• FSA Library
  • Communication documents
    • Press releases

FSA/PN/071/2006
19 July 2006

Despite improvements over the past year, firms still need to do more to improve the quality of their advice on lifetime mortgages, according to the Financial Services Authority.

The second review of this market, designed to check progress since a similar exercise at the start of 2005, comprised 75 mystery shops and visits to 23 firms. It found that performance varied significantly between firms.

The improvements made by the large product providers reviewed, which advise on lifetime mortgages directly or through their appointed representatives, mean they now generally have in place the overall systems and controls to enable their sales forces to give an acceptable quality of advice to their customers.

However, the review found greater variation of standards among intermediaries. In some cases standards were unacceptable, particularly in firms where lifetime mortgages are not a significant part of their business. These firms tend to write occasional business in this area without developing the necessary systems and controls, knowledge and skills to give customers the quality of advice FSA standards require.

In contrast, those intermediary firms which have committed to the lifetime mortgage market by putting in place effective systems and controls and effective training and competence arrangements were found to be meeting, and in some areas exceeding, regulatory requirements.

Overall, the review found the following areas where further progress needs to be made:

• in a third of the occasions sampled where clients could have been eligible for means-tested benefits or grants, advisers did not pay sufficient attention to this issue;
• advisers in all firms consistently failed to explore in depth the impact of taking out a lifetime mortgage on their clients' future options;
• in around a third of cases, advisers still failed to issue the Initial Disclosure Document; and
• some advisers recommended to their clients the creation of arbitrary, sometimes excessive, "rainy day" funds, often with no clear record of the rationale for doing so.

Clive Briault, Managing Director of Retail Markets at the FSA, said:

"Welcome progress has been made by the industry over the past year. However, we remain concerned over the variable quality of advice provided in this market. The customers for lifetime mortgages are typically older and potentially vulnerable, so firms need to take particular care to ensure that suitable advice is given as a key element of treating customers fairly.

"There is no place in this market for firms that do not develop the necessary skills and do not implement appropriate systems to ensure that they give suitable advice. We expect firms to commit to delivering quality advice or to refer the business to firms that have done so."

The review found examples of good practice among large product providers and the better performing intermediaries. These included specialist lifetime mortgage training programmes for advisers; the checking of cases before final recommendation; the use of informative, client-specific suitability letters; and firms addressing the means-tested benefits issue by using specialist software to assess their clients' eligibility.

The review also found relatively few cases of borrowing to invest in high risk products, which had been an area of concern a year ago, with many firms having introduced effective controls in this area.

The FSA will continue to work with the trade bodies, who are actively engaged in improving standards in the market, to communicate the good practice being found and the common problems firms should avoid.

The regulator is intervening directly in respect of those firms whose standards were considered unacceptable and, more generally, will look to be satisfied that firms engaging in the lifetime mortgage market have made the necessary commitment to it. This may lead to formal enforcement action in some cases. Further work will be done next year to reassess the standards of advice in the equity release market.

Notes to editors

1. A lifetime mortgage is a mortgage product under which the lender gives the borrower an advance against the property and takes a mortgage charge over the consumer's property. As the name suggests, lifetime mortgages are available to consumers for their lifetime, or until sale of the property, or until the consumer moves out of the mortgaged home (e.g. into residential care). Lifetime mortgages make up 94% of the Equity Release market with Home Reversion Plans representing the remaining 6%.
2. The FSA took on responsibility for lifetime mortgages when statutory mortgage regulation started on 31 October 2004. The FSA does not currently regulate Home Reversion Plans but is expected to take this on in Spring 2007.
3. The 2005 review found that most advisers were gathering insufficient information before making recommendations and not explaining the downsides of equity release. Also that some advisers were failing to explain the risks of borrowing to invest and were advising customers to invest some of the funds from equity release in unsuitable products. More details about can be found in press release 054/2005.
4. The 2006 review involved 75 mystery shops with three different scenarios. The detailed mystery shopping report to accompany this work will be published in September. The review also included visits to a cross-section of 23 firms who offer advice on lifetime mortgages to discuss their business plans for this market, to look at governance, systems and controls and training and competence and to assess firms' performance.
5. The FSA's review of lifetime mortgages is part of a range of thematic work which includes the recent appraisal of the quality of mortgage disclosure documentation and follows specific analysis on the process of advice detailed in the FSA's recent publication on Treating Customers Fairly.
6. The FSA will be updating the fact sheet "Raising Money from Your Home" to help consumers understand the issues they need to consider.
7. 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.
8. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.