Elderly mis-advised on equity release
Financial advisers are exposing vulnerable consumers to 'needless risk' by pushing lifetime mortgages, according to the FSA. Paul Farrow reports
Most financial advisers give poor advice to elderly homeowners about releasing equity in their homes, according to a damning survey by the Financial Services Authority.
|Bad directions: the elderly are getting poor advice and being needlessly exposed to risk |
The findings suggest that hundreds of elderly homeowners may have bought unsuitable products. The FSA carried out a mystery shopping exercise last autumn, shortly after it became responsible for regulating mortgage sales.
It discovered that more than 70 per cent of advisers failed to gather sufficient information about their customers before offering them advice on equity release and recommending a lifetime mortgage. The FSA does not yet regulate the second type of equity release product - home reversion schemes - so sales of these products were not included in the survey.
With a lifetime mortgage, the loan is secured against the property and the homeowner retains full ownership of it. No repayments are made during the lifetime of the loan.
Instead, interest accumulates throughout the life of the plan and when the plan ends - typically when the homeowner dies or goes into a nursing home - the loan is repaid from savings or from the proceeds of the sale of the home.
The regulator found that two thirds of advisers failed to explain the disadvantages of equity release.
For example, many failed to point out that the interest charges being added to the loan could seriously erode the family's inheritance. The homeowner may only be cashing in a small proportion of the equity in their home, but the debt is likely to represent a far greater proportion of the value of the home by the time it is eventually sold.
Interest typically rolls up at about 6.75 per cent a year. On an average £50,000 equity release loan, this means the debt will double in the space of 10 years. The FSA also found that many consumers were being advised to invest the money raised from an equity release scheme into products, such as investment bonds, that were not suitable for their needs and exposed them to unnecessary risks.
The regulator warned that enforcement action or fines against the culprits had not been ruled out.
"Our work found another disappointing instance of consumers being given poor advice," says Clive Briault, the managing director of retail markets at the FSA. "What makes matters worse is that these consumers tend to be elderly and vulnerable people who can ill afford to be unnecessarily exposed to risk."
There are a number of equity release products that allow consumers to draw down an income from their lifetime mortgage. But the FSA found that many advisers suggested homeowners take out a lump sum, reinvest it in an investment bond and take five per cent withdrawals to provide a regular income stream. The FSA warned that, as well as being more risky, this is a more expensive option.
The equity release market has boomed in recent years with thousands of elderly people cashing in on the house price boom to unlock capital tied up in their home. The money is often used to boost retirement income or splash out on home improvements or holidays.
The total value of the equity release market has reached £1.2 billion - 25 times larger than a decade ago, according to Safe Home Income Plans (Ship), the industry's self-regulatory body. Meanwhile, The Institute of Actuaries reckons that equity release lending could reach £5 billion a year by 2010. Household names have raced to join the party, with Standard Life, Prudential and Norwich Union all now big players in this market.
Equity release has also been touted as a way of reducing IHT bills, particularly in view of the sharp rise in the value of property, which has pushed many estates above the current £275,000 threshold.
However, the FSA warns that using equity release for IHT mitigation is a very finely balanced arrangement. Norwich Union, which has a 40 per cent share of the equity release market, says it won't let any adviser without an IHT qualification give equity release advice on the issue.
Help the Aged says it is not surprised by the FSA survey. Its own research had already thrown up the same concerns. "The very reason we launched our own equity release service a year ago was to provide a trusted source of advice and information for those older people concerned they may be susceptible to ill-advised recommendations," says Peter Fisher of Help the Aged. "The FSA's mystery shopping exercise merely confirms that the concerns of these older people were well placed."
The charity added that a good adviser should discuss all the options and alternatives, be able to explain how releasing equity could affect entitlement to benefits and tax liabilities and, importantly, never encourage you to borrow more than you need.
This is not the first time that equity release schemes have had problems. Back in the 1980s and early 1990s another type of equity release product - known as a home income plan - caused misery for thousands of pensioners.
Under these plans people took out a mortgage on their property and put the proceeds in an investment bond. It was hoped that the return on the bond would be enough to pay the interest on the loan plus a decent level of income.
But interest rates rocketed and the cost of servicing the loan soon outweighed the income generated from the investment plan. Borrowers suffered a double blow as poor stock market performance dented investment returns.
With many pensioners facing repossession, lenders and financial advisers were forced to offer compensation.
Many advisers had failed to explain the risks involved. The schemes have since been outlawed and most equity release schemes today offer a "no negative equity" guarantee to ensure that people never owe more than the value of their property.
Providers hit back at the FSA's research, saying it was "misleading" because the results were based on a very small sample of advisers. Norwich Union criticised the regulator for basing its figures on just 42 "mystery shops" and extrapolating the figures into percentages applicable to the entire market.
Mark Kelly, the director of personal finance at Norwich Union, says: "We strongly support regulation of the life-time mortgage market and always treated equity release as a regulated product even before regulation in 2004. We are therefore extremely concerned about the damaging effect this report will have on consumer confidence."
Jon King of Ship adds: "It is a small sample. Equity release plans have never been safer, with all our schemes having a "no negative equity" guarantee. "
Meanwhile, the FSA will distribute 120,000 leaflets entitled "Thinking of raising money from your home?" to doctors' surgeries, libraries, Citizens Advice Bureaux and other not-for-profit agencies across the UK. A free fact-sheet providing more detail for consumers is also available by calling the FSA leaflet line on 0845 456 1555 or on its website. The Help the Aged Equity Release Service is on 0845 2300 820.