The FSA highlighted its concerns at the potential risks in this sector in December 2003 and subsequently made reviewing selling practices one of the early priorities for the first year after mortgage regulation came into effect on 31 October 2004.
In early 2005 the FSA conducted initial work, involving product providers, mortgage brokers and Independent Financial Advisers, on equity release and subsequent investment advice. The work, which involved mystery shopping, visits to firms and desk-based research, revealed that more than 70 per cent of advisers in these firms did not gather enough relevant information about their customers to assess their suitability for the product. And more than 60 per cent of the mystery shoppers reported that their adviser had not explained the downsides of equity release.
The review of subsequent investment advice found that, in all of the seven firms looked at, advisers failed to explain the link between this type of borrowing and subsequent investments. The outcome of this was published in May 2005.
The FSA has taken a number of steps to address the issues raised in this earlier work. In particular, it has been in active discussion with the main industry trade bodies to help deliver higher standards and all have issued comprehensive guidance to their members on the shortcomings identified. It has also been proactive in communicating messages directly to the industry, including through small firms road shows, the Retail Intermediaries newsletter and a number of speeches and conferences. The message has been clear: standards must be raised and the FSA will be back to test that improved standards are being delivered in practice.
Industry response
The industry has responded in a number of ways, for example:
The Council of Mortgage Lenders (CML) has revised its relevant Good Practice Notes, which is aimed at the industry. It has also: produced material on taxation and benefits to assist advisers to complement its support of the Fintel benefits system; in addition to its promotion of lifetime mortgage exams, entered into a joint venture with Absolutely Training which is designed to deliver desktop training in accordance with its members' specific requirements; is working with other trade bodies to produce a checklist for intermediaries to ensure that all relevant information is made available to consumers at the appropriate time; and has issued a consumer leaflet on equity release for use by its members.
Safe Home Income Plans (SHIP) has revised its membership rules and issued new guidance to help deliver a fair contract for consumers. SHIP has also: set up an independent complaints board which has the authority to fine members or compensate consumers up to agreed limits; advised us that a number of its members now regularly undertake research with clients and IFAs to determine the purpose of funds released and advisory activity; promoted the use of an adviser checklist to ensure that consumers receive relevant information regarding all aspects of equity release; publicly stated its commitment to the importance of ensuring that both product and advice standards are focused on consumer protection.
The Association of Independent Financial Advisers (AIFA) has explored the availability of lifetime mortgage training to determine the extent to which this is accessible and has issued a number of newsflashes, which have focused on the content of our press release on equity release findings issued during May 2005 and the further work which we will be undertaking in this area, to their members. The issue of lifetime mortgage exams has been raised in a number of their regional meetings and they have promoted the use of the Fintel system.
The Association of Mortgage Intermediaries has negotiated with Fintel to offer a discount to their members and actively promoted the system at a series of road shows. AMI also conducts a monthly intermediary census relating to equity release and has recently launched a 'One Year On' campaign.
The Association of British Insurers (ABI) is producing guidance in respect of both lifetime mortgage financial promotions and advice.
FSA Next Steps
The FSA has identified four priority areas for future work:
*assisting firms with meeting their regulatory responsibilities (as noted above);
*mystery shopping;
*review of subsequent investment advice; and
*review of lifetime mortgage advice.
It has engaged a research agency to undertake pilot work for the next round of mystery shopping. The main research will take place during the Spring of 2006 and in our proposed review of subsequent investment and lifetime mortgage advice, the FSA will be visiting firms to discuss their approach to conducting equity release business and to carry out client file reviews to assess suitability.
FSA Action to inform consumers
In addition to the information made available to consumers via the FSA website, during May 2005 the FSA updated and issued two consumer publications which focus on equity release schemes; in the first instance, an FSA factsheet, 'Raising money from your home' and secondly a leaflet, 'Thinking of raising money from your home'.
Since publication, the FSA has distributed 120,000 copies of the leaflet via Doctors' waiting rooms. This leaflet contains a URL which provides a direct link to a bespoke section of the consumer website dealing with equity release. Another 3,000 copies of the leaflet were distributed to libraries and Citizen's Advice Bureaux (CAB).
Between May and October 2005, almost 30,000 copies of the factsheet were distributed (over 7,000 through not for profit advice agencies such as CAB and Advice UK more than 19,000 through firms and just under 3,000 to consumers directly).
Additionally a PR campaign was run to ensure the key findings of the work and the key messages were delivered to consumers. Media editorial was extensive across the national and regional press and a spokesperson from the FSA did interviews with 10 regional radio stations across the UK
The FSA has also met with consumer bodies - Counsel and Care, and Help the Aged, and is seeking to meet Age Concern shortly - with a view to improving the dissemination of relevant information to consumers.
