The Financial Conduct Authority (FCA) has said that equity release is “working well for many consumers” after it published a review of the ever-growing later life market.
But the UK watchdog 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.
This comes after the Equity Release Council said that £1.06bn ($1.32bn, €1.17bn) of property wealth was accessed via equity release products in Q1 2020, up by 14% from £936m a year earlier.
Transactional
Tim Sargisson, chief executive of Sandringham Financial Partners, told International Adviser that “it’s encouraging” that the FCA’s review found equity release to be working well for many consumers.
But he added: “In my experience, it is still too ‘transactional’ and seldom forms part of a wider financial plan. Indeed, the transactional nature of equity release is often how equity release is depicted in the adverts on weekday afternoon television.
“This transactional approach often leads to consumers releasing too much which they don’t really need and seldom consider the fact that they likely will not be capable of repaying another mortgage before they die.”
Inheritance
Sandrigham’s CEO also spoke about the long-term problems with UK investors using equity release.
“Any amount left unpaid will be subtracted during the sale of the home. This could take away from inheritance amounts left to children and grandchildren,” Sargisson added.
“Homeowners should also think of both the long-term and short-term implications of equity release and the fact that this could impact on means-tested benefits.
“People looking to equity release should engage with an independent financial adviser to consider the wider implications of equity release, rather than specialist equity release firms who are incentivised to persuade homeowners as to the merits of this approach, with less focus on the drawbacks.”
Review
The FCA said that deciding to take out equity release is one of the “most important and long-term financial decisions consumers make in later life”.
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.
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.
The UK regulator said that it is “more important than ever that advice on equity release is appropriate taking into account consumers’ individual circumstances”, as people look for liquidity during the pandemic.
The review was undertaken by the FCA as part of its exploratory work on later life lending, where it considered the borrowing opportunities available to consumers aged 55 and over, who may be more vulnerable.
Still not up to scratch
Jonathan Davidson, executive director of supervision, retail and authorisations at the FCA, 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.
“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.”
