Equity Release: is product innovation solving the wrong problem?
When the Sunday papers start writing about a firm harassing its prospective customers with phone calls and massive mailings, this should send a red flag to its board of directors. Last year’s exposé by the Sunday Times of the incentives offered to St James’s Place advisers, in particular the overseas conferences and cruises to reward the most successful, resulted in these benefits being withdrawn within a couple of months. This time, the newspaper has equity release in its sights, with not one but three companies named and shamed.
Some of us in financial services are old enough to still remember the bad old days of later life lending, when in the worst cases, a family member could die leaving the shock of a substantial debt on their dependants. These days are thankfully gone, and the industry has cleaned up its act thanks to the Equity Release Council with its standards code. ERC members agree to provide full financial advice and independent legal advice on all transactions, and the customer benefits from a no negative equity guarantee (NNEG) so that their family will never be left indebted.
Some of the Sunday Times’s criticism is arguably unfair, making comparisons in interest rates between standard residential mortgages and equity release ones, without a thought for why the latter would be higher. Lenders clearly must allow a risk premium, balancing the estimated future value of the property against the customer’s unknowable longevity and the risk of incurring the NNEG.
Nonetheless, the report poses a serious question about how prospective customers are treated upon making their initial enquiry into the product. As these specialist lenders should know all too well by now, lifetime mortgage borrowers should all be treated as “potentially vulnerable”. By definition, they will all be 55 or over and may be retired, with little in savings or pension income. They may be heavily indebted or feel under emotional pressure to help a family member, or even have been thrown into a desperate financial position by the pandemic. Regardless of why they need the money, they are considering taking value from their home, an emotionally charged decision to make.
It’s not unusual for someone considering a lifetime mortgage to spend eighteen months researching their options, before reaching the point of taking financial advice. Yet journalist Katherine Denham’s experience suggests the firms she approached were in a hurry to compress this timeframe down to days or weeks. Bombarding vulnerable customers with numerous phone calls, emails and letters is the wrong approach. With FCA’s focus on vulnerability, lenders are not just risking bad publicity. The regulator has yet to issue fines specifically citing vulnerability as a factor, but sanctions for breaching Principle 6 on fair treatment have run to many millions of pounds.
The industry can fix this
Yet equity release providers and advice firms have demonstrated the ability to change. Witness the huge transformation in the advice business model that happened during lockdown, as firms were forced to look for ways to complete on loans without the usual face-to-face advice and wet signatures. On the whole though, innovation has focused on the range of product options, and even this year a record 210 new products have been launched as of end of August.
It seems to me these firms could apply the same capacity for change, to staying on the right side of the regulator. Forcing customers to provide their contact details before giving access to full product details and calculators, then following up with heavy-handed marketing, is surely counterproductive. Shouldn’t the Equity Release Council be leading the way by showing firms a softer way to help their customers? Why not make researching options as simple and stress-free as possible? Ensuring customers make informed choices as to whether equity release is the right product for them, in their own time, must lead to better customer outcomes all round. Furthermore, this would more quickly filter out those for whom the product is not suited, saving advisers a great deal of wasted effort – time which could be usefully spent continually improving the quality of advice.