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Notes from the Equity Release Roundtable
Hosted by the Financial Services Consumer Panel and StepChange Debt Charity 13 November 2013
At the Financial Conduct Authority, 25 The North Colonnade, Canary Wharf, E14 5HS
Objectives of the roundtable
• Bring together experts, examine concerns, and discuss research.
• Provide a forum for interaction between experts.
• Develop clear statements that define our understanding of the problem and focus on possible solutions. Issues to explore may include: value for money, price transparency, flexibilities and penalty for repayment, portability, impact on complex welfare benefits, quality of advice, better alternatives
• Raise awareness of the issue, and highlight the FCA’s role in keeping the market under review.
• Develop recommendations for future research or work in this area.
• Challenge and provide an opportunity for policymakers to hear and participate.
Consumer Panel and StepChange concerns about the market
The Consumer Panel believes that the equity release market is severely restricted in consumer choice due to the market being dominated by three main product providers and adviser firms. In addition, many of the products have confusing, restrictive, and changeable terms. It is therefore difficult to shop around and almost impossible to switch.
The Government have implied that it is looking to the equity release market to help solve two major social issues of later life - low retirement income and long term care funding. The Panel believes that the market needs to improve before this can happen. The Consumer Panel therefore want to start a meaningful debate about how to encourage new product providers into the market, make access to advice easier and fairer, with more affordable and better products.
StepChange Debt Charity has been offering free and impartial equity release advice to
consumers over the last three and a half years. Their day to day experience of dealing with all the players in this market has led to useful insight and knowledge about how the market operates.
They make the following observations and suggestions for improvements:
• Remuneration: Stepchange Debt Charity would like to see commission banned in this market. They suggest that the industry or FCA should take an RDR approach, ban commissions to increase competition, increase transparency, choice, innovation and encourage new entrants.
• Cash backs, variable pricing/variable incentives: Cash backs devalue the industry and advice, these should either be eliminated or capped, so that clients can focus on suitability of products and advice. It is not in clients’ best interest that all advisers are unable to recommend all products. Variable pricing should be removed, there should be a single product tier for the entire industry to access.
• Terms and conditions: It is not appropriate to offer products which run the course of a lifetime but which prohibit consumers from making important lifestyle changes later,
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especially when they are unlikely to be able to predict or know what their needs would be 20 years or so earlier. The industry need to go back to the drawing board and be more open minded about what kind of products to offer to take the market forward.
• Suitability of advice: Is the quality of advice good enough to cover the shift in the clients’
objectives to long term care, debt management and interest-only mortgages? The industry should look again at what qualifications an equity release adviser needs and continue to work on standards to drive confidence in the equity release market.
Research - Financial and Legal Advice when purchasing equity release
The findings from a recent consumer study undertaken by the University of Essex into financial and legal advice when purchasing equity release plans, was presented to the roundtable. The study focussed on consumers experience when purchasing equity release plans. Around 70 consumers were interviewed in-depth. These included lifetime mortgage and home reversion consumers.
Consumers had held their plans for a minimum of 5 years but mostly 8 years plus, and were drawn from different socio-economic backgrounds.
Key findings
• Financial advice works well when consumers have already carried out some research of their own, thought about the questions they might ask the adviser, had time to digest the
information and they had access to others, i.e. friends or family, to help decipher the information.
• Financial advice was less useful when consumers had not carried out their own research and were not in a position to know what questions to ask, under pressure to clear debts, or in financial difficulty.
• Legal advice did not seem to inform consumers’ decisions. Consumers had either already made up their minds by the time they saw their solicitor or, for some, they felt they could not change their minds.
• Some providers’ terms and conditions changed post taking out an equity release plan so that consumers were unable to move to sheltered accommodation.
• The research concluded by noting that if these products are to meet the current and future needs of consumers products need to be more flexible, or there needs to be some sort of control over terms and conditions.
Key points post the research presentation Legal Advice
• Solicitors provide an additional layer of protection which is not required by the FSA, but put in place as best practice by the industry.
• Solicitors have a difficult job covering everything at one consultation with a client, but they are in a position to ascertain the client’s lucidity or ability toundertake the transaction.
• Most of the legalities are already covered within the financial advice process.
• Where a client does not have support and is vulnerable, one firm would appoint a solicitor at their own cost to support the client and look after their interests.
• Advisers rely on solicitors to point out important factors such as inheritance tax.
• Solicitors with experience of later life issues, work hand in hand with specialist financial advisers.
• There have been problems with family solicitors who are not experts in equity release plans.
• The findings didn’t question or assess the quality of legal advice, rather it focused is whether such help, from a consumer perspective, is of value and the answer seems to be no.
Changes to Contractual terms
• Lenders changing the terms of contracts and not allowing people to move to retirement
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apartments were presented as a growing problem.
• Advisers have to advise clients that they can move to a retirement apartment but this was subject to the lender’s criteria at that time.
• In some cases, lenders did allow the client to move (where the client needed to retain independence or treat ill health) but this information was not freely available.
• There are problems with the ever changing definition of a retirement property.
• Lenders argued that retirement properties are often more expensive than other properties as they also involve additional service charges, which make them less affordable for those seeking to move into them.
