Conducting Equity Release Business 1
1. Introduction The term Equity Release refers to both Lifetime Mortgages and Home Reversion Plans. Conducting Equity Release business includes all activities relating to advising clients on Lifetime Mortgages and Home Reversion Plans; including status disclosure, fact-finding and documenting the sales process. This Chapter sets out the minimum requirements TRER expect when conducting an equity release sale. 2. Initial Disclosure Document (IDD) Advisers must provide the client with an IDD at the first meeting. This can be emailed to the client if they request. Advisers must verbally give an overview of the IDD including what whole of market means, that advice will be given, the fee basis, the complaints procedure and the compensation scheme. 3. Fact-find In all cases, advisers must fully complete the RER Equity Release fact-find at the first visit and ensure this is fully signed and dated by the client(s). The Fact Find must evidence if the client has selected to add fee s to the loan. 4. Express Consent Form For all Equity Release business, cold calling is not permitted. There needs to be an established pre-existing client relationship through which the consumer expects to receive such promotions. In other words the client must be expecting a call from RER to discuss their equity release needs. In order to evidence the existence of a pre-existing client relationship, an Express Consent Form must be completed on the first visit to the client and retained on the client file. Where business is conducted over the Internet the firm must obtain express consent directly from the client. This must be in a durable medium 1 originating from the clients personal email account. Where the client no longer wishes to receive such promotions they may express this desire by any form of communication. There is no requirement for the client(s) to express this in writing. The client file must be noted accordingly and all such promotions must cease with immediate effect from the date that the notification was given. 1 Durable medium is either paper based, or via a communication which can be stored by the client 2
5. Witness Expression Form Where the youngest client is 70 or over, a witness expression form must be fully completed at the first visit. Part 1 of the form must be completed by the client with part 2 being completed by the witness. Both parts of the form must be signed and dated and a copy retained on file. 6. Fee Agreement Where a fee is charged the fee agreement form must be fully completed to reflect the charges to the client and the client must sign and date form. This must be completed on the second visit. A copy must be retained on file. 7. Adding Fee s to the loan amount A customer has to positively elect to add the fees to the loan, the Fact Find asks how important adding fees to the loan is to the client which must prompt a discussion with the client around the consequences of adding fees to the loan. Two KFI s must be completed one showing no fees add to the loan and one showing the affect of adding fees to the loan. Both must be discussed with the client and The Right Equity Release positive election form completed where the client wishes to continue with adding fees to the loan. The Suitability Letter must also confirm the affect of adding fees to the loan detailing the monthly payment if applicable or affect of roll up. 8. Data Protection statement Two copies of the data protection statement must be given to clients one copy for the clients records and second copy which must be signed and dated by the client and retained on file. 9. Sourcing Systems Advisers must evidence that the most appropriate Equity Release Plan has been sourced for the client from the whole of the market. In order to evidence this, advisers must use the following RER approved sourcing systems: Trigold, Exchange or Assureweb Mortgages & Lifetime Mortgages Exchange or Assureweb protection & home reversion schemes Where you are recommending a lender who is not top of the research tool, a reason for this must be kept on file. 10. Key Fact Illustrations The Key Facts Illustration will only be required where a recommendation is made or where the customer asks for a KFI. A KFI must be produced with and without fees discussed with the client and kept on file. This information must be recorded within the Suitability Letter, showing the monthly cost comparison and the total effect on the borrowing. 3
11. Existing Regulated Mortgages with an Early Repayment Charge (ERC) Where there is a recommendation for the client(s) to effect an Equity Release and incur ERC, the adviser must obtain either of the following from the client(s) relating to their existing mortgage/equity release plan: A copy of the original KFI confirming the amount of the early repayment charge, or Redemption Statement, or Verbal confirmation from the client(s) that early repayment charges apply. In these circumstances the adviser must recommend that the client(s) obtain confirmation of the ERC from the lender in writing. Where an is ERC payable the suitability letter must include: The exact charges the client(s) are to incur in monetary value. Confirmation that these have been discussed with the client(s), and That the client(s) are willing to pay the charges. 12. Transfer of Equity Where a client wishes to add/remove a person(s) to a deed, there is the potential for liability to Stamp Duty where there is consideration for money or monies worth (i.e. the person being added to the deed will benefit financially from the transaction). Although the duty to inform HMRC falls to the client(s) and the solicitor, as the adviser is handling the transaction that ultimately leads to the incurring of Stamp Duty this must be documented in the suitability letter. 