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Policing the perimeter

Angela Faherty

October 6, 2007

If you are an intermediary currently involved in the equity release market then you may be forgiven for thinking that the Financial Services Authority (FSA) has been rather quiet recently in its missives regarding the sector.

There may even be some out there who believe that the regulator is now less concerned with equity release advisers, considering the lifetime mortgage sector has already been the subject of a number of thematic reviews since ‘Mortgage Day’.

However, with the regulation of home reversion plans from April this year, the idea that the FSA is somehow leaving the equity release market to its own devices could not be further from the truth. We should remember that equity release in general is constantly on the FSA’s radar given its belief that the sector is ‘high risk’ and that the potential for consumer detriment is greater in this market than in others.

Main focus

Clearly, the FSA’s main focus in the earlier part of the year was on the home reversion providers and advisers, and ensuring they were able to successfully navigate the authorisation process to ensure they could keep on providing and advising on home reversion plans.

Like any new sector that comes under the auspices of the FSA, the first objective the regulator has post-regulation is to police the perimeter. That is to ensure that firms who have not sought authorisation do not continue to operate illegally in the market. This is vitally important to ensure the confidence of consumers and those who have sought and gained authorisation.

The FSA is currently allowing the market, both home reversion and lifetime mortgage, to work naturally and the official line is that both are being kept under a ‘watchful brief’. The results of the last FSA work on lifetime mortgages were published in July 2006 and given that we are now nearly a year and a half on, perhaps the equity release market is not considered as high risk as previously? This I would not count on.

A new programme

Having talked to one of the FSA’s senior equity release team members, everything seems to be pointing towards an FSA work programme on this market beginning in quarter one of 2008. This will include a review of both lifetime mortgage and home reversion and will benefit from the FSA’s collation of a considerable amount of data on these two sectors.

By early next year, of course, the regulator will be in possession of home reversion plan provider data through the Mortgage Lenders and Administrators Return, plus it will have its hands on the first set of complaints return data. This will allow it to take its first firm look at the newly regulated home reversion market to ensure that the rules are being followed and implemented.

Advisers, of course, will figure prominently in any FSA work and one would expect a series of firm visits, plus extensive desk-based work into cases where home reversion plans have been sold. One wonders if the regulator will take a similar stance to ‘dabbler’ firms in the home reversion market as it has done with those who only complete a very small number of lifetime mortgage sales.

You may recall that the FSA has been less than keen to see advisory firms ‘dabble’ in equity release and has written to all firms it considers to be conducting only small amounts of lifetime mortgage business. The letter warned the firms about their responsibilities in providing appropriate advice and in treating their customers fairly. The sometimes hidden accusation from the FSA seems to be that firms who only complete small volumes of business are more likely to give poor advice. However, even those that do not ‘dabble’ should expect to be challenged on their advice processes – especially if there are indications of product or provider bias.

Firms must be aware that they need to invest time, money and patience into providing equity release advice and if they are not able to commit in this way, they should refer these types of clients to those that do.

Getting up to scratch

With the FSA gearing up for its 2008 work, now is the time for all those advisory firms who are involved in this market to ensure that their processes and systems and controls are up to scratch. I would suspect that the full range of thematic work options will be used by the FSA, including mystery shopping. It has been quite clear from recent activity that the regulator is much more willing to censure firms if they are found to be flouting the rules. Those who may not have been regulated by the FSA before should ensure they are prepared for the full scrutiny that its employees will bring to the market.

One way to learn more about the market is to attend one of a number of equity release events currently taking place. Forums around the country are aimed not just at advisers already active in the market, but also those who are considering entering the sector. The idea is to give advisers an overview of the market itself, its potential clients and the opportunities available. These events also outline the key responsibilities of an equity release adviser and the areas which need to be covered to keep the FSA happy. In that sense the forums are a useful checkpoint along the ongoing road of compliance.

So, while the equity release market may feel it is being left alone at the moment, the intentions of the FSA are clear. It will be taking another look at the whole sector early next year and it will expect to see continued improvement. You have been warned.

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