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

The regulator’s review into later life mortgage providers, published on the 14^th 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.

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.

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.