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14/11/23


WHY ARE EQUITY RELEASE AND LATER LIFE MORTGAGES IN THE FCA SPOTLIGHT?

The FCA highlights the ongoing risk of poor outcomes for later life mortgage
borrowers




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The regulator’s review into later life mortgage providers, published on the 14th
of September 2023, took a deep dive into the advice standards and mortgage
advertising of the firms collectively responsible for around half of all the
UK’s later life mortgage sales.

The review is focused on the equity release market where complex products are
sold to customers, particularly customers with a higher risk of being in
vulnerable circumstances.

Where the FCA found that standards have fallen short, it explains that it is
currently intervening robustly with firms to ensure significant improvements in
the advice process.

As a result of this multi-firm initiative, it was highlighted that some firms:

 * Lacked evidence to show that sufficient consideration had been given to
   consumers’ individual circumstances
 * Poorly considered borrowers’ income and expenditure
 * Minimised discussions around alternative options available to customers
 * Incentivised sales, potentially at the expense of quality advice and good
   customer outcomes
 * Steered outcomes in favour of lifetime mortgage products

What’s even more worrying for consumers – and the regulator – is that these are
all ongoing themes were also found in the FCA’s 2020 review of equity release
advice.

 

Firms fail to comply with the longstanding rules about financial promotions

Despite clear and longstanding rules about financial promotions, the outputs of
the review resulted in the amendment and removal of almost 400 misleading
promotions found to be inaccurate or misleading.

The regulator found instances of product benefits being highlighted without
sufficient transparency of risks versus rewards. Evidence of firms using their
regulated status in a promotional manner was also revealed.

A look back at TR14/4 offers a reminder that the FCA’s concerns are not new. TCC
has commented in the past on the need for firms to consider the importance of
the implicit and explicit messages that customers take from promotion and, in
many ways, base their buying decisions on.

Indeed, customers place a high degree of trustworthiness on financial promotions
and tend to view them as a part of the advice that they receive, giving them a
significant level of influence over their decision making.

Equity Release is a very permanent decision for consumers, and financial
promotions can significantly impact a customer’s understanding of the options
available to them. As Sheldon Mills, FCA Executive Director of Consumers and
Competition, said: “Releasing money tied up in your home later in life is a big
decision and can have a financial impact on consumers and their families well
into the future.”

Financial promotions need to comply with the new Consumer Duty 

Financial promotions – or FinProms – go wider than just advertising: the FCA
spelt out in their Consumer Duty guidance that Fin Proms link directly to the
Customer Understanding outcome. This outlines that customers must be given the
information that they need, in a manner which they understand and at the right
time to enable them to make sound financial decisions.

Firms should be considering their communications as a whole – and looking
closely at whether they have the controls in place to meet the regulator’s
expectations under this outcome.

TCC has worked with a number of firms to analyse the regulated content of
promotions and assess the implicit or explicit expectation of product
performance that customers may reasonably assume from messages given.  All of
which are essential to comply with Consumer Duty and wider Product Governance
requirements.

With Equity Release being a complex product, firms should consider how they show
the regulator that their customers truly understand the permanence of their
decision and the downsides, as well as the upsides, of choosing an Equity
Release product – satisfying the FCA’s ‘show me, don’t tell me’ approach.

Quality of advice vs Sales incentive structure

Evidence from the report also showed that some sales were incentivised at the
expense of providing quality advice. Reward structures that encourage the
purchase of a particular product or service when it may not be suitable for the
customer can have far-reaching consequences.

In the Equity Release space, there’s a greater potential for major detriment to
customers posed from financial incentives: the wrong solution can have a very
costly and long-lasting impact due to the higher cost of borrowing and
restricted future access to borrowing to meet needs in later life.

Firms should be asking themselves whether the incentive structures they have in
place at all levels are designed to lead to good outcomes for customers:





Have you reviewed the implicit and explicit expectations that could arise from
your promotions?

Have you undertaken independent consumer research to test your conclusions?

Is the strategy and culture of your business aligned to delivering good outcomes
for customers? And can this be evidenced?





 

Fulfilling your Customer Understanding requirements

Customer understanding is one of the FCA’s key focus areas for mortgage lenders.
The regulator expects firms to tailor all communications to meet the needs of
their client base and to ensure that all materials are fair, clear and not
misleading.

This includes any material used to interact with your customer base – whether
that be in the form of advertisements, verbal communications, online, written
correspondence or product terms and conditions. These should all be carefully
considered under this outcome:





Can you evidence your communications meet the information needs of the intended
recipients?

