April 2016 Adviser guide to equity release Section 3: Initial advice process The Adviser Guide to Equity Release is a guidance framework only. Advisers must always refer and adhere to the regulatory regime set out in the Financial Services and Markets Act 2000, and the FCA Handbook. Use of this guide does not alleviate any responsibility or obligation to follow the regulatory regime set out in statute and secondary legislation. For more information on regulatory standards, please contact the Financial Conduct Authority, or visit their website www.fca.org.uk The Equity Release Council will not be held responsible for regulatory breaches incurred by firms relying on this guide for FCA compliance purposes. Created and sponsored by Retirement
Contents Disclosure 3 Three simple steps 5 Initial disclosure document 6 1st appointment process 7 Fact Finding 11 The Equity Release Council : Adviser Guide 2
Disclosure This part of the guide is designed to help you through the initial stages of the advised equity release purchase process, from initial client contact, through to completing the first appointment and fact finding. Client contact by telephone When the initial contact with the client is by telephone, you must make them aware of the following: Your name. The name of your firm. The scope of service you can provide, and the product range you have access to. That you will provide the client with advice on their need for equity release. How you will be remunerated. When you communicate information to your client, you must ensure that you communicate in a way which is clear, fair and not misleading. This means that you must judge the level of knowledge that your client has regarding the potential contract to be recommended. Be aware that your client may not have a high level of knowledge of financial terminology or jargon, so ensure that you present all information as clearly as possible. Take extra time to explain financial terms clearly if necessary, so that your client can make an informed decision. Disclosure at offer stage Lenders may need to ask you to give information to help them prepare the offer. For example, they may ask about the level of service provided, or any fees that you have charged. A lender must provide an offer document which complies with the rules when making an offer for an equity release product (Home Reversion product or Lifetime Mortgage). The offer must include an updated and suitably adapted Key Facts Illustration (KFI) as an integral part of the offer. In any communications to your client, you must describe any regulated lifetime mortgage contract as a lifetime mortgage and not use any other expression to describe such a mortgage or omit that description from the name given to any product that meets the definition. The Equity Release Council : Adviser Guide 3
Explaining scope of services At the initial contact with a potential client, you must ensure that they are adequately and clearly informed of the scope of services that you offer. The scope of services you might offer is as follows: Unlimited A limited number of lenders Single lender This is not an exhaustive list of what can be disclosed, but any disclosure must be clear. Suitability of advice A personal recommendation has 3 elements: You must give advice relating to the merits of the client entering into a regulated lifetime mortgage or home reversion contract. The advice must relate to a specific mortgage. The advice must be to a specific person in the capacity as borrower or potential borrower In order to establish suitability of the equity release contract, you must ensure that the benefits to the client outweigh any adverse effect on: The client s entitlement (if any) to means tested benefits. The client s tax position. And That any alternative methods of raising the required funds have been investigated. Affordability (if recommending a Lifetime Mortgage contract) An adviser must explain to the client that the assessment of whether he/she can afford to enter into a regulated lifetime mortgage contract is based on: Current interest rates, which may rise in the future. The client s current circumstances, which may change in the future. Information provided by the client on his/her income and expenditure. Any likely change to the clients income and expenditure, and any costs that the client may have to meet in relation to any offer periods on the lifetime mortgage. Debt consolidation Where the main purpose of taking the lifetime mortgage contract is to consolidate existing debts, you need to take account of the following: The costs associated with increasing the period over which a debt is to be repaid. The costs associated with swapping from simple interest to (potentially) compound interest. Whether it is appropriate for the client to take an unsecured loan. Where the client has payment difficulties, whether it would be more appropriate to negotiate an arrangement with his/her creditors, rather than to take out a lifetime mortgage. The Equity Release Council : Adviser Guide 4
Three simple steps It is recommended that you always carry out a three stage process, as this gives the clients time to fully understand and assess the advice being given. STEP 1 Initial disclosure STEP 2 Offer supporting literature to client STEP 3 Carry out Fact Find Initial disclosure should be carried out, and once established that the clients wish to continue, to investigate the possibility of taking out an equity release product, the following items should be given to the client: Fees and concepts Equity release is a fully advised purchase which cannot be bought any other way, and as such requires that the adviser be appropriately authorised to advise in this specialist area. The specialist nature of this market suggests and confirms that advice fees can be charged, and in almost every circumstance advice fees are charged. Fees are normally added to the loan or monies raised and the acting solicitor would deduct the fee from the loan and send to the adviser. There are also some products where the lender offers their products as fee free paying both the solicitors and advisers fee to maximise the amount the customer receives and in some cases can be the difference between being able to repay an existing mortgage or not. Initial Disclosure Client Fee Agreement ERC brochure A Fact Find can then be carried out. The Fact Find should be completed with the clients. This should then be signed and dated by the client and the adviser. You can now proceed to research the case. Carry out research and then print off or request a lender KFI. Suggested research tools include Iress/The Exchange, Assureweb, Defacto and MoneyFacts. The Equity Release Council : Adviser Guide 5
