access housing wealth is through later life lending, such as equity release mortgages or retirement interest-only (RIO) mortgages. 

But the market for later life lending has a big problem. 

A restricted view of options 

Different types of advisers tend to advise on different types of mortgages. Mainstream mortgage brokers might not advise on equity release mortgages, while equity release advisers might not advise on other types of mortgages. 

Without knowing it, the consumer’s initial choice of adviser could determine which product they end up with. 

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This isn’t good enough. Non-holistic advice opens up consumers to buying sub-optimal products. This ultimately reduces trust in the sector, impacting the uptake of later life lending. 

We highlighted this issue in our recent report, and the Financial Conduct Authority (FCA) picked up on it in its Discussion Paper on the future of the mortgage market. Older people may not know about the full range of options available to them as they approach retirement, as noted in a recent report from Fairer Finance.

Indeed, several of the FCA’s questions focus on this, and it says it is open to cutting regulatory rules that maintain damaging silos. 

This begs the question: how should we reimagine later life lending advice to deliver better consumer outcomes and facilitate long-term market growth? 

Aligning the economic incentives of consumers and advisers 

A core principle of economic regulation is that the commercial incentives of firms should align with delivering good consumer outcomes.

Does the adviser make their money from selling services that generate good consumer outcomes? 

This is a trade-off. Some models are good at reducing adviser bias, but can suffer from low consumer take-up. Other models are better at encouraging consumer take-up, but have greater potential for bias. This is best decided on a case-by-case basis. There is no one-size-fits-all. 

In 2012, the FCA banned investment advisers from taking commission from providers, meaning that they only charge fees directly to consumers. By ensuring that advisers’ fees are not dependent on what they recommend, the FCA stopped ‘product bias’ and ‘provider bias’. But these fees reduced consumer demand for investment advice, contributing to the ‘advice gap’. 

Meanwhile, the FCA did not ban adviser commission for mortgage brokers. This means that later life lending advisers can get paid commission by the lender, as well as charging fees to the consumer. 

Adviser commission depends on the type of mortgage. An equity release mortgage might have a different commission (in £ terms) from a standard mortgage or an interest-only mortgage. This introduces the possibility of an incentive to provide biased advice. 

In 2023, the FCA said it had concerns about the potential for bias among equity release advisers, and the FCA appears to remain concerned (referring to it in its recent discussion paper). So, how should we ensure that all types of advisers give holistic and unbiased advice? 

There are other related questions for policymakers, such as: 

• How to encourage mainstream mortgage brokers to refer consumers to equity release mortgage advisers
• How to ensure that financial advisers consider housing wealth
• Should equity release advisers be remunerated upfront or on an ongoing basis for offering ongoing support?
• To what extent do tied advisers deliver holistic advice?

Policymakers can unpick these thorny questions through economic analysis of adviser business models. We must ensure that the later life lending market has aligned incentives between consumers and advisers. 

Sustainable business models for distributing later life lending 

The distribution of later life lending products must be commercially sustainable. Firms providing advice must generate a return on the capital invested in their business. 

Remuneration for advisers covers both marketing costs (i.e., customer acquisition) and the time spent giving advice. 

Ultimately, there may be more routes into supporting consumers to better consider their housing wealth in later life. For example, the FCA could open up targeted support to help consumers think about accessing their housing wealth in retirement. 

With this in place, will the cost of customer acquisition fall? 

The strategy question for firms is how to take advantage of this, reaching more consumers with holistic advice. 

Reimagining later life lending advice 

The UK is on the verge of a later life crisis. As life expectancy increases, pension provision weakens and the cost of care rises. The number of people reaching retirement without adequate provision to maintain their standard of living is set to increase year-on-year. 

As things stand, there are a number of barriers that block the path to housing wealth becoming part of mainstream later life planning. 

Sorting out the issue of fragmented advice would be a significant step forward in opening up the later life lending market to more of the millions of consumers who will need to access their housing wealth. 

With the FCA reviewing its mortgage and later life lending markets and as the government continues to formulate its long-term growth strategy, there is a unique opportunity to make progress on this vital issue.