The FCA has written a ‘Dear CEO’ letter to lifetime mortgage providers to warn them that it will intervene if firms fail to tackle “exploitation” risks to consumers.
The watchdog is concerned about a number of practices in the sector, including concerns that some procuration or introducer fees paid to advisers may be creating a “conflict of interest.”
While the FCA says that overall the sector has coped well with the pandemic challenges, it is concerned that some equity release and lifetime mortgage providers are exposing clients to a risk of buying unsuitable products.
It is particularly concerned about vulnerable customers, as many buyers of lifetime mortgages are elderly, but there are also signs of a trend towards lifetime mortgage firms targeting much younger customers who are borrowing more to try to beat the financial crisis.
With the new FCA Consumer Duty rules on the horizon, the FCA has told the sector, part of the equity release market, that it needs to improve in a number of areas.
Lifetime mortgages are a type of equity release plan allowing consumers to take out a new mortgage on their property to raise cash. The loans are a type of mortgage but are rarely paid off. On the death of the borrowers the property usually reverts to the lender.
In its 9-page letter to lifetime mortgage provider CEOs this week the FCA said: “We have seen examples of exploitation and misleading information. These practices are counterproductive and detrimental to a healthy financial services system and are the types of poor practices the Consumer Duty seeks to prevent.”
The letter informs CEOs that the FCA’s second consultation with specific rules and guidance on the proposed new Consumer Duty is now closed and it expects any new rules and guidance to be published in July.
A key area of concern for the FCA on lifetime mortgages is procuration fees.
In its letter the FCA said: “Sales of lifetime mortgage products are predominantly made through mortgage intermediaries.
“Our work with advisers and intermediaries in this and other portfolios has highlighted the risk that placement of business may be subject to conflicts of interest, for example to providers that offer the highest procuration fees or where there is an adviser – provider relationship. We will intervene where we consider that there is a potential distortion to the market or that firms’ systems and controls are not operating effectively to help ensure positive outcomes for customers.”
The FCA identified 7 areas where lifetime mortgage providers needed to pay particular attention, adding that it would act where it identified firms causing, or likely to cause, significant harm to consumers.
These include firms needing to do more to evidence how they are monitoring outcomes for customers in vulnerable circumstances; product design and governance with a concern that there is now a trend for some equity release plans to be sold to younger customers who are outside the traditional target market and are borrowing larger amounts than the usual medians.
The FCA is also concerned about contracts that may expose borrowers to “excessive charges” and relationships between lenders and intermediaries. There are also concerns about post-sale systems and controls and financial resilience. The FCA says it will intervene where it learns that that firms are at risk of exhausting cash reserves or face liquidity challenges and may need to exit the market.
The FCA is also concerned that tougher economic times will cause more consumers, potentially vulnerable ones, to search for credit and firms must remain alert to the risk of some consumers buying “unsuitable” equity release products.
