The regulator highlighted that it had found cases where it “was not clear that the advice was in the best interests of the consumer” and that advisers had largely taken a “form-filling approach to fact finding”.
Borrowers were confronted with suitability letters of more than 20 pages, relying on significant volumes of standard text, and some case files showed inadequate evidence to demonstrate the suitability of advice.
The findings were the result of a probe into the sector launched last year where it reviewed case files from a range of firms.
The FCA did not reveal the firms sampled but said it was addressing the findings with those firms and added it will be undertaking further work to review the suitability of advice in the lifetime mortgage market.
Not in consumers’ best interests
Overall it said the results were mixed, noting that lifetime mortgages were working well for some consumers who would not have been able to afford traditional mortgages or other sources of borrowing.
“However, we also saw cases where it was not clear that the advice was in the best interests of the consumer,” the regulator said.
It found three significant areas of concern about the suitability of advice provided, which it considered increases the risk of harm to consumers in the market:
- Insufficient personalisation of advice
- Insufficient challenging of customer assumptions
- Lack of evidence to support the suitability of advice.
The FCA emphasised that poor quality advice in this market was “unacceptable” and was likely to create “significant harm for customers who may be vulnerable”.
“Where we find breaches of our rules we will, in line with our general approach to supervision, take the necessary supervisory action,” it said.
“Since the completion of our review, the coronavirus pandemic has placed new pressures on people’s finances and there is anecdotal evidence of more interest in equity release.
“The ongoing situation does not change our conclusion or findings. Indeed, it reinforces the importance of advice reflecting the needs and circumstances of the individual,” it added.
Poor fact finding
The regulator said it was disappointed to find that evidence on file indicated advisers had largely adopted a form-filling approach to fact finding.
Examples in this regard included advisers not sufficiently accounting for the different financial circumstances of customers, such as those in their 50s and still working compared to those retired and on a fixed income.
Advisers also relied wholly or substantially on the Key Facts Illustration (KFI) to show customers the long-term costs, rather than taking time to ensure customers thoroughly understand these costs and implications.
The impact of debt consolidation was not properly explored and advisers also recommended changes to property ownership without evidence of sufficient discussion of the impact.
Absence of robust advice
The FCA highlighted in the absence of robust advice, it could be easy to sell a product that, on the face of it, had no immediate cost and released a cash lump-sum to the customer.
This made the role of the adviser, to ensure the long-term implications are considered, particularly important.
However, it found that some advisers were acting as order-takers, relying solely on customers’ initial stated preferences without taking sufficient steps to assess whether the product was appropriate.
In some cases customers with substantial monthly surplus income stated they did not want to commit to making monthly payments, but there was little evidence the adviser had explained the effects of this.
Not paying upfront fees went unquestioned, despite the fact it could result in a sum 25 times larger as a result of interest roll-up, and similar situations were found for short-term debt consolidation.
Generic rejection of alternatives
Evidence of the suitability of advice was also questioned, with the FCA finding failings in some cases here.
“When we reviewed some case files we found inadequate evidence to demonstrate the suitability of advice,” it said.
“For example, a number of files contained standard generic text to justify why customers didn’t want to consider alternatives to equity release.”
It found that most customer interactions were not recorded by firms, which meant good written records were vital.
Suitability letters were across the board but some were 20 pages long with significant form text, which ran the risk that important advice would not be picked up by customers.
“If warnings or implications are clearly explained and the case file records the customer’s response in their own words, this can provide good evidence that the customer has been made aware, understood the potential impact on their personal situation, and also that the product recommended or advice given is suitable,” the FCA said.
Areas of work
Concluding, the FCA said all firms should ensure that their advice processes, including how they record the suitability of advice, are sufficient.
As a result of this work it highlighted:
- Firms need to ensure that they take reasonable steps to obtain sufficient information from customers to provide advice.
- When giving advice to enter into an equity release transaction, firms should ensure the advice given is suitable.
- Firms should ensure that they collect and retain the necessary evidence to support that assessment of the suitability of advice and how it was determined.
Advisers welcomed the FCA’s review when it was launched last year, while former regulator Lynda Blackwell highlighted the need for oversight in the sector before it became a serious problem.