Covering all of the issues

Angela Faherty

November 3, 2007

In my last column I wrote about the Financial Services Authority’s (FSA) scrutiny of the equity release sector and its intentions for further thematic work on both the lifetime mortgage and home reversion market.

It seems to be the regulator’s intention to focus again on the whole of the equity release market in Q1 2008 and therefore advisory firms involved in the sector should ensure their systems and controls, processes, and overall advisory service is up to scratch.


Until recently it would have been difficult to point to the consequences for firms which did not comply with the equity release rules. While advisory firms in different sectors have met with the full force of the FSA’s enforcement action and been fined, there had been no specific case of an equity release adviser being censured in such a manner. Until now.

Recently the FSA, for want of a better phrase, broke its duck in the equity release market issuing its first fine of £10,500 to The Minel Group Limited, a firm based in Newcastle. The regulator gave the fine for, what it called, ‘exposing consumers to the risk of being sold an unsuitable equity release (lifetime) mortgage’.

Along with the fine, Minel must now review all its sales of lifetime mortgages from the period 9 November 2004 to 9 December 2005, compensate all customers who may have received unsuitable advice and has also agreed to stop selling lifetime mortgages. You will notice that the review period goes back to the start of statutory regulation in the mortgage market and Minel’s failings were clearly picked up during the FSA’s initial foray into the equity release market.

FSA agenda

This case is interesting for a number of reasons. Firstly, of course, and something the FSA is keen to point out, this is the first time action has been taken against a lifetime mortgage adviser. The way the FSA has drawn attention to this could mean a number of things.

It could be trying to say that given this is the first fine, consumers should not be overly concerned that there is an endemic problem within the equity release market. The regulator will surely not want to panic equity release customers, especially at a time when media scrutiny is intensifying.

Secondly, the FSA could be taking a different tack and preparing the market for further fines in this area. While we might all hope this particular case is a one-off, the likelihood will be there are other firms currently being processed through the enforcement process and will eventually receive a similar fate.

For those advisers involved in the equity release sector, the Minel case gives some useful pointers to the way the FSA works, what it is looking for, and the areas which could result in further investigation.

In previous mortgage-related work the FSA has questioned the robustness of some firm’s record-keeping procedures and their systems and controls. These core areas are highlighted in the Minel case with the main problems as follows:

  • The firm had ‘insufficient procedures for controlling its lifetime mortgage business and the quality of advice provided’.
  • It ‘failed to record sufficient information about customers’ personal and financial circumstances to establish their needs and objectives, and to demonstrate the suitability of its recommendations’.
  • Finally, while the FSA categorises lifetime mortgages as a higher-risk product, the firm did not have any specific training and competence (T&C) procedures in place.

A familiar ring

Anyone who has looked at the FSA’s recent final notices against intermediary firms and the results of its various thematic work projects will be aware that these same failings have a certain familiar ring to them.

Record-keeping, suitability and T&C have been raised as concerns for the regulator in all manner of reports from the quality of advice, to the non-conforming and self-cert reviews, and now here in the equity release sector. It would seem that firms continue to underestimate the necessary process and resource that is needed to ensure the customer receives suitable advice based on their circumstances.

Advisory firms must be able to clear evidence that they recorded sufficient personal and financial information from the client to show they could afford to enter into a lifetime mortgage arrangement. Advisers must also be able to deliver proof on the reasons why that product was suitable for the client and the reasons for the recommendation. Time after time, insufficient practices in these areas are brought to light by the FSA.

Considering the FSA considers the lifetime mortgage market to be ‘high risk’, it is even more imperative that specific procedures are in place to monitor the quality of the advice being given, plus a robust T&C scheme to ensure the ongoing T&C needs of all staff are met.

With another major piece of work into the equity release market on the horizon, advisory firms should ensure they can not be accused of similar failings. The issues uncovered at Minel were first identified during an FSA supervision visit in May 2005.

With the regulator committed to more contact with smaller advisory firms in particular, and specifically those firms that only conduct a small amount of equity release business, the likelihood of a visit, telephone call or mystery shop has never been higher. It is therefore imperative that all issues have been covered, otherwise the penalties that could be incurred are all too clear to see.

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