Last week the FCA published a ‘Dear CEO’ letter to equity release providers, warning that it was “particularly concerned” that poor product design and governance could lead to vulnerable clients taking out products they didn’t fully understand, or which did not actually meet their needs.
Brokers have welcomed the attention of the regulator, with some cautioning that the influx of inexperienced and poorly supported advisers increases the risk of vulnerable clients taking out inappropriate loans.
Protecting clients from themselves
Andy Wilson, director of Andy Wilson Financial Services, said that by its very nature equity, the target group for equity release would include potentially vulnerable borrowers. While this presents a challenge, he argued that the industry as a whole had taken positive steps towards recognising vulnerabilities early on, as well as developing processes for how to handle them.
“We have a duty to these clients to protect them, and often from themselves. We need to impress upon them the effects of making decisions to borrow money against the house – and wherever possible, get the families on board too,” he said.
The risk of inexperienced advisers
The FCA is right to highlight potential issues, according to Stuart Powell, managing director of Ocean Equity Release, who noted that his firm assesses all clients for any potential vulnerabilities, such as health issues or a potential lack of capacity.
He continued: “We have politely declined to act for clients that we have deemed as too vulnerable, or referred them to an advisor who could meet them in person if we were unable to do so.
“My question would be, is every firm taking these measures? This is where the FCA needs to focus ‒ inexperienced and unsupported advisors.”
Jumping on the bandwagon
Jane King, mortgage and equity release adviser at Ash Ridge , said that given the complicated nature of equity release products, a lot of time needs to be taken to ensure that elderly clients truly understand what is involved.
She added: “I am not so concerned with lenders as with the vast number of new equity release advisers that have jumped onto the bandwagon as these products pay generous commission fees, and with some firms charging additional fees of up to £1,000, this could be viewed as a very lucrative business to be in.”
As a result, King warns that some “target driven salesmen” will end up selling these products to borrowers who don’t really understand them.
“Many vulnerable people for instance are on benefits and with means tested benefits often affected by a lifetime mortgage, they may not be made aware that these benefits could reduce or stop,” she added.
Avoiding last minute desperation
Samantha Bickford, mortgage and equity release specialist at Clarity Wealth Management, said that the industry needed to be more proactive, for example in reaching out to older clients who have interest-only mortgages coming to an end.
She added: “The lender may write to the clients to inform them of the end date but if they do not have a broker to talk through their options this is usually left to the last minute. I often think if there was more communication in the industry between lenders and brokers we could identify and support many more clients sooner, before it came down to the desperate stage where equity release is really the only option left for them.”
Bickford also suggested that more needed to be done to support those with existing equity release plans, who may be stuck on uncompetitive rates.
“I appreciate the lender would lose business, but I feel there should be a moral obligation to highlight to clients that there may be better deals out there if they explore their remortgage options with an independent, whole of market mortgage broker,” she continued.
Is the cost of living situation driving equity release interest?
Powell noted that rising living costs had “entered the majority of conversations” being had with clients currently, with older people on fixed incomes feeling the effects disproportionately.
He added: “Although clients are not currently considering taking out equity release solely to survive daily living costs, they are undoubtedly considering borrowing additional funds over the coming years to factor in the current price increases. This is an interesting one to consider within the advice framework, as inflation is likely to come down at some stage in 2023 and beyond, however prices will not come down, just not go up as quickly.”
King said that with her clients, the main reasons for pursuing equity release tended to be in order to gift funds to family members or in order to carry out improvement work on the existing property.
She added: “I have yet to advise on a case where the reason for capital raising was to fund lifestyle improvements, although I have done a case where the funds were to pay for solar panels on the roof to save on energy bills, so I suppose that is sort of connected to the cost of living.”
Bickford said she had seen clients looking to release funds in order to make energy efficiency improvements to their home, spurred by the cost of living crisis, which included solar panels.
“I predict that over the coming months we will see more homeowners really start to feel the strain of the fuel costs and inflation, and we will see more clients borrowing to support this,” she concluded.