Claire Barker is managing director of Equilaw
In December of last year, the Financial Conduct Authority (FCA) confirmed that it had begun an ‘exploratory’ (though as yet informal) review of the later life lending market, with the regulator aiming to achieve a better understanding of working practices within the sector as well as to identify and reduce ‘any potential harms’ that might befall customers.
It also confirmed that it would ‘take action’ against any firm or practice that exhibited clear evidence of wrong-doing, with some critics (such as former FCA mortgage policy manager, Lynda Blackwell) raising concerns about the suitability of certain later life products, the sales techniques used by some advisers and the possibility of an advice gap resulting from a disparity in paid commissions; a potentially serious issue if confirmed.
Yet, while the review is intended to cover lending practices across the entire later life sector, some media outlets have chosen to portray it as an investigation into the equity release industry specifically, with one particular tabloid publication asserting that fears of a PPI-type mis-selling scandal have prompted the FCA to single out and ‘probe’ the industry- a deliberately mis-leading, highly emotive and all too typical cake-and-eat-it journalistic ploy.
The article makes great play of the dangers connected with compound interest levels and of the threat that rolling debts can pose to the value of properties and inheritances, while also suggesting that many customers are unaware of or misunderstand the implications of these risks.
Yet, the equity release sector has never made any bones of the fact that lifetime mortgage products are reliant upon a very specific set of circumstances or that their suitability can be limited in many cases.
This is why ER customers are barred from pursuing an application until they have consulted with an independent and impartial, fully qualified and insured legal adviser face-to-face; a far reaching process that is designed to discuss the risks and rewards of the advised product in depth and to establish that the client understands the long-term nature of their contract.
Moreover, legal representatives are required to assess whether clients have been unduly pressurised or coerced by a third party (be it a family member or over eager adviser) and to thereby inhibit the risk of mis-selling or bad advice – a form of protection which is entirely absent from other later life product options.
However, the article fails to mention this safeguard at any point in its narrative (other than as a passing quote from the chief executive of the Equity Release Council at the very end of the piece), whilst implying that sales commissions paid by ER providers are motivating advisers to ‘sell inappropriate loans’ to custom bases; bases that one would assume to be woefully befuddled from the tone of the writing.
And, while many within the industry would acknowledge that commissions paid on equity release recommendations can outweigh those for RIO mortgages, there isn’t a scrap of evidence to suggest that this has produced a sales bias of any kind or that aggressive sales techniques represent an industry norm.
Moreover, even if one was to assume (for the sake of argument) that some kind of bias did exist, there can be little doubt that the mandatory legal process that underpins consumers applications and the tight regulatory standards that are maintained across the industry are robust enough to offer an effective counter-balance. Indeed, Equity Release Council (ERC) membership standards (which were updated at the beginning of the year following a consultation process with the FCA and the Treasury) are committed to the support of regulated financial advice, face-to-face legal vetting and product safeguards.
Moreover, if the FCA decides to focus part of its review on this particular issue and to analyse the use of commissions over fees (irrespective of the outcome), this all benefits the customer. It is important for an industry that has grown at the rate which ER has achieved to be scrutinised from time to time (if only to maintain levels of customer confidence) and for checks and balances that protect and promote the best interests of all parties to be implemented wherever isolated incidences of harm are found. Indeed, this is one of the reasons why the Equity Release Council (ERC) has so warmly welcomed the FCA review; with membership of the organisation almost doubling in the past two years (from 219 to 431), they have nothing to hide.
Nevertheless, media suggestions of an advice gap that specifically favours the interests of one product at the expense of another are particularly galling, especially when one considers the low numbers of brokers who are actually qualified to advise on ER and the low levels of confidence that are reported when discussing product options. Do these not constitute examples of compromised advice or serve (as the director of Access Equity Release, Martin Wade has pointed out) to undermine the reputation of the ER sector?
And, while some readers may regard the forensic examination of a newspaper article to be a step too far, it’s worth bearing in mind that media reports of this kind can have troubling ramifications for our sector if they go unchallenged; especially when they are so off target.
Not that there’s much we can do to stop it, of course.