Initial disclosure document When you anticipate giving a customer advice or personalised information about a mortgage, you previously had to give them an Initial Disclosure Document form. The IDD promoted consumer understanding about the services you offer. This is no longer a requirement following the Mortgage Market Review, though some firms have continued to use this document to promote good practice. Irrespective of whether you use an Initial Disclosure Document or not, you must give the same information to the customer on first contact. The IDD explains to the customer: The scope of service you offer. If you base your service on a limited number of lenders you must tell the consumer that he can ask for a list. The service that you will provide. What he will have to pay for your service. Whether any fees are refundable. Your regulated status. Contact point if he has a complaint, and That they are covered by the Financial Services Compensation Scheme and the level of protection provided. Client fee agreement The charging of fees should be discussed with the client during initial consultation. The level of fee to be charged should be agreed with the client(s) and documented in a client fee agreement. This document sets out the formal fees which are chargeable and the services agreed between the client and the Adviser. The document should be edited to show the specific client s name and address details. The agreement should be signed and dated by the client(s). The client should be provided with a copy of the Fee Agreement for their records. The original should be held on your client file. Chargeable work will not start until this time has elapsed. The Equity Release Council : Adviser Guide 6
1st appointment process Know your market Research has shown that, typically, there are two key audiences for equity release. However, please remember that there are strict lender eligibility guidelines which we must follow. 1. Those who want to maintain their lifestyle sustaining comfort in retirement 2. Those who are less comfortable in retirement needing cash more urgently. Audience 1 Sustaining their comfort in retirement What do they look like? Have enough money to live on presently but see need for future additional funds. Likely to foresee fund shortage and plan accordingly. Longer purchase process as less immediate need for funds. Find equity release appealing and use it to maintain their current lifestyle. Main criteria is value for money. Pragmatic in nature (Financially astute). Optimisers, planners. Progressive outlook. What do they do with the money they release? Supplemental income for: Holidays. Home improvements. Funds for children. Use as part of planning their retirement income. Alternative to downsizing: Love their home life and don t want to move. The Equity Release Council : Adviser Guide 7
Audience 2 Less comfortable in retirement What do they look like? Have reached retirement still with a mortgage and without any means to repay. Do not have the means to pay existing bills with current income. Likely to have not foreseen fund shortage and therefore have immediate need. Short purchase process as have a more immediate need for the funds. Main criteria is ensuring they get enough money to meet their needs. Traditional outlook. What do they do with the money they release? Essential funds for: Repyament of mortgage Bills Vital property repairs Operation not covered by NHS Adapting house for old-age use Alternative to downsizing: Don t want stigma of giving up their home Situation precludes inheritance issues: Need for funds outweighs children's needs Additional points to consider: Different age groups may have different reasons to buy an equity release product. However, in general, we have identified that customer needs do differ by age group. The Equity Release Council : Adviser Guide 8
Customer needs by age Clients below age 55 not normally eligible for an equity release product 55-65 year olds eligible for some equity release products for financial support 65-75 year olds need pension or additional financial support 70-75 year olds private health care or property maintenance 80-85 year olds may be on their own and need more pension Over 85 s need care assistance as they don t wish to move out of their house Impaired health gives access to higher LTVs Product types/features Your customers need to be in control, therefore it is important that you provide them with all the facts. Remember to offer examples of the benefit of each individual feature. Some examples of this are: Offer a proposition that is clear and easy to understand this makes the decision process easier, as the client is aware of what they need to do now and any action they could take in future, such as taking additional drawdowns. Speedy access to funds clients may need funds quickly, to fund essential home repairs, or medical bills. Offer a proposition with a competitive rate, and the flexibility of further cash releases if they need funds in future your customers are happy that they are getting a good deal, and that they have flexibility to meet any future needs. Try to provide assurances for future financial needs reassures your client that they have a "safety net" of additional funds to take, should they need it. Offer flexibility and choice the best product may not necessarily be the one with the best rate, if future flexibility is compromised. Try to offer a product that can cope with future financial needs. Always remember to always give equal prominence to the disadvantages of a product. These disadvantages maybe consistent through all lifetime mortgages or home reversion products, but may also be particular to a specific product. Does the customer understand the implications of rolled-up interest? Give a specific example of how much will be owed and when within the product literature, to avoid misunderstanding. Means tested benefits may be affected by money released through lifetime mortgages and home reversion products. Although possible, moving home at a late date becomes more complicated if there is a lifetime mortgage. Home reversions may mean that it is impossible to move home at a later date. The estate that you leave your family will be reduced by a lifetime mortgage or home reversion plan. The Equity Release Council : Adviser Guide 9
