Check out a way to improve advice

The first round of lifetime mortgages mystery shopping by the Financial Services Authority in 2005 highlighted deficiencies in the advice offered to clients and in the sales process. More than 70% of advisers were not gathering enough information about clients before offering advice on equity release. To compound the problem many advisers were advising clients to invest the proceeds in products that were unsuitable for them and posed an unnecessary risk. And more than half were not advising clients of the downsides of equity release.

This was a wake-up call for the industry and gave trade body Safe Home Income Plans cause for concern. In the SHIP member survey in January this year advice standards were flagged as an area to be add-ressed as a priority and SHIP introduced a number of initiatives to raise the standard of advice.

So has the FSA’s latest round of mystery shopping shown the industry going from bad to worse or to the top of the class? The answer lies somewhere in between.

The report, while acknow-ledging some significant improvements have been made, says that much work remains to be done. Serious deficiencies in the quality of advice were found with small firms dabbling in the market identified as being the worst culprits.

But large providers were generally found to have appropriate systems and controls to ensure clients are properly informed. Among brokers again it is those who deal with a significant proportion of lifetime mortgages business that have the best procedures in place.

The key concerns of the FSA include quality of advice and in particular failure to pay enough attention to issues such as a clients’ eligibility for means-tested benefits or grants. It also covered low volume firms dabbling in the market and failing to implement suitable systems to provide quality advice. And around one-third of firms mystery shopped failed to hand over the Initial Disclosure Document at the appropriate time.

Serious as these concerns are, the FSA’s findings must be seen in the context of the journey the industry has made. While thorough information-gathering remains disappointingly low at 55%, this is an improvement on the unacceptably poor 30% in the 2005 report. More than half of advisers are now properly explaining the downsides of equity release products compared with 40% in 2005. The number of advisers handing over the IDD at the correct point in the sales process has doubled.

Problems with IDDs are not confined to equity release advisers but are evident across the whole IFA community.

As a reaction to concerns raised by members SHIP launched two initiatives this year to raise standards of education among those advising on equity release. First, it announced that from August 1 2007, no SHIP members will accept business unless the adviser holds a specialist qualification in lifetime mortgages from either the Chartered Institute of Surveyors, the Chartered Institute of Bankers through its educational wing the Institute of Financial Services, or the equivalent bodies in Scotland. It is sending a message to the industry that it must put up or shut up.

Second, SHIP devised a 10-point checklist for advisers and consumers to use in the equity release process. This covers the critical areas advisers must address such as impact on benefits, consultation with families and alternatives to equity release such as downsizing. The check- list, which can be downloaded from SHIP’s website www.ship-ltd.org, can be used by advisers as an aide memoire or by clients to ensure they are getting relevant information.

These initiatives have been devised by SHIP not as a result of external pressure, but from a desire by the industry to treat customers fairly.

So where do we go from here? Some things are obvious. Just as we protect young people from riskier financial products that are unsuitable for them such as credit cards, more must be done to protect the elderly and potentially vulnerable.

The FSA, like SHIP, has made it clear the advice process must be tightened up and that the ignorance and poor practice seen in previous mystery shopping exercises must stop.

But how can the industry push things on and how can SHIP spearhead change?

For a start, SHIP calls on other bodies in the financial services industry to support the use of its checklist as part of the sales process for all advisers. While not wishing to add to the burden of paperwork, SHIP feels that having a clear consistent form for advisers and consumers to follow will do much to address to concerns over gaps in the advice process.

SHIP would also welcome a compulsory certificate for solicitors to confirm they are acting for the client on an independent basis. SHIP would like the support of the Law Society in pushing this through.

One final point. SHIP will continue to engage in open communication with the FSA and looks forward to working with it to build a stronger, more secure equity release industry in the years ahead.

Jon King, chief executive, Safe Home Income Plans

10-point equity release checklist
Customer name:

01. Has the client considered alternatives to equity release including trading down, grants and using savings?
02. Have you discussed state benefits and the effect equity release may have on them?
03. Have you considered the customer’s tax position?
04. Has the customer been advised to speak to their family and any other material beneficiaries of their will, and to consult an independent legal adviser?
05. Have you discussed health and life expectancy and taken into account changes in house values?
06. Are you sure the contract recommended is the most suitable one, and have you advised that any outstanding mortgage must be redeemed on completion?
07. Have you ensured that you have not recommended that the funds released are reinvested into any medium or long-term investments?
08. Have you reviewed the customer’s needs and objectives, plans and commitments?
09. Have you ensured that the amount released does not exceed the customer’s current requirements and is appropriate to their attitude to risk?
10. Has the customer put together a realistic expenditure budget plan for the funds released?

Signed (Adviser):

Date:

This is not a substitute for a full fact-find or a replacement for a suitability letter. A full version of this checklist can be downloaded from SHIP’s website.