Are you giving customers the information that they need, and at the right time,
so that it can be easily understood?

Does your analysis incorporate Consumer Duty, Product Governance and associated
PROD rules?

Do you have the right level of MI, metrics and underlying analysis of customer
opinion and challenge?

Do you have the right committees and Quorums to review product performance vs
expectation?





Firms should again bear in mind that this is a segment of the mortgage sector
where customers are more likely to be vulnerable. Later life mortgage products
contain features that customers may be unfamiliar with, and so may find it
difficult to understand – such as ‘interest roll up’ and ‘drawdown facilities’.
As the charges tend to be higher within this market segment, firms should pay
even closer attention to ensuring that their customers understand the associated
fees and charges.

Furthermore, this means that your financial promotions monitoring must not only
be looking at the financial promotions sign-off process but must also oversee
the content, placement and appropriateness of all customer communications.

The Consumer Duty now mandates that all firms put customers at the centre of
their decision making across the full business lifecycle, and that’s why
businesses need to take proactive steps now to meet the more stringent customer
understanding requirements.

Contact us


FIVE WAYS TO ADDRESS THE FCA’S EXPECTATIONS

All providers involved in this latest review have subsequently made changes to
their sales and advice procedures – and the attention now turns to
intermediaries not involved in this review process.

Here, we outline five ways to uncover and address the FCA’s findings at your
firm.

#1 Step up your customer communications

 * Consider the communication needs of all your customers. Communicate in a way
   that’s tailored, considers characteristics of vulnerability and is clear,
   fair and not misleading to the demographic(s) that you target.
 * Take active steps to ensure customers are likely to understand your
   communications and test your communications with intended recipients (having
   a ‘consumer panel’ is a good approach to consider).
 * Get a second opinion. TCC’s Consumer Duty compliance experts can provide
   impartial advice on your financial promotion material and sales practices.

#2 Enable effective decision making

 * Ensure that customers get the appropriate information about their proposed
   product/service, in a timely and understandable format, to enable them to
   make effective decisions.

Ask the right questions:

 * Does your firm provide the right information at the right stage of the advice
   process to customers?
 * Is there adequate friction in the sales journey to allow customers enough
   time to take stock and consider their decision?
 * Are you ensuring that behavioural biases, such as instant gratification, are
   not exploited?

#3 Focus on meaningful conversations

 * Gather all relevant information necessary to provide personalised advice and
   avoid treating customer conversations as a simple filling-in exercise for
   fact-find systems.
 * Don’t rely on customers’ initial stated preferences. Be prepared to consider
   alternatives and challenge, where appropriate, customers’ initial requests
   rather than simply taking customer orders or preferences without question.
 * Explore customers’ preferences and, if there’s any potential negative impact,
   then make the customer aware.
 * Set requirements and expectations for your advisors and ensure they’re in
   line with the requirements of the Consumer Duty.

#4 Set out best practice guided by the Consumer Duty

 * Review whether your sales process helps your customer reach their financial
   goals.
 * Scrutinise whether your business KPIs allow time for meaningful discussion.
   Do you allow customers sufficient opportunities to understand and assess
   their options? Or is only limited time given to conversations with customers
   due to targets?
 * Consider how vulnerable customers are identified – as vulnerable individuals
   aren’t always forthcoming with this information. It’s important that you
   tailor your communication to the needs of those customers and review what
   channels are available to them.
 * Procuration fees and commissions tend to be higher in the later life lending
   market, so ensure that the commission received from providers is never
   prioritised over the suitability of advice.
 * Remember that any advice or arrangement fees should provide fair value to the
   customer, even if the customer is not paying for it.

#5 Spotlight on processes and governance

 * Examine your governance responsibilities under the Consumer Duty. Does your
   firm’s culture drive good customer outcomes, and how does it do this? Can you
   evidence this?
 * Are your later life products appropriately designed to meet the needs of the
   target market, and can you evidence that they reach the target market and
   provide good outcomes?
 * Use MI to review advice and ensure that customers receive support, and
   quality of advice is consistent with the Consumer Duty rules. Consider
   utilising the latest in tech advancements like ReviewAI by Recordsure for
   your MI data gathering. Do you have the right levels of Product Governance to
   assess Products design to distribution and post-sale performance vs
   expectation?