Roundtable discussion – Making the market work better Key points from Respondents and the wider discussion:
• The reputational damage to the industry in the 1980s is still around today. This unsavoury reputation as well as the capital requirements under Solvency 11 contributes to the reluctance of new providers to enter the market. It was however noted that a new provider is joining the market in a month’s time.
• One participant thought that the market was very competitive. He noted that on the supply side his firm competes with other firms in 30% of cases. On the demand side consumers were encouraged by the regulator and in the disclosure document to shop around.
• One attendee said that firms educated consumers through marketing, and the whole process of purchasing an equity release plan could take 12-18 months, so there was plenty of time for the consumer to think things through.
• Consumer representatives said that competition in this market is being driven by providers and intermediaries rather than consumers. There were concerns that this could lead to bad
consumer outcomes.
• Consumer representatives suggested that an OFT-type competition review should be undertaken by the regulator. The study should assess how well aligned the advisers’ and providers’ interests are with the interests of consumers.
• One firm thought cash backs were bizarre and noted that they didn’t use it, another thought such product features were important to some consumers and that it should be left to the adviser to make that call with the client.
• Industry representatives argued that variable pricing has been around for over 10 years, and applies in other financial markets.
• Consumer groups noted that the equity release market dealt with older and more vulnerable clients and that variable pricing was confusing for them.
• There were concerns that the product is not meeting the long term care needs of those who buy it. It was also pointed out that most of those who purchase the product do not end up in care.
• Consumer groups noted that there have been complaints from people who could maintain a normal mortgage but are pushed towards equity release as the only option for people over a certain age.
• Industry representatives noted that there are low levels of complaints and a high level of customer satisfaction in this market. Typically these products come to an end when a person goes into care but in the intervening years these products are increasingly being used to boost a disappointing pension income.
• It was stated that these are simple products, which if explained well are easily understood and are designed to help consumers enjoy a more pleasurable retirement. Another participant strongly disagreed that these were simple products. It was argued that most consumers find lifetime mortgages complex, compound interest isn’t an easy concept to understand and there are hidden terms and features that consumers have never come across before.
• All research done by Which? found big problems with consumer advice in this market.
• Value for money – industry representatives noted that equity release products will always be more expensive than an ordinary mortgage due to the characteristics, extra advice, regulation,
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but that there were significant safeguards in place e.g. no negative equity guarantee.
• Value for money – consumer groups noted that value for money extended to the terms and features of this product, particularly when they are sold to vulnerable consumers who may not have interacted with the financial services industry before.
• Exit Penalty: Consumer Groups raised concerns about mark-to-market exit penalties,
particularly consumers’ inability to calculate what these charges will be until the day they pay back the money. It was noted that this significantly constrained consumers from planning and that this was grossly unfair. Industry representatives acknowledged that this was difficult for consumers to understand but noted that it was the fairest and most accurate mathematical way of calculating the charge.
• The FCA noted that the equity release market is a really small market (½% compared to the mortgage market). The FCA informed the group that they have had some applications for entry into the equity release market. The FCA said it was looking at this market through its
implementation of the Mortgage Market Review and follow-up to the results of the interest only mortgages review. The FCA noted that they refer to this market not as high risk but higher risk, as customers are more vulnerable, entering into a policy which might seriously impact them later in life, and therefore include the provisions for advice. They feel that the level 3 qualification is adequate but have committed to review this in the next few years and would be grateful for feedback on whether it should be higher or not. The provider/intermediary pricing issues apply across the market, not just home finance. They will continue to review the market and how it might be influenced by government policy. They are not planning to do a
competition study but any problems should be raised with them, particularly post regulation issues.
Wish Lists
Attendees were asked for one wish with regards to how they wish to see the market change. The following were noted as the wish list:
• Quality advice and products; advisers who use product to increase income in retirement and pay for care must understand the impact and interaction with other planning needs going forward. Is it good enough that advisers have to tell clients that they may not be able to move later on if it is appropriate to the lender at the time?
• A competition review of the market before the market expands – what does value for money, competition and good products look like for consumers.
• Remove commission bias; good consumer outcomes; and more definition if used for long term care.
• Greater flexibility in repayment charges where there are dramatic life changes.
• Greater product innovation.
• Explore further how to get building societies more involved in this area.
• Provider agrees to hold settlement figure for 30/60 days.
• The FCA addresses issues around no age limits in the standard mortgage market and the overlap with the equity release market.
• The ERC to consider adding a consumer voice to their Industry/Government Forum to carry forward discussions.
• Overcome stigmas of past in the eyes of the general consumer.
Next Steps
Four main areas were identified for further discussion:
• Products - how can existing products be made more flexible and innovative; in the longer term how can they meet the public policy interests of ageing population?
The industry should lead on these discussions, with input from consumer bodies, industry and
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the FCA should maintain an interest.
• Quality and standards of advice - is it really working? Issues for industry and the FCA
• Reputational problems – do they still exist and how can industry build trust to eradicate reputational problems. Issues for industry.
• Competition – charging, pricing, commissions, constraints to barriers to entry and is there real competition? FCA could do a market study as an initial case study into the use of their new competition powers.
