Since the FSA’s damming report on equity release, much has be written and said by brokers, lenders and leading journalists. The analysis of responses makes for fairly predictable reading.
Brokers came out with the ‘sitting on the fence’ statements along the lines of ‘we welcome the work of the FSA in highlighting the need for the adviser to maintain high standards of care when advising the elderly’. One leading lender focused on the small sample presumably in the hope of questioning the results and therefore lessening the negative impact.
Some journalists on the other hand waded in with both feet to pour ridicule on the advice given, for example, highlighting that the FSA reported on what had happened but stopped short of saying why it had happened. One journalist suggested the ‘why’ was a combination of ignorance and greed by the adviser.
Ignorance and greed
Ignorance is seen as the failure to gather all the facts, the failure to ask all the relevant questions and the failure to understand the complexities and implications of the means-tested rules.
Greed manifested itself in advice being weighted in favour of maximising income to the broker at the possible expense of client best advice. How else can you interpret the emphasis of recommending maximum loan-to-values then looking to reinvest some of the proceeds in additional commission generating investments?
Ignorance is understandable, particularly when it relates to the complex means-tested benefit rules, and even more so when the required advice is overlaid with a potential need for long-term care. Greed however has no place in our profession and the sooner it is eradicated the better.
Advice concerns
At NHFA we operate an equity release advice line service on behalf of Help the Aged. In that capacity we operate as independent financial advisers with our revenue being solely dependent on completion fees from the lenders. Following the release of the FSA report we had a significant increase in callers. Some of these related to concerns over advice already received from elsewhere.
Here are a couple of notable examples:
· “I only wanted £50,000 but was encouraged to take the maximum and reinvest the excess to help boost my income.” Not so bad you might think until you find out the balance went into a precipice bond whose value has since fallen by about 60 per cent. How can any credible adviser or the senior management of such a firm support an elderly client financing an investment where the return after tax and charges could be around 4 per cent by borrowing at a lifetime fixed rate of up to 7 per cent?
· In another situation: “My adviser wanted me to take the maximum lump sum which worried me.” Fortunately this case was delayed by ‘Mortgage Day’ following which the adviser’s company decided not to include equity release in its approved areas of advice. Maybe this was because it was concerned by the potential for negative reputational risk or perhaps it was simply an inability to obtain affordable professional indemnity (PI) cover? As it turned out the organisation certainly made the correct decision. Why? Because the client could have claimed various means-tested benefits. After these were successfully secured it was still possible to provide a beneficial equity release plan but this time via a drawdown facility that did not undermine the means-tested benefits now being paid. This outcome will annually provide thousands of pounds of tax-free benefits and also save thousands of pounds of unnecessary interest charges.
Claims danger
What’s particularly scary for those advisers who have advised on equity release is the potential for retrospective standards of knowledge being applied by such organisations as the FOS to claims by clients for earlier misadvice. And not only for advisers – let’s not forget their PI insurers.
How are they going to react? Assuming that the broker’s policy covers equity release, premiums and excesses could rise significantly or maybe they will be refused any cover at all. History, as we all know, has a strange habit of repeating itself. Might this be such an occasion?
So the next time you get a call from a retired client wanting your advice on the merits of taking out an equity release plan, how will you react? Do the best you can and hope it turns out ok?
That’s assuming you have added equity release to your PI policy. Refuse to help them and suggest they approach their bank? Or maybe you will decide to refer them to a specialist broker who you have established has the knowledge, PI cover and the integrity to ensure the client is given unbiased professional advice?
So the choice is simple. Either get qualified and then insured or become an introducer for your equity release leads.
Peter Fisher is director of NHFA
