In work carried out since mortgage regulation began last autumn, the regulator found that more than 70 per cent of advisers are not gathering enough information about their customers before offering them advice on equity release. The regulator also found that, once the lifetime mortgage has been sold, consumers are being advised to invest some of the equity released in products that are not suitable for their needs and may unnecessarily expose them to risk. The FSA has not ruled out the use of its enforcement powers following the results of this work.
The FSA had identified lifetime mortgages as a priority ahead of becoming responsible for mortgage regulation on 31 October last year, and carried out an exercise involving 42 mystery shops – including product providers, Independent Financial Advisers and mortgage brokers – to assess advice standards within the lifetime mortgage market. A second piece of work, involving visits to firms and desk-based research, looked closely at subsequent investment advice provided to customers of seven firms that are active in this market.
As well as revealing that many advisers in these firms did not gather enough relevant information about their customers to assess their suitability for the product, more than 60 per cent of the mystery shoppers reported that their adviser had not explained the downsides of equity release.
The FSA is also concerned about the findings of the review of subsequent investment advice where, in all of the seven firms looked at, advisers failed to explain the link between this type of borrowing and subsequent investments. The FSA is concerned that advisers are recommending consumers to borrow to invest without properly explaining the implications of this. The investment advice given fits into three key areas:
-Investing for growth: the FSA identified that, in some firms, advisers are encouraging customers to release more than they require and reinvest the surplus cash in products such as
- Investing for income: There are equity release products on the market that allow the consumer to draw down an income from their lifetime mortgage. Instead of recommending this route, advisers are recommending that consumers release a lump sum and reinvest it in, for example, an investment bond and take 5% withdrawals to provide a regular income stream. As well as being more expensive for the consumer, reinvesting capital in equity-backed investments unnecessarily exposes the consumer to risk.
- Inheritance tax (IHT) mitigation: Using equity release for IHT mitigation is a very finely balanced arrangement. A number of the cases the FSA reviewed were likely to leave the customer's estate worse off than if they had not taken any action to mitigate their IHT liability.
In many cases reviewed, customers were zero-rate tax payers and did not have any existing investments, and the FSA is not satisfied that recommending a complicated strategy was suitable for these consumers.
Clive Briault, Managing Director of Retail Markets at the FSA, said: "Our work has found another disappointing instance of consumers being given poor quality advice. For example, some people releasing equity from their homes are being advised to borrow more than they need, and to invest these additional funds, which can be a high risk strategy. What makes matters worse in this area is that these consumers tend to be elderly and vulnerable people who can ill-afford to be unnecessarily exposed to risk.
"It is extremely important that anyone considering releasing equity from their property is properly advised so they understand what is involved and can make a decision that suits their circumstances. We have produced material to help consumers understand these risks and listed key questions to which they must have satisfactory answers before making a decision.
"We will be carrying out further work in this area and we expect senior management to ensure that their advisers are giving appropriate advice, and to deal with any concerns that we identify. It is our aim to help retail consumers to achieve a fair deal, and the financial advice market should provide good quality, suitable advice to consumers."
The FSA will distribute 120,000 leaflets entitled "Thinking of raising money from your home?" to GP surgeries, libraries, Citizens Advice Bureaux, and other not-for-profit agencies across the UK. A free factsheet providing more detail for consumers is also available by calling the FSA leaflet line on 0845 456 1555 or on its website at http://www.fsa.gov.uk/consumer/equityrelease
