Reflections on fact-finds and the FCA report

Graham Evans is head of compliance at the Equity Release Supermarket, the chief examiner for the LIBF level 3 CeRER qualification and a member of the Equity Release Council’s Standards Board. Here he considers the recent FCA report and how advisers should respond to it.

The Financial Conduct Authority (FCA) report on the equity release sales and advice process is an unpleasant read for any decent equity release adviser but it serves as a reminder of the importance of a strong and thorough fact-find.

A strong fact-find is not meant to be intrusive, but it allows advisers to make a bespoke recommendation based on a customer’s personal circumstances. Advisers should remind customers that it’s their job is to ask questions, probe the answers, document the response, and make a recommendation based on the customer’s short, medium, and long-term situation and personal circumstances.

Equity release advisers must consider all later life lending options to ensure their advice is suitable and tailored to the customer’s needs. Customers may have a number of objectives that could be satisfied from different lending sources and not amalgamated into one product such as a Lifetime Mortgage. For example, a customer may have several credit cards or unsecured loans and they could possibly consolidate this debt into one, affordable payment via a short-term personal loan.

The adviser may not have a licence for debt advice, however, has the customer explored this option? Could they be referred to a debt councillor/specialist? If not, are there sufficient notes and discussions captured in the fact-find, regarding different lending options, the customers responses, and reasons why they were dismissed.  Advice may be to dismiss any form of borrowing or equity release and an adviser must make this clear once they have conducted a full review of the customer’s individual circumstances.

If an adviser does make a recommendation, they should give the customer clear, transparent information and the recommendations must be fully documented in both the fact-find and a suitability letter.

The fact-find and suitability letter should include adequate personalisation including the customer’s current situation, the alternative options and why they were dismissed. The reasons for the recommendations and explicit details of the charges involved and the impact on the customer’s estate over the long-term, should also be set out.

Customers should be encouraged to get their family and possibly even friends involved with the decision-making process and to think very carefully about the long-term effects on their individual circumstances. Advisers should give an explicit forecast of the long-term impact on their estate to allow customers to consider whether it will be right for them both now and in the future, as well as how much it will ultimately cost.

It’s no secret that the FCA recognises suitability from the quality of the fact-finds. Advisers should ask open questions when fact-finding, and thoroughly discuss the alternatives to equity release. They should capture their customers responses, suggest alternative options, and clarify if and why they were dismissed. Encourage customers to view and agree with the content of the fact-find to ensure it is reflective of the discussions and then provide the customer with a short, punchy suitability letter that summarises the advice obtained from the fact-find.

Some of the other key concerns from the report, appear below.

Alternatives and order taking: The report said that advisers should consider alternatives to a lifetime mortgage and “be prepared” to challenge customers’ initial requests where appropriate, “rather than simply take customers’ orders or preferences without question”. The watchdog said failing to do so amounted to “taking orders” from customers without taking sufficient steps to assess whether a lifetime mortgage was suitable with regard to each customer’s specific needs or circumstances.

Surplus income: Some advisers had also not properly considered a customer’s financial circumstances, so a customer’s significant surplus income had little or no bearing on the final recommendation, the regulator said.

Removing a spouse: Additionally, the FCA found examples of advisers recommending changes to property ownership so that equity could be released, such as removing from the title deeds a joint owner who did not meet lenders’ age requirements.

Debt consolidation: It pointed to problems with determining the impact of debt consolidation, saying all too often the default assumption was that equity release would be suitable with alternative solutions discounted with little consideration.  

Upfront fees: The regulator also found that some advisers had accepted that customers did not want to pay upfront fees “without question”. It gave one example where over the expected course of the loan, this decision would cost the customer 25 times the fee in extra interest. However, the case file “contained no evidence as to why.

Standard generic text: While reviewing case files the FCA said it had found cases where there was “inadequate evidence” to show that the advice was suitable. The regulator found a number of files that contained standard generic text to justify why customers did not want to consider alternatives to equity release. The FCA found that most customer interactions were not recorded either on tape or digitally by firms and advised that in the absence of audio recordings, “good written records of discussions” were important not only to evidence the suitability of advice but also to assure a firm on the advice given by its advisers.

Suitability letters: All of the firms looked at by the FCA had provided suitability letters to their customers, despite not being mandatory. The FCA said if used appropriately these could be helpful to explain the advice. However, it said it had seen examples of suitability letters that ran to 20 pages or more, containing “significant volumes of standard text”.

The opinions of contributors to the Equity Release Council’s website and newsletters are not necessarily those of the Council.