FCA review of Retirement Income Advice

FCA review of Retirement Income Advice
What is this about?
On 20th March the FCA published details of a thematic review into retirement income advice. Why is this important? Although this was aimed primarily at IFAs, the review included the use of later life lending within retirement income options. Also, for advisers only dealing with Lifetime Mortgages, the insight into regulatory thinking about responsibility to consumers is invaluable.
In this brief article, we’ll look at how the findings of the review are important to equity release advisers, and whether they need to take any action to up their game.
Consumer Duty
The report is clear that the investigation was carried out before the implementation of the Consumer Duty. It does, however, outline expectations of the support they expect for consumers. This includes, that consumer can:
- Get the advice they want, at the time they need it, at an affordable price
- Enter into financial services arrangements with confidence, understanding the risks they are taking, and the regulatory protections provided
- Access and identify products that suit their attitude to risk and their circumstances
- Be better protected against scams
They expect core features that include:
- Accessible support
- Diverse products and services
- Useful information for consumers
- Appropriate protection where something has gone wrong
Use of Lifetime Mortgages in retirement income
One of the findings was that IFA firms often approach “… lifetime lending as a distinct and separate area of advice, only tending to bring this into consideration as a last resort.” Although the report gives no specific guidance, the use of equity release, this is likely to cause some ripples in the ways IFAs formulate advice.
Pensions forming part of the estate on death can usually be passed on the beneficiaries without attracting Inheritance Tax. For some customers, preserving that pension and making use of other assets which don’t have such an advantageous IHT profile might be an effective form of estate planning.
If you have permissions only to provide lending advice, this is not an area where you can make recommendations. However, you are entitled to provide factual information and encourage customers to accept a referral to an IFA. This might be a good time to reach out to your IFA introducers (or, if you have no IFA introducers, to find some) to remind them of your services.
When you are giving advice on borrowing based on a recommendation for IHT planning. I would expect their credentials including their FCA number to be included in the suitability report, and a copy of their advice held on equity release file.
Suitability of Advice
Although the report relates to retirement income advice, there are a number of parallel issues that an adviser in the equity release market, offering recommendations predominantly in lifetime mortgages, should be aware of.
Evidence demonstrating suitability
A number of the files checked had gaps either in documentation or fact gathering which would have been needed demonstrate that the advice was suitable. Recommendations appear to have been made based on assumptions that were neither justified nor recorded. This relates directly to the way that equity release files are constructed, and recommendations recorded in the suitability report.
For example, where a lifetime mortgage is advised, the file needs to demonstrate why such a long term and inflexible product is used when alternative cheaper and more flexible options might do the job better. Recommendations must be driven by client needs and the options available rather than by starting with the assumption that a lifetime mortgage is the correct product and finding reasons to justify it. The whole range of alternatives must be genuinely explored with the client including returning to work, downsizing, taking a lodger, and so on. Although these options may not be attractive to a customer in a vacuum, when compared with the long-term impact of equity release, they could become more attractive.
In checking files, we are looking to prove that customers looking to release equity have compared their short-term objectives and the use to which money will be put, with potential long terms needs. We must differentiate between “need” objectives and “lifestyle” objectives.
People borrowing money to enhance what is already a comfortable retirement will often have alternative sources of funds. For them, confirming that they are genuinely making a personal decision safely, and that they have made a positive choice in favour of a lifetime mortgage and that they are likely to have adequate resources for their long-term needs does the job. Where there is a need objective, the suitability report must demonstrate why a lifetime mortgage is the best product compared with all possible alternatives, the reason it is needed now and cannot be deferred and justify the amounts of the initial advance and drawdown.
Roughly 50% of the files we see at the moment are applications to be made for customers yet to reach state retirement age. These are people with an average life expectancy of 20 or 25 years. Although it is impossible to foresee what will happen in peoples’ lives during that time, big issues such as the suitability of their home as they grow older, costs of property maintenance, increasing costs against an static income might be good reasons to defer releasing equity until it is really needed.
Assessment of income and expenditure
Another area of concern seems to have been the failure to consider a income requirements both now and in the future in some files. Minimum income needs were not recorded effectively and foreseeable changes in income such as whether current income is sustainable, the impact of the full retirement or the death of a joint applicant were overlooked.
The most recent FCA statements about the need for income and expenditure seem to be limited to comparing the options of unsecured borrowing, standard residential mortgage and RIO to the lifetime mortgages. However, in the report they point to the Consumer Duty cross-cutting rule about IFAs avoiding foreseeable harm through robust cash flow forecasting. If you are not taking this into account with current customers now, you are potentially doing them a disservice. I’m planning a separate blog post on cash flow modelling to cover this subject in m ore detail.
Recognising and recording vulnerability
You are probably aware of the importance of ensuring vulnerability is considered in the way that meetings are carried out and recommendations are formulated. The most important things is not recognising that a customer is vulnerable but determining whether vulnerability is leading them to make poor decisions.
Characteristically, problems arise if a person is making decisions to alleviate short term pressure but without considering the long-term implications of their actions. It is your role as an adviser to do that thinking for them and help mitigate the risks involved. A lesser discussed subject related to vulnerability is the potential risk of coercion or duress being applied by friends or family that would usually be considered supportive. We’ll look at this in another article later.
Conclusions
There are various other issues raised in the report that cross permissions and product boundaries including the need for regular reviews, firms having appropriate controls in place to ensure that ongoing support is provided in line with customer needs, and so on.
The thing to remember is that these are not rules for the sake of rules. FCA expectations are fundamentally there to ensure that customers receive the products and services they deserve. Every case is different and it is up to us to understand the principles of good advice and apply appropriate thinking to each one.
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