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Older borrowers more at risk of buying unsuitable equity release products: FCA

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The Financial Conduct Authority (FCA) has sent a letter to later life mortgage providers expressing concern about older borrowers being more at risk of purchasing unsuitable equity release products or lifetime mortgage products due to the cost of living crisis.

In the letter, the FCA co-director, consumer and retail policy division supervision David Raw asks chief executives of lifetime mortgage providers to consider the risks it presents, review strategies for mitigating them and be able to demonstrate that they alongside senior managers are taking reasonable steps to mitigate these risks.

Raw also says the FCA is “particularly concerned” about those consumers who are facing financial stress being more susceptible to the purchase of unsuitable equity release products.

He also asks firms to consider how the cost of living crisis is likely to impact consumers and take the necessary steps to support consumers and mitigate harm.

The letter comes as the cost of living continues to rise, with many feeling the impact on their personal finances.

The FCA says: “While the headline average inflation rate is at 9% and rising, the Institute of Fiscal Studies estimates that the poorest households may face average inflation rates as high as 14%. This is in the context of a quarter (27%) of the population having low financial resilience, a figure likely to increase over the coming months.”

“At the same time, we expect to see higher demand for credit, although rising interest rates, and lower disposable income, may make borrowing less affordable, or unavailable, for some. Firms will also see a wider group of consumers in financial difficulty, who will find it harder to pay their debts.”

“Some of these consumers will be in vulnerable circumstances or may be experiencing financial difficulty for the first time. Firms need to remain alert to the changing situation of their customers and target their efforts in response.”

The FCA says it has weighed up the different outcomes it would like to achieve and the issues it needs to tackle by looking at a variety of factors including the likely scale, severity and probability of harm occurring, likely future harm given external events, its ability to address issues and its judgement about urgency.

Taking that into account, Raw explains: “We continue to see challenges for the sector, particularly around customer vulnerability, product design and governance and its relationship with intermediaries, particularly where this 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 remain focused on ensuring firms understand the importance of a customer centric culture to their business model and strategy,” he adds.

While the risks of harm have remained unchanged compared to those identified in its October 2020 letter, the latest assessment factors in the impact of the pandemic,

and the implications of the rising cost of living, recognising that these have created significant challenges for firms and consumers that could not have been anticipated.

“Given the unprecedented impact of the pandemic, we expect firms to be aware of the difficult circumstances that some customers find themselves in and to consider very carefully the individual needs of their customers and show flexibility in their treatment of them,” Raw explains in the letter.

The FCA also says it expects firms to place “sufficient emphasis” on the fair treatment of all consumers.

“We often see poor treatment of consumers being linked to weak operational oversight, ineffective systems and controls and lack of meaningful management information.”

“We expect lifetime mortgage providers to manage these risks and to consider that increasing consumer debt and poor treatment has the potential to increase the prevalence of consumer harm,” it states.

It also highlights that the new Consumer Duty proposals would set a higher standard of care that firms should provide to consumers in retail financial markets.

Raw comments: “The Consumer Duty would require firms to act to deliver good outcomes for customers (including those in vulnerable circumstances). This reflects the positive and proactive expectation we have of firm conduct, and our desire for firms to think more about consumer outcomes and place consumers’ interests at the heart of their activities.”

The Consumer Duty, due to be published later this year, is set to be a package of measures, comprised of a new Consumer Principle that provides a standard of conduct, supported by a set of cross-cutting rules and outcomes that set clear expectations for firms’ cultures and behaviours.

The FCA identified several areas where it expects lifetime mortgage providers to pay particular attention to the needs of consumers.

These include treating customers in vulnerable circumstances fairly, product design and governance, fees and pricing structure, relationships between lenders and intermediaries, responsible lending, post-sales systems and controls, and financial resilience.

Raw says the FCA expects lifetime mortgage providers to ensure that their products are designed to meet the needs of an identified target market and that they continue to perform as expected.

Firms’ product governance frameworks should help them identify and manage the ongoing risk of poor consumer outcomes.

“Providers should have effective monitoring frameworks in place to help ensure the products continue to be sold appropriately and to the identified target market and are delivering in line with expectations,” he explains.

Raw also suggests that firms should be able to demonstrate that their customers are treated fairly, “particularly given the ongoing impact of coronavirus, the impact of cost-of-living increases and any associated increase in financial vulnerability across the country”.

“We are also concerned that poor product design and governance could lead to consumers purchasing later life products they don’t fully understand, and which do not meet their demands and needs. We expect all firms operating in the later life lending market to treat customers fairly, particularly older borrowers, and to pay particular attention to signs of vulnerability,” Raw explains.

For systems and controls, Raw says the FCA expects providers “to assure themselves that any customer-facing systems and controls are consistently delivering appropriate customer outcomes throughout the term of a product”.

“We will consider post-sales systems and controls as part of our product design and governance work,” he adds.

Finopulse

Disclaimer: This story is auto-aggregated by a computer program and has not been created or edited by Finopulse.
Publisher: Becky Bellamy

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