13. Suitability The following issues must be considered to ensure that any recommendation is suitable for the client and treats them fairly. It is important to record this information in the suitability letter. Alternative options - You should ensure that releasing funds from equity release is the most suitable way for the customer to raise the money they need, and you should also take into account whether a different type of equity release plan from the other market sector would be more suitable, for example, an adviser offering lifetime mortgages should take home reversion plans into account. Local Government Grants - If a customer requires money for essential repairs to the property, you should establish whether they could get this from a grant. You may have to refer the customer to an appropriate source, such as their local authority or Citizens Advice Bureau, before meeting the customer again to continue your assessment of their needs and circumstances. Means Tested Benefits - Using equity release to release funds may affect the customer s entitlement to means-tested benefits and could have an adverse effect on their tax position. You need to make sure the benefits of the equity release product outweigh any negative effects. 4
Equity release Customer s preferences for their estate advisers must consider customer s preferences for their estate before recommending an equity release product, as certain products will guarantee an inheritance and others will not. You need to consider whether the customer wishes to leave an inheritance and, if so, how much and to whom. Health and life expectancy - Advisers need to take customer s health and life expectancy into account because this will affect how much equity the customer can release from their home. Where a client has a health problem, advisers must consider products that offer enhanced benefits. Occupational Rights - When assessing whether a home reversion plan is appropriate to the needs, objectives and circumstances of the customer, one thing to consider is the duration of the customer s right to occupy the property. Unauthorised reversion provides - Advisers should also take into account the protection a client will lose if an unauthorised reversion provider is used rather than an FCA-authorised one. Future Plans - It is important that you take into account the customer s future plans, because a lifetime mortgage is a long-term solution that can be expensive to cancel or replace and home reversions can only be cancelled in very limited and expensive circumstances. Future plans are especially relevant for those in the lower age range of equity release customers, or those still in employment. You should also consider the customer s pension or income and expenditure if one person in a joint agreement dies. This is because if the customers are repaying interest and one person dies, the remaining customer may not be able to afford the repayments. Customers may need further funds in the future and this could affect the type of product you recommend. There are also interest savings for customers if they only draw the money they need immediately at first and the money they need less urgently at a later date. Where the client(s) have savings/investments that exceed their emergency fund requirements, the adviser must recommend the excess is utilised prior to effecting an equity release transaction. Where the client does not wish to follow this advice, and there no adequate explanation, the adviser must transact the business on an insistent client basis. 14. Rejected Advice (Execution Only) Where a recommendation is made to the client but the client does not wish to proceed with the full recommendation a execution only sale may be completed. An execution only sale can only be completed where: the customer has rejected the advice and instead requested an execution-only sale the customer has identified which particular equity release transaction he wishes to purchase, and specified at least the required additional information 5
Where it is clear that the customer wishes to proceed on an execution only basis the following must be adhered to: Inform the customer verbally and in writing (separate from the Suitability Letter) that the customer will not benefit from the FCA rules on assessing suitability and the consequences of this, On the same document as the above the client must confirm that he/she is aware of the consequences of losing the protection of the rules of assessing suitability and is making there own decision to proceed on an execution only basis. Complete a Suitability Letter detailing the full recommendation made to the client, why the client wanted to follow an execution only process and details of the product sold. 14.1 High Net Worth Equity Release can be conducted without advice where the client is classed as High Net Worth, the FCA s definition is a customer with a minimum annual net income of 300,000 or minimum net assets of 3m. With a joint application one for the clients must meet the criteria in there own right. The client(s) must provide proof of these assets or income to the adviser. Where the criteria is met, the client can proceed on an execution only sale with no advice being given from the adviser. In these situations it is likely that other financial professionals with be involved in the sale. Please refer to the TRER Compliance Director where a HNW client wishes to proceed on an execution only basis. 