 


HOW TO PREPARE FOR THE ANNUAL REVIEW OF THE CONSUMER DUTY

To date, boards have been expected to oversee and challenge their firms’
implementation of the Duty. Now, the board carries the ongoing obligations to
embed the Consumer Duty – and to ensure that it has the MI required to provide
comfort that good customer outcomes can be evidenced.

Before long, firms will be required to complete their Consumer Duty annual
assessment, which will provide the opportunity for firms to gain real insight
into how well they have implemented the Consumer Duty a year on from its
introduction. The MI firms use for customer outcomes monitoring will be a key to
this assessment.

Here are some key questions to get you started.





Do you have the right levels of evidence to determine:

Product expectation indicators and metrics?

The MI to assess them?

That appropriate evidence of oversight is taking place?

The use of MI?

Take action where appropriate?





Consumer Duty experts like TCC can help your firm design your annual assessment,
carry out a dry run of the review, support with building your customer outcomes
dashboard or conduct a post implementation review to give you the assurance that
you’re on the right track.  Our skilled team of ex-regulators and industry
practitioners have worked across the financial service sector to help firms
identify and address any gaps that went unnoticed at the implementation stage.

We can assist in creating an action plan that your board can make a reality.

If you’re a Stakeholder – a Senior Manager, Director, Consumer Duty Champion or
NED – TCC can support you to discharge your collective and personal
responsibilities by delivering the required challenge and scrutiny to the
business, and maintaining independence in doing so.

Contact us


LEVELLING UP YOUR LATER LIFE MORTGAGE ADVICE

With the stakes so high, naturally, there’s a greater need to consult and seek
external validation.

Make sure your processes and actions deliver the outcomes that matter to the
regulator and your customers. TCC’s professional consultancy team of advisory
and remediation specialists can help ensure you’re on the right track to deliver
advice that truly meets customers’ unique needs whilst achieving the best
possible outcomes.

Whether you’re looking to overhaul your entire framework for long-term
regulatory compliance, or want to identify gaps in your processes to manage risk
more effectively, our regulatory experts have got you covered.

The TCC difference is delivered through our range of personalised services –
from quick, targeted examinations to full-scale governance transformation
projects:

 * Diagnostic check-in

If you’ve already identified an area of potential concern, our compliance
experts can offer a swift, reliable second opinion. Taking a small
representative sample of historical advice, we’ll review your current cases, and
present you with a snapshot of key areas/processes that are in need of
improvement. Then, we’ll outline what actions you can take to achieve better
outcomes.

 * Suitability and quality of advice

Is your advice consistently suitable for a borrower’s individual needs and
circumstances? Have the final outcomes matched customers’ expectations and
goals? And has your advice and process been improved to achieve good outcomes
every time?  TCC’s impartial suitability review of your past advice or ongoing
monitoring of suitability for later life mortgage customers can help you
mitigate risks and remediate problems in the early stages for a more
sustainable, compliant future. And where beneficial, we’ll leverage the latest
cutting-edge technology to add valuable efficiencies to your review process.

 * In-depth systems and controls reviews

Do your firm’s systems work as well in practice as they do on paper? With so
many regulatory requirements to keep track of, we know it can be daunting to put
theory into practice. That’s why when you work with TCC, we don’t simply reveal
the obstacles stopping you from regulatory success – we help you overcome them.

 * MI framework for Annual Consumer Duty Assessment

Do you have the right MI to evidence good customer outcomes for your annual
assessment? TCC can support you with the review of your MI framework – we
provide guidance on your consumer duty dashboard and can help you with the
delivery of your annual assessment.



Let’s explore together what actions your firm should take to ensure you meet the
regulator’s later life mortgage standards.




GET IN TOUCH WITH OUR REGULATORY EXPERTS TODAY TO DISCUSS YOUR NEXT STEPS.

Connect with us today

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LATEST INSIGHTS


WHAT YOU NEED TO KNOW: FCA'S S166 REQUIREMENT NOTICES FOR MOTOR FINANCE FIRMS

The regulator’s

29/01/24 Read more


PUTTING CUSTOMERS FIRST: PREPARING FOR YOUR CONSUMER DUTY ANNUAL ASSESSMENT

The regulator’s

12/01/24 Read more
News


REGULATORY DUE DILIGENCE: EXAMINING THE FCA'S PRIORITIES FOR 2024

The regulator’s

10/01/24 Go to article


2024 IN FOCUS: ARE YOU PREPARED FOR THE JANUARY RESOURCE RUSH?

The regulator’s

13/12/23 Read more
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