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The development of the later life lending market will be one of the most significant aspects of the housing and mortgage market alongside technological innovation over the next decade.  It was therefore fascinating to see where the FCA decided to land on the issue of retirement interest-only mortgages.  AMI had requested that advice was made compulsory for such loans in order to deliver compatibility with lifetime mortgages and ensure a consistent degree of protection for consumers in this space.  However compulsion was not required by the regulator saying “this is because in practice most retirement interest-only mortgages will be sold with advice as our standard mortgage rules require advice in many cases.”  That was an assertion which of course ignores the extent of the execution only product transfer market.  This was followed by “we also think that many of the concerns that prompted respondents to argue for mandating advice are better mitigated by other requirements. For example, the ongoing affordability of the loan is already covered by our responsible lending rules.”

This mixing of thinking from the policy arm of the regulator was very educational.  One of the foundation stones of MMR was that lenders should be responsible for assessing affordability not intermediaries.  It is an adviser’s job to assess suitability.  In partially carving out retirement interest-only from lifetime, and blurring the lines around affordability and suitability for this new product line we have the start of a new phase in mortgage policy.

By adding the need to consider the tax and benefit implications on all sales, but that they must be taken into account where any additional capital is being drawn adds a dimension to this part of the mortgage rule book not seen elsewhere.  Whilst it is understandable it creates an interesting conundrum for lenders and brokers.  The rule book does not require advice, but if you are creating the product should you not both require advice and the need to ensure that the broker providing it is competent to fully understand the implications of the tax and benefit rules, and also the need to disclose that a lifetime mortgage is an option although they may not be qualified to advise on them.

For me this is the worst of all worlds.  The regulator has freed up the market, provided great consumer facing solutions which many could benefit from, but left all the risk with the advising firms, without regulatory clarity.  It appears to be the current state of affairs for the elderly as it is now almost impossible to get advice on transferring out of a defined benefit pension scheme as the rules are too loose and supervisory intervention not yet transparent in its intent.

There are many ways that lenders wanting to participate in this market could meet their product design and delivery responsibilities.  They could consider employing independent solicitors in all cases to validate the advice, or they could consider calling all cases to validate that the customer understands the transaction before completion.  However the FCA defence that advice is not required because “the risk of repossession is mitigated by our responsible lending rules and our rules on how to treat customers in payment difficulty” is for me a throw-back to policy thinking I thought had been consigned to history during the last crisis.

Robert Sinclair

April 2018

 

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