Any adviser active in the equity release market would do well to spend some time looking at October’s issue of the Financial Ombudsman Services’ ‘Ombudsman News’ publication. This is because it provides a number of case studies specifically highlighting complaints relating to lifetime mortgages – the detail can be found here: http://www.financial-ombudsman.org.uk/publications/ombudsman-news/121/121-mortgages.html
It’s not very often that FOS will talk about equity release – indeed it highlights in the introduction that equity release complaints form a very small part of its mortgage workload – however as the market grows it anticipates it will be asked to look at more cases. It’s for this reason that it wants to give the market a steer on the reasons why it has upheld specific complaints and what it looks for when it is determining if consumer detriment has occurred.
The information outlined in Ombudsman News is a must-read for any adviser because, regardless about how we might think lifetime mortgages (and equity release products in general) are appropriate for clients, the Ombudsman might take a completely different view should a complaint be made. For instance, here are some of the key areas that FOS is concerned about:
- ‘Lifetime mortgages are a relatively expensive form of borrowing.’ There are no comparisons made here – expensive compared to what? However, the Ombudsman explicitly states: ‘We might uphold a complaint if we find that the consumer could have raised the money they wanted in a different, less expensive way.’ A lesson here for advisers to explore all other avenues as well as the lifetime mortgage option and fully explain why rates are more expensive than, for example, normal mortgages.
- ‘We might uphold a complaint if we see evidence that the consumer always intended to repay the mortgage early – for example, because they’d planned to move house.’ Again the Ombudsman is highlighting what it sees as the high costs involved in a lifetime mortgage, for example, the roll-up of interest and, on top of this, if the loan is to be repaid back early, some ‘significant early repayment costs’. Advisers will need to document fully why they recommended a lifetime mortgage if the client said they were likely to pay it back.
- Finally, in terms of upholding a complaint and judging that a lifetime mortgage should never have been sold, the FOS says… ‘we’ll tell the business to put the consumer – or their estate – in the position they would be in if they hadn’t taken it out. We’ll need to take into account whether the consumer spent any of the money – and also whether they paid any set-up fees and charges.’ As you can imagine the redress could be significant.
The case studies listed in the issue are particularly involved and we do not have time to go through each one here but here are some particularly relevant highlights for advisers to keep in mind:
- One complaint involved allegations from the client’s Power of Attorney that they had been sold a lifetime mortgage they did not really need and hadn’t understood. The FOS did not uphold this case. Its review of the adviser’s file suggested the factfind clearly demonstrated the money was needed and used to repay business debts and undertake home improvements. The factfind recorded the client’s accountant had been at the original meeting and asked pertinent questions. This is great to see – an adviser obviously doing a fantastic job of documenting and articulating exactly what happened and making the Ombudsman’s job that much easier.
- One other complaint suggested the consumer didn’t understand the terms of the lifetime mortgage. This was upheld by FOS. The client was just three years away from repaying their mortgage with adequate endowment plans in place and no affordability issues apparent from the factfind. Instead the customer appears to have been advised to use existing savings to repay the mortgage, cash-in the endowments to spend on home improvements, car and holidays, and take the lifetime mortgage to replace the capital they already had. The client made the complaint eight years into the lifetime mortgage when they decided to move. The result was that the client had to be put back in to the position they would have been in but less the benefit of some of the release they had spent.
- In the final example, FOS upheld a complaint where equity release was used to purchase a motor home (£25K), but when some years later the client retired and took a lump sum from his pension – using some of it to pay off the lifetime mortgage – they were surprised at how £25K had escalated to £40K. Tapping into the lump sum earlier to fund the motor home would have been a better option, but was not explored – FOS agreed. It appeared the adviser had known of the pension which the client could have drawn off sooner but failed to adequately consider this and the fact the client was essentially looking for short-term funding to buy the motor home. The equity release firm had to pay the difference between the £25K and the costs of redeeming the lifetime mortgage plus 8% interest, plus a refund of all original fees and costs when the product was set up.
These examples clearly show the need for advisers to cover off every single conceivable option with a client when determining whether equity release is right for them. It also shows the importance of knowing a client’s finances inside out, not just their wants and needs, and it clearly outlines the huge importance placed on record-keeping and accurately detailing everything in the factfind and all correspondence. If advisers can keep all this in mind then they are putting themselves in a much stronger position should the FOS ever come calling.
Chris Prior is manager, sales and distribution at Bridgewater Equity Release