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FSA/PN/055/2005
24 May 2005

The Financial Services Authority (FSA) has warned advisers it must address the regulator's serious concerns about the suitability of advice being given to consumers on equity release schemes and follow-on investments after it completed initial work into this area. 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.

The results of mystery shopping revealed that more than 70 per cent¹ of advisers in these firms did not gather enough relevant information about their customers to assess their suitability for the product, and 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 investment bonds.
• 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 risk².
• 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 many advisers giving 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 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 advisers ensure that anyone considering releasing equity from their property understands what is involved and can make a decision that suits their circumstances.

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 by visiting the Equity Release web pages.

Footnotes

^1. This research was qualitative and involved 42 shops to 20 firms. For details of the scenarios used and a detailed breakdown of the findings please refer to the Briefing Paper.

^2. For example, an average interest rate on a lifetime mortgage is 7%, and the projected growth rate for an investment bond, after charges, using the lower growth rate assumption (to reflect the low risk profile of the underlying funds recommended), is around 3.5%.

 

Notes to editors

1. A four-page briefing on the mystery shopping exercise and further research into investment advice is attached to this press release. Further information on the research, including a detailed report on findings, and anonymous case studies, can be obtained from the FSA press office.

2. The FSA took on statutory responsibility for mortgage regulation on 31 October 2004. The FSA does not currently regulate Home Reversion Plans.

3. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.

4. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.