The second review of this market, designed to check progress since a similar exercise at the start of 2005, comprised 75 mystery shops and visits to 23 firms. It found that performance varied significantly between firms.
The improvements made by the large product providers reviewed, which advise on lifetime mortgages directly or through their appointed representatives, mean they now generally have in place the overall systems and controls to enable their sales forces to give an acceptable quality of advice to their customers.
However, the review found greater variation of standards among intermediaries. In some cases standards were unacceptable, particularly in firms where lifetime mortgages are not a significant part of their business. These firms tend to write occasional business in this area without developing the necessary systems and controls, knowledge and skills to give customers the quality of advice FSA standards require.
In contrast, those intermediary firms which have committed to the lifetime mortgage market by putting in place effective systems and controls and effective training and competence arrangements were found to be meeting, and in some areas exceeding, regulatory requirements.
Overall, the review found the following areas where further progress needs to be made:
- in a third of the occasions sampled where clients could have been eligible for means-tested benefits or grants, advisers did not pay sufficient attention to this issue
- advisers in all firms consistently failed to explore in depth the impact of taking out a lifetime mortgage on their clients' future options
- in around a third of cases, advisers still failed to issue the Initial Disclosure Document
- some advisers recommended to their clients the creation of arbitrary, sometimes excessive, "rainy day" funds, often with no clear record of the rationale for doing so.
"There is no place in this market for firms that do not develop the necessary skills and do not implement appropriate systems to ensure that they give suitable advice. We expect firms to commit to delivering quality advice or to refer the business to firms that have done so."
The review found examples of good practice among large product providers and the better performing intermediaries. These included specialist lifetime mortgage training programmes for advisers; the checking of cases before final recommendation; the use of informative, client-specific suitability letters; and firms addressing the means-tested benefits issue by using specialist software to assess their clients' eligibility.
The review also found relatively few cases of borrowing to invest in high risk products, which had been an area of concern a year ago, with many firms having introduced effective controls in this area.
The FSA will continue to work with the trade bodies who are actively engaged in improving standards in the market, to communicate the good practice being found and the common problems firms should avoid.
The regulator is intervening directly in respect of those firms whose standards were considered unacceptable and, more generally, will look to be satisfied that firms engaging in the lifetime mortgage market have made the necessary commitment to it. This may lead to formal enforcement action in some cases. Further work will be done next year to reassess the standards of advice in the equity release market.