15. Affordability (where relevant) If the equity release product recommended requires regular payments to the provider, you need to assess whether these payments are affordable for the customer. Examples can include an interest-only lifetime mortgage or a home reversion plan where the customer is required to pay rent. A completed copy of the lenders affordability calculator and lending criteria from their website or from Trigold must be kept on the client file. Responsibility to assess affordability is now the responsibility of the lender, however the adviser will still be expected to gather this information accurately and explain the consequences of incorrect disclosure to the client. It is a requirement that: Proof of income is gathered and that this matches the income they have declared on the Application Form and Fact Find. That all outgoings are declared and that the client knows the consequence of not declaring these correctly. To sense check the gathered income/expenditure i.e. are they any additional regular out goings on the bank statement which have not been disclosed. In order to assess whether the transaction is affordable, advisers must consider: 6
The clients income and expenditure to ensure there is sufficient means to make any payments any likely changes to the clients income and expenditure that impact the clients ability to make payments, and The costs that the client(s) must meet after the discount period ends (If appropriate) and whether these are affordable. Advisers must explain to the client(s) that the assessment is based on: Current interest rates, which might rise in the future. The client(s) current circumstances and how they might change in the future. Where the mortgage payments are being meet by a 3 rd party, Lenders will need to verify affordability and will require documentation in order to evidence this. Advisers will need to gather full income and expenditure details and record these on a separate Fact Find along with any other relevant information such as changes in circumstances. 16. Most suitable Once the adviser has identified an Equity Release product as being the most suitable option, the adviser must make an appropriate recommendation taking into account the features of the product most suited to the client s requirements. Where the least expensive product is not recommended for the client(s), full justification must be documented on the file and recorded within the suitability letter: consideration for the product features could include: The overall cost Low initial set up charges The absence of early repayment charges. To have a drawdown facility available in the future To raise the maximum lump sum The inclusion of a 'no negative equity' guarantee. The inclusion of an early vacancy guarantee Raising money to provide for long-term care needs Protect a certain percentage of the equity in your property Maintain ownership of your property House price inflation guarantee 17. Assessing Appropriateness The FCA has highlighted 9 factors that they expect firm to consider when assessing appropriateness when providing advice (not all are relevant for Equity Release). The 9 factors being: 1. Whether the customer s requirements appear to be within the mortgage lender s known eligibility criteria for the regulated mortgage contract; 2. Whether it is appropriate for the customer to have an interest only mortgage, a repayment mortgages, or a combination of the two; 7
3. Whether it is appropriate for the customer to take out a regulated mortgage contract for a particular term; 4. Whether it is appropriate for the customer to have stability in the amount of required payments, especially having regard to the impact on the customer of significant interest changes it the future; 5. Whether it is appropriate for the customer to have their payments minimised at the outset; 6. Whether it is appropriate for the customer to make early repayments; 7. Whether it is appropriate for the customer to have any other features of a regulated mortgage contract e.g. repayments to be capped / option to have a payment holiday etc.; 8. Whether the regulated mortgage contract is appropriate based on the information provided by the customer as to their credit history; and 9. Whether it is appropriate for the customer to pay any fees or charges in relation to the regulated mortgage contract up front, rather than adding them to the sum advanced. 18. Debt Consolidation If the purpose of the equity release is to consolidate debt, it is important the adviser sufficiently assess the customer s debt position and explains the implications of debt consolidation to them. The client file and the post-sale documentation must document: Whether it is appropriate to secure previously unsecured loans, The costs associated with increasing the period over which the loan(s) are to be repaid, and Where applicable whether it would have been appropriate to negotiate an arrangement with creditors. Where the money raised from the Equity Release is to pay secured or unsecured debts the Lender will either use the current monthly payments within the affordability calculator or will require proof that the loan has been paid. 19. Suitability Letter Signatures Two copies of the suitability letter must be sent to the client (and any other relevant parties) within 5 days of the business being written. After reading through the letter the client (and any other relevant parties) must sign and date a copy and complete the declaration and advisers must retain this copy on file. 8