Keep it simple As we have seen through the market history and background, equity release appeals to 2 groups of clients those that are often younger, wealthier and more financially astute, looking to maintain their standard of living, and those who need the money released to supplement an insufficient income. More financially astute clients should see the benefits that taking out an equity release product can provide, particularly when used for financial planning such as IHT mitigation. Short term gain is not the priority in these cases and you should instead focus on the long term benefits to the client and their estate. However the presentation of equity release to often older, less financially sophisticated clients should be kept as simple as possible. The real and immediate benefits to lifestyle that the client can achieve should be shared as well as the longer-term benefits, whilst remembering to give a balanced view of product disadvantages alongside the benefits. Discussion skills Keep the language as simple, clear and factual as possible Try to explain situations of what a lifetime mortgage could enable the client to do that they cannot do currently. This is a very strong message. Demonstrate how they can remain independent without having to rely on their family. Keep in mind for your client the immediate life changes, over the next six months and into the future, say around 10 years time. As the client grows older, you have an opportunity to develop your advice e.g. the first drawdown released could be used for client s income. Any further drawdowns could be used to help the family, or for IHT planning. Show how family members can be helped financially now, not after client s death. It is important if possible to involve the client s family. The family will often endorse the purchase if they are involved in the discussion from an early stage. It will also avoid any potential problems in the future if potential inheritors are aware of any implications on the estate. The sale of equity release deals with product features, potential client benefits and emotions. Your clients often feel a strong emotional tie with their home it is where they brought up their family for example, and often where the family gathers for celebrations. This approach does not usually require more than two visits to your client, and can be quite a short time commitment. It is essential however, to ensure that you gather all of the relevant facts we will deal with this later in the Fact Finding chapter. The Equity Release Council : Adviser Guide 10
Fact finding Free guides are available on benefits for use with clients The final stage of the 1st Appointment process is to conduct a full fact find. This will help you in your later stages of researching a suitable product, helping profile your client(s) present financial situation, needs and wants and any future requirements Supporting notes In addition to the fact find document, which can help guide you in asking all of the relevant questions, it is a good idea to take supporting notes. This can help record any particular feelings your client may have about aspects of the product, or any future needs, wants or aspirations. Means tested benefits The information on the Fact Find must be taken prior to discussing any options with your client. You must know your client before offering any type of advice. The fact find must contain sufficient details for advice to be given. If any piece of relevant information is missing, the suitability of advice must be in question. The FCA and Compliance teams look at the Fact Find on the basis ' there is no such thing as too much information on a fact find'. There should be no blank spaces on the form. This, of course, must be balanced out with common sense and if a piece of information is missing which would have little or no effect on the recommendation made, it could be ignored. The relevant section of the form however should be completed to confirm that the information is not relevant/not applicable or that the client was unwilling to disclose. Important You should provide clients with the opportunity to seek expert tax and benefits advice from their The Citizens Advice Bureau before they enter into an equity release scheme. 1. Department of Work & Pensions (DWP) Benefit and Pension Rates Leaflet Ref BRA5DWP see website www.jobcentreplus.gov.uk 2. Age Concern Financial help in retirement Leaflet Ref ACIG10 see website www.ageconcern.co.uk 3. Money Advice Service (MAS) www.moneyadviceservice.org.uk/en/categories/benefits The Fact Find must include the following facts: Current Income including sources and type of income. Current Assets. Current Liabilities. Current Expenditure. Employment Status. Any likely significant changes in the near future. Any current state or other benefits claimed. Estimated Property value. It is important that the following information is also gathered on the fact find: Client What is their state of health? (some products about 17% of the market offer higher LTVs for impaired lives) What other assets or investments are available? Are there alternative sources of raising income? Have they considered moving home and 'downsizing'