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Equity Release

The FSA has classified the equity release sector (lifetime mortgages and home reversion plans) as 'high risk'. Lifetime mortgages are currently regulated by the FSA, home reversion plans will become regulated from April 2007.

FSA has conducted two phases of thematic work into the lifetime mortgage sector on the quality of advice intermediaries give to clients. The first phase of its work took place in mid-2005.

FSA's 1st Phase work

In May 2005, FSA issued communications on its first phase of work into the lifetime mortgage sector. The communications made it clear that FSA was looking to the industry to deliver improvements on the sale of equity release products. The key message was identifying compliance as the responsibility of firm's senior management, both in dealing with the concerns identified and ensuring that advisers provide appropriate advice:

The following links are to two press releases issued at the time by FSA. Firstly, 'FSA warns advisers unsuitable equity release advice has got to stop.' And secondly, 'FSA work discovers consumers are not being properly advised on equity release'.

FSA also issued a briefing note, 'FSA Equity Release Mystery Shopping Results May 2005', summarising the results of the FSA mystery shopping research. The research involved 42 mystery shops across 20 firms, made up of product providers, independent financial advisers and mortgage brokers. The key failures identified were in factfinding and the lack of information provided about the downsides of equity release plans.

The Financial Services Consumer Panel (FSCP) wrote to the FSA in November/December 2005 outlining its concerns over the results of the first mystery shopping exercise, and requesting information on how the FSA intended to address the failures identified.

The FSCP stated that following the next round of mystery shopping, it expected enforcement action to be considered for those firms which were found to have fallen short of the required standards. The FSA responded to this letter with details of its work with the industry since the mystery shopping results, including AMI's activity. The full text of both letters can be found here.

In December 2005, in its Financial Promotions Mortgage & General Insurance Bulletin, FSA published results of work carried out on financial promotions for Lifetime Mortgages, including guidance on 'clear, fair and not misleading' and the requirement to include the specific lifetime risk warning in promotions. View here.

In January 2006 FSA followed this up by outlining its work on Lifetime Mortgages since the initial firm visits and mystery shopping carried out in early 2005. The briefing note included details of work trade bodies and other organisations had carried out to increase standards.

FSA further review July 2006

Following its first round of thematic work on lifetime mortgages, FSA followed this up with a second review of the quality of advice in the lifetime mortgage sector. Improvements had been made since the first review but the regulator said firms still needed to do more to improve. The press release also outlined the areas where FSA felt improvement was needed.

The full findings of FSA's mystery shopping results are available here.

As you can see, there has been a constant stream of work into this sector by the FSA. There has also been a general improvement in the quality of advice issued by intermediaries on lifetime mortgages over this timescale. FSA has also covered lifetime mortgages in its MCOB frequently asked questions (FAQs). This document includes information on lifetime mortgages and home reversion schemes, and mortality tables for Lifetime Mortgage KFIs.

AMI Information

AMI has provided updates to members about FSA activity in the equity release market over the past two years. It also provides information on how to meet the required standards for this type of business.

To help with AMI's policy work in this area, we set up the Equity Release Working Group. This Group was made up of equity release practitioners, a number of members interested in providing equity release advice and representatives from the legal profession. The Group met a number of times during 2006 and it has helped AMI with its output to members aimed at raising the standards of advice in this sector.

Output to members included regular update information via AMI's monthly newsletters. It has also included the AMI Equity Release factsheet. This factsheet provides members with information about the equity release market and practical help in meeting the regulatory standards required when providing advice in this area.

AMI Equity Release Factsheet - Click here

AMI has also recently published a good practice guide for those giving advice on equity release. It gives an overview of the equity release market, products and solutions, coverage of the six-stage advice process, and a list of useful contacts, support material, services and other organisation.

Home Reversion Plans

As stated above, FSA will begin the regulation of home reversion plans from 6 April 2007. The final rules for home reversion plans are available here.

For those who wish to carry home reversion business, FSA has been accepting authorisation applications from 6 November 2006. To find out what your firm needs to do to becoming authorised to carry out this business, go here.

Regulation Issues

Equity release is not just a subject which interests the financial services industry. The potential vulnerabilities of customers, the complexity of the products, and the results of the FSA's work have also drawn attention from Parliament.

In the text from this Parliamentary debate MPs discuss the FSA's mystery shopping report on lifetime mortgages. Points raised include what action the FSA intends to take on the failures identified in the sale of lifetime mortgages, and matters which ought to be considered in the regulation of home reversion schemes:

Taxation & Benefits Issues

The Impact Of Equity Release On Benefits & Taxation - this guide provides an overview of how equity release will impact on a client's taxation and benefits situation:

Benefits Calculator - A company called Ferret Information Systems have developed a benefits calculator known as 'FINTAL'. This is available for purchase by intermediaries, and AMI members will receive a 15% discount on subscription to the system. Alternatively, Ferret will provide a report generated from this system on a pay-by-case basis, at a cost of £45+VAT per case.

Further information on these can be obtained here or by calling 029 2064 3333.

Equity Release Product Sourcing

The Exchange offers an equity release trading platform to subscribers of its Exweb system. The equity release trading platform costs £1.50 per search, although regular users can subscribe on an unlimited usage basis for £18.00 per month. These costs are in addition to the cost of the Exweb system.

Further information can be found here or by calling 08450 530490 .

Training & Competence

As is true of any regulated activity, a robust training and competence (T&C) scheme will help to maintain the provision of good quality advice to customers. Those considering equity release plans are often vulnerable, and have different needs and pressures to those who are considering a standard mortgage. In order to provide a quality advisory service, advisers need the skills to handle such customers with care, and up-to-date knowledge about what can be a complex set of products.

Qualifications Information

The Financial Services Skills Council (FSSC) maintains the appropriate examination lists for regulated activities. Those who attained the CeMAP qualification prior to 31/10/04 are not required to hold any further qualifications to advise on Lifetime Mortgages. However, considering the complexity and evolution of the equity release market, it is prudent to consider gaining additional specialist knowledge of equity release plans in order to help meet the training and competence requirements. Studying for and passing examinations is an essential part of a training and competence plan. Two relevant qualifications are:

Certificate In Lifetime Mortgages - a qualification from ifs learning. Further information can be found here.

Lifetime Mortgage Activities Exam (CF7) - from the Chartered Insurance Institute. This unit can be taken on a stand-alone basis or as part of the wider 'Certificate in Financial Planning and Lifetime Mortgage Activities' qualification. Further information can be obtained here.

FSSC appropriate examination list - for the activity of advising on regulated lifetime mortgage contracts.

Home reversion plans qualifications - T&C requirements, including a requirement to pass an appropriate examinations, will apply for those individuals undertaking home reversion activities. To view the standards for these examinations, go here.

Free Equity Release Adviser Toolkit

Rayner Spencer Mills, the financial services research group, are offering regulated firms a free toolkit for advisers looking to enter the Equity Release market. It is designed to help advisers assess the equity release sector and look at the potential business opportunities and risks that may come with advising on these products. A copy of the toolkit can be obtained by e-mailing your name, FSA number and business address to: enquiries@rsmgroup.co.uk

FSA Consumer Information

The FSA's Consumer website 'Money Made Clear' contains information on equity release here.

It also includes information on the different types of equity release products available here.

FSA Factsheet - 'Raising Money From Your Home' - this consumer leaflet has been recently updated and describes the different types of equity release plans available, and encourages consumers to consider the key issues such as the effects of equity release on benefits and taxation. The leaflet also informs customers on how to use the Key Facts Illustration to compare different Lifetime Mortgages. View here.