Whoever writes the briefing notes at the FSA probably doesn’t go out of their way to make them sound like film scripts, but in one sent out at the start of the year there were definite undertones of the sci-fi classic, The Terminator.
Commenting on problems it had found within the lifetime mortgage market during 2005, the FSA said: ‘Standards must be raised and the FSA will be back to test that improved standards are being delivered in practice.’ Granted, it’s a bit more wordy than the original “I’ll be back” and the author is unlikely to be a muscle-bound cyborg, but when it comes to power broking in the financial services sector there are few to be more wary of than the Canary Wharf regulator.
Host of problems
Last year saw the FSA uncover a host of problems in the lifetime mortgage market from inadequate client factfinds to poor assessment of product suitability. In many cases the FSA also discovered that advisers were painting lifetime mortgages in an artificially good light by not giving sufficient information on their downsides.
In stating its intention to revisit the market, the regulator has given fair warning to offenders to get their houses in order and could not have been clearer in expressing its intentions when it said in January: ‘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.’
Against this backdrop, February also sees an industry-wide equity release roadshow begin its tour of the country, further focusing attention on the lifetime market and making it the hot topic of conversation on lenders’ and intermediaries’ lips.
Vulnerability
There are a number of reasons that the lifetime mortgage market attracts such interest and why it sits so high on the FSA’s agenda. First there are the issues it had previously when negative equity and poor products created real problems for many borrowers, and then there is the elderly client base who in some cases are more vulnerable to shoddy practice than others in the mortgage market.
But perhaps more influential in putting lifetime mortgages well and truly on the map has been the growing size of the sector. Although outstanding equity release balances only accounted for 0.55 per cent of the market last year, this is almost 50 per cent up on the figure for 2003. In the last three years the market has recorded annual new advances of between £1 billion and £1.2 billion, and there is no reason to suspect this should fall off in the coming years. Indeed, as more and more providers come into the market, its profile rises and alternative pension funding is required, there seems agreement across the industry that equity release will play an increasingly central role.
It may remain niche but it won’t be sidelined.
Business expansion
In light of lifetime mortgages’ growing importance and demand, they are certain to play a major role for more and more advisers across the country on a daily basis. Rather than the odd enquiry that is passed on to a specialist, it is likely that more intermediaries will have to set up equity release divisions and look to compete with the one or two specialists that currently hold the lion’s share of the market.
For those intermediaries now beginning to see an expanding number of lifetime mortgage cases, there is the temptation to deal with it personally and muddle through the first few times, picking it up as they go along. There is certainly plenty of information available to intermediaries on the lifetime mortgage market and access to products is improving, but is it a risk they can afford, especially with the FSA monitoring the market so closely? Even if brokers fumbling through these first cases escape sanctioning from the regulator, they will only serve to damage their reputation.
Lifetime mortgages have an important role to play and can provide an excellent source of income to many borrowers. They are also set to become a very important revenue stream to more and more brokers as they tap into the market. Making sure they do this correctly is essential if they are to make the most of it and avoid endangering the rest of their business.
CeLM
The Institute of Financial Services (ifs) launched its Certificate in Lifetime Mortgages (CeLM) at this time last year to meet demand from intermediaries looking to establish themselves in the market. The module also forms part of Advanced CeMAP and so advisers who complete the qualification need only take a further two modules to achieve the advanced qualification. The lifetime mortgage module aims to provide intermediaries with both the technical information they will need to act in the market successfully, as well as the ability to implement it into their practical dealings with clients. It requires between 40 and 60 study hours although for those who have done some of their own research, this will be less.
What is important here is that brokers looking to take advantage of the business that lifetime mortgages offer are armed with the right tools to do the job effectively and can meet with the FSA’s requirements. Being fully up-to-speed with the market will enable them to handle cases with ease and instill confidence in their clients that they are getting the kind of service they want and need.
The regulator has visited the market once, and sworn it will be back. Those who saw what The Terminator did on his return visit, will realise how imperative it is to have their house in order.
