Equity release – how do you assess mental capacity?

With the arrival of Consumer Duty, there has been increased conversation in the mortgage community about the need to assess clients for signs of vulnerability.

However, one expert believes another area that deserves just as much consideration, certainly in the later life lending market, is mental capacity. Related to vulnerability, but very much its own concept, mental capacity is often difficult to assess.  So how can it be measured and what are the risks when assessing it?

What is the difference between vulnerability and mental capacity?

Tim Farmer (pictured), clinical director and co-founder of Comentis, has seen an increasing number of capacity-related claims coming through in recent times - particularly claims that elderly clients have signed up for equity release mortgages when they were not of sound mind.

“What makes this issue even more pressing is that while the industry is broadly aware capacity must be assessed, there seems to be confusion as to where that responsibility lies - the broker, the solicitor, or the lender,” he said.

It is a topic which everyone must understand, Farmer said, and the implications of getting it wrong are going to be felt all-round.

The first thing to understand, Farmer said, is the difference between vulnerability and capacity.

“From conversations that we have been having with mortgage advisers, it is clear that there is already a good level of understanding of what vulnerability entails,” he said.

However, Farmer said whereas vulnerability is a regulatory concept, enforced by the regulator, capacity is a legal concept, laid out by the Mental Capacity Act.

“What we ultimately mean when we talk about capacity is the ability to make decisions; for instance, a client could be vulnerable as a result of a redundancy, divorce, or bereavement, but while that may mean there is the potential to lack capacity, due to any resulting mental health issues, it does not immediately guarantee it,” Farmer said.

An adviser, he added, could meet two clients in exactly the same circumstances, one of whom has lost their mental capacity to take out an equity release product, while the other is still perfectly capable.

This is why, Farmer said, it is so important for brokers to correctly test the capacity of each and every client.

How can we measure mental capacity?

A person must be able to do four things in order to make a decision, according to the Mental Capacity Act.

“They have to be able to understand relevant information, they have to be able retain it, they have to be able to apply it, and they have to be able to communicate their decision back to you; if they cannot meet one of these requirements, they are deemed to lack capacity,” he said.

To help assess capacity, the Mental Capacity Act, Farmer said, suggests a two-stage test, starting with a question, ‘is there an impairment to the functioning of the brain?’ It is important to note, Farmer added, that the act does not ask for a diagnosis, rather the presence of an impairment.

“The difference between the two is important as a diagnosis is a label we give to a set of symptoms - but a person will be experiencing the symptoms before they get a diagnosis, whereas an impairment refers to something not working correctly,” he said.

In the case of someone aged over 55, when people typically begin to take out equity release and when there starts to be a much greater incidence of cognitive decline, Farmer said, an obvious impairment could be memory loss or confusion, but until that manifests into something such as dementia, they will not have a diagnosis.

If this initial question finds that there is no impairment, he said, the first of five key principles outlined by the Mental Capacity Act dictates that the assessor must presume capacity.

“However, if an impairment is found, we jump to the second stage, which is to determine whether they can understand, retain, communicate, and apply relevant information,” he said.

The act, Farmer said, also describes a third scenario, whereby an impairment is identified but is not found to affect that client’s ability to retain or communicate relevant information.

“If this is the case, if there is no causative nexus, then again, we have to presume capacity,” Farmer added.

While the act outlines the two-stage test as starting with a question about an impairment of the mind or brain, Farmer said, more recent caselaw has suggested that a better way to look at it is to start by asking if there is an issue with a person’s ability to understand, retain, weigh up and communicate.

“Indeed, if there is, try to identify a link to some sort of impairment such as memory loss; for advisers, this reverse process should be much easier,” he said.

The threshold of understanding

The word ‘relevant’, Farmer said, is often used when discussing mental capacity, the reason being that the entire process hinges on the notion of understanding relevant information.

However, he added that this crucial element also paves the way for an additional complexity: the threshold of understanding.

“What one needs to understand in order to release equity is very different to what they need to understand in order to make a will or buy a car, and this threshold of understanding is what a person needs to be able to understand, retain, weigh up and use and communicate in order to demonstrate their capacity; it is also what makes capacity item-specific,” he said.

You cannot simply say that someone has capacity or lacks it, Farmer said - instead it must be determined whether they have capacity to make a certain decision.

However, the question of what that threshold of understanding should be, he said, is one of the major issues surrounding capacity, particularly for equity release.

Farmer said it cannot be expected that everyone know everything, so he questioned what should the average client be expected to understand and what are the most salient parts.

“The courts tell us there are a number of factors we have to consider. For instance, is the client making a macro- or micro-decision? Is it a one-off or is it ongoing? Each changes the sort of evidence we look for and the questions we need to ask,” he said.

It is easy to see how this can become complex, but Farmer said only once it is understood what the client needs, can brokers then know what questions to ask, and ultimately, determine how to assess their capacity.

What are the risks when assessing mental capacity?

Undoubtedly, Farmer said, the prospect of assessing someone’s mental capacity is tremendously complex.

“However, what are the risks of getting it wrong - and if someone is incorrectly deemed to have capacity, what are the risks,” he asked, rhetorically.

First, of course, Farmer said, the person who is making a decision they do not fully understand is put at risk. Aside from the obvious outcome that they may lose their money, it can also affect their family, for instance, when it comes to inheritance, and it can have an impact on what they want to do later in life.

They might not need the money now, but Farmer said when they really need it down the line it is gone.

“For the lender, meanwhile, the risk is that if someone takes out a product and they are later deemed to lack capacity, that contract would be null and void, with no guarantee that the lender will get their money back,” he said.

As such, Farmer said that it really is important, for all involved, that this process is taken seriously.

“There is no one-size-fits-all when it comes to capacity, nor is there any scope for responsibility to be ignored or left to be picked up by someone else; this is something we must all be aware of, and all be prepared to investigate,” he said.

How do you go about assessing mental capacity of clients? Let us know in the comment section below.