Judging by the number of enforcement actions taken by the FSA this year against mortgage broking firms one could be forgiven for thinking that the profession is in something of a compliance crisis. 2008 has witnessed the highest number of censures, fines and banning orders against mortgage intermediary firms since the FSA took over the regulation of mortgage advice back in 2004.
Outsiders looking at this increase in enforcement might think there is something inherently rotten amongst the broking community. However, we should not forget that this is an industry comprised of thousands of firms and it is a very small minority that have had action taken against them. Indeed, we should be grateful that the bad apples are finally being dealt with as this can only increase consumer confidence that the regulator is carrying out its responsibilities and that the advisers that remain are abiding by the rulebook.
Without a significant level of confidence in the profession the intermediary sector will suffer, therefore it is vitally important that the adviser-client relationship is placed at the heart of all intermediary firms to help maintain the necessary trust. No place is this more important than in the equity release sector where advisers are dealing with clients who are possibly making the final life-changing major decision of their lives. Taking into account all the specific circumstances and needs of the individual client through a comprehensive factfind is one aspect of the professionalism required. A factfind, however, that is sufficient for a residential mortgage is not going to cut the mustard when it comes to a potential equity release client.
The problem for a number of advisers, particularly those who have recently moved from mainstream mortgages into equity release, is that they assume the process for residential mortgages will simply transfer across to equity release with little, if any, changes needed. This is a common misconception and one which could cause major problems for the adviser and their firm. A number of aspects make this different – best practice means that the client’s beneficiaries may be involved in the interviews, the impact on social security benefits and tax status need to be analysed, product search and analysis tends to be a manual process and the adviser is more likely to advise the client to wait or not take a product at all. This final point may be a bitter pill for the adviser to swallow. However, it is important that these types of recommendations continue to be made if they are in the best interests of the client so fee charging to balance or cover this scenario is advisable. The ‘product at all cost’ option may only place the firm on the regulator’s radar.
Traps to avoid
Advisers who are not particularly experienced in the equity release sector and are finding their feet need to be aware of a couple of advice traps to avoid. One such trap is to place too much weight on what they deem to be the ‘hard facts’ of the case; the other is to not recommend that the client uses a specialist equity release legal adviser. More of the latter in a future article.
For residential mortgages, the ‘hard facts’ of course form a large part of any advice, for example, how much deposit do you have, how much do you want to borrow, what is your monthly income, what can you afford, and so on. Gaining this information is a necessity and will be the fundamentals of any case. Done properly, the client would also be asked about their opinions on interest rate movements and their attitude to the associated risks.
In equity release the hard facts are important especially where the client needs the maximum cash but generally it is the soft fact details that an adviser gleans from a client that have the most impact on the advice. In order to retrieve this ‘soft’ information, the equity release adviser must ask a series of important questions which are the foundations of any good advice in this sector. The type of questions advisers should be asking their clients include the following:
· How long does the client expect to live? What is the client’s anticipated lifespan?
· What is the client’s attitude to house price inflation?
· What are the client’s wishes with regard to their estate and how they would like to distribute its contents?
· Tenure is completely guaranteed until death or long term care. How important is it to them that their name(s) remain on the deeds? What is the client’s attitude to giving up the ownership of their property?
· How does the client feel about borrowing? What is the client’s attitude to debt?
· What is the client’s likely need for funds in the future? Do they need the security of knowing they can definitely come back and access the equity remaining in the property?
· What is the client’s attitude to risk? How cautious are they? For example, they may have a positive attitude to house price inflation but how much risk are they willing to take on that attitude being right or wrong?
As can be seen, an adviser operating in the mainstream market would have little need to engage in these sorts of discussions with their client. However, in the equity release market, no recommendation or subsequent advice can be made without such questions being asked.
The major point to make with these questions, and it sounds obvious but is too often overlooked, is that these questions are actually there to get the client’s opinions. There may be a healthy discussion around each one, and the client may even ask the adviser’s opinion, but they should be very careful when responding. It is important that the adviser’s opinion does not get in the way of the client’s, leading to the wrong recommendation. For example, if the adviser has suggested that house price inflation is going to be positive over the client’s lifespan, and the client follows this opinion but it turns out to be wrong, then the adviser is leaving themselves exposed to a complaint in the future.
The adviser should always remember that yes, they are there to advise, but no-one is an expert on predicting the future. If anyone is able to say with true confidence where house price inflation will move in the next few years, particularly given the current situation, then one would have to question their sanity.
An adviser’s expertise is all about taking those client opinions – gained from the questions listed previously – and objectively recommending the best product to suit those and their future aspirations and needs. No-one is expecting the adviser to be an economic expert in such matters and neither should they hold themselves up as such. In any client-adviser relationship, opinions matter; the adviser should make sure that, when asking the questions, it is the client’s opinions they work from and not their own.