The Financial Conduct Authority (FCA) has released the finding of its review to equity release.
The regulator found equity release to be working well for many consumers.
However, it highlighted three significant areas of concern which the FCA says increases the risk of harm to consumers:
- Advice given by firms did not always sufficiently take into account consumers’ personal circumstances;
- Consumers reasons for looking at equity release were not always challenged by firms;
- Firms weren’t always able to evidence that their advice was suitable.
The FCA stressed that deciding to take out equity release is one of the most important and long-term financial decisions consumers make in later life. It said that the consequences of their decision are likely to have a significant impact on their financial wellbeing for the rest of their lives and some of the costs can be less obvious but significant. For example, the costs of compounding interest over a long period of time can make equity release an expensive way to meet a short term borrowing need, while the costs of ending these contracts or repaying early if personal circumstances change can also be significant.
In its review the FCA was concerned that the advice given to take out equity release products could not always be shown to be in the best interests of all consumers given their personal circumstances.
In light of coronavirus, which continues to have a significant financial impact on many consumers, the FCA said it is more important than ever that advice on equity release is appropriate taking into account consumers’ individual circumstances.
The review was undertaken by the FCA as part of exploratory work on later life lending, where it considered the borrowing opportunities available to consumers aged 55 and over, some of whom may be more vulnerable.
Jonathan Davidson, the FCA’s executive director of supervision, retail and authorisations, said: “Deciding to enter into a lifetime mortgage is a big decision with a big financial impact for consumers. In many instances it makes sense but whether it does or not depends on personal circumstances and how they might change.
“It is therefore critical that advice offered to consumers looking at lifetime mortgages is suitable to their personal circumstances. It is clear from our review that advice being offered to such consumers, including some vulnerable consumers, is still not up to scratch.
“All firms offering these products should read our review and take action to make sure consumers are receiving advice tailored to their personal circumstances.
“We’ve continued to engage with firms where we had concerns and, as part of our ongoing supervision of Mortgage Intermediaries, we will be carrying out more detailed follow-up work into the suitability of advice in the lifetime mortgage market.
“If in doubt as to whether a lifetime mortgage makes sense for you as a consumer, you should explore your personal circumstance fully with your advisers or with independent sources such as the Money and Pensions Service.”
David Burrowes, chairman of the Equity Release Council, added: “The FCA’s report found that equity release is ‘working well for many consumers’ by helping to meet important social needs, from boosting retirement income to funding home improvements, repairs and adaptations.
“We will continue to work with members and the wider market to make sure this is a universal characteristic, by developing and embedding best practice standards which we would like all firms to sign up. For context, equity release makes up fewer than 2% of complaints about home finance products¹ and, of 38 complaints made to the Financial Ombudsman Service in the last year², only two were upheld.
“The combination of FCA regulation and Equity Release Council standards provides three levels of protection for customers, including independent legal advice alongside regulated financial advice and clear product safeguards. The requirement for customers to receive independent legal advice is unique among mortgages and helps to ensure customers understand the product and are under no duress or coercion to enter into the contract.
“It is vital that customers are supported to consider both long and short-term needs when deciding whether equity release is right for them, as well as potential alternatives now and in future. The FCA’s findings will inform our ongoing work to support advice standards across the market.”