Lifetime MortgagesThe regulator’s view of the market

Equity Release Road shows

February/March 2007

Andy Turrell Keith Hale Nuala Harber Small Firms Retail Policy Retail Themes

Outline

• Background to our work• Approach to equity release• Key findings• Good practice / cause for concern• Ongoing work• Our expectations

Equity Release

“ Many older home owners could improve their quality of life with extra care at home and better maintenance of their property, if they were to draw on the value of their home to pay for it”Joseph Rowntree Foundation October 2006

“ Conservative estimates suggest that over £1 trillion of unmortgaged equity is held by the over-65s. In the future, larger numbers of households are likely to have insufficient income….This signals a vast opportunity for growth”CML April 2006

“ The retired as a group score well above average, but those over 70 are almost as weak as 18-19 year olds when all other factors are taken into account”Financial capability baseline survey 2006

Lifetime Mortgages Background

What does the FSA regulate in the equity release market?• Lifetime mortgages since October 2004• Home reversions from April 2007

Why is the FSA interested?• Potentially vulnerable consumer group• Higher risk product• Many consumers looking to fill possible pension shortfalls

What lifetime mortgage work has the FSA carried out?• 2005 Mystery shopping and firm visits• 2006 Further review of the market• Regular dialogue with industry

Lifetime Mortgage work

• Desired outcomes

- Lifetime Mortgages fairly sold to consumers

who have a clear appreciation of the risks and

benefits associated with the product

• Principles based approach

• Risk based approach

July 2006 – Key Findings

• Performance varied amongst different types of firms but, across the board, more to do to improve important aspects of the quality of advice

• Generally acceptable standards at large product providers

• Wider variation among smaller firms but some good work

• Particular issues amongst firms intermittently involved in the market – specifically

– Insufficient consideration of clients’ eligibility for benefits/grants in 1/3 of cases

– The IDD was not issued around 1/3 of the time– Concern about excessive rainy day funds– Consistent failure, in all firms, to explore in depth key issues

around taking out a lifetime mortgage

Key Findings: Good Practice (1)

• Specialist lifetime mortgage training programmes

• Specialist/risk based checking of cases before final recommendation

• Use of informative, client-specific letters explaining recommendation

• Use of specialist software to assess clients’ eligibility for means-tested benefits

• Firms having stricter controls around borrowing to invest

• Well-resourced product research keeping pace with the market and coping with individual client needs

Key Findings: Good Practice(2)

• Involving the wider family

• Providing focused consumer information including using the FSA fact sheet: “Raising money from your home”www.fsa.gov.uk/consumer/pdfs/raise_home.pdfwww.fsa.gov.uk/consumer/consumer_publications/index.html

• Handling property “downvaluations”

• Assessing quality of compliance files

Key Findings: Poor Practice (1)

• Use of standard fact finds

• Limited exploration of clients’ needs– “It was part of a fact finding form which was simply

answered ‘No’ without going into any detail.”

• Positive slant on house price increases– “The rise in the value of properties such as this one is

about 8% a year. Going back over 20 years this is the case.”

• Failure to explain sometimes complex early repayment charges

Key Findings: Poor Practice (2)

• Failure to assess the clients’ appetite for risk in terms of future life changes

• Failure to explain the potential impact of lifetime mortgages on future options e.g.: - moving house

- making alternations to accommodate health / mobility- “My wife mentioned that she had MS but in a benign

form. We then discussed the benefits of spending our money now rather than later when we might not have such good health.”

• Access a challenge for some consumers– “It took some time to get the interview organised and quite

a few phone calls”– This is not a rule breach and is offered to you for information

Ongoing work on Lifetime Mortgages

• Continuing to improve our information for consumers. For example the updated the consumer fact sheet “Raising Money from your Home”

• Continuing to provide information to you:“Good & Poor Practice”www.fsa.gov.uk/pages/Doing/small_firms/mortgage/PDF/lifetime_mortgages.pdf

• Sharing observed practice with firms actively committed to the lifetime mortgage market

• Focusing on firms writing occasional lifetime mortgage business and, where appropriate, encouraging them to commit to delivering quality advice or refer business to firms that have.

• Establishing in 2007 whether further work on advice concerning lifetime mortgage work is still required after 2006 mitigation activity

Conclusion: our expectations of firms

• Ensure customers receive the quality of advice they are entitled to across the equity release market

• Take away and use the observed good practice we have shared to improve your or your firm’s performance where required

• Continue to deliver TCF as the market evolves and matures:

– New products– Re-mortgaging– More mortgages being re-paid

• Be proactive in making sure customers are being treated fairly in home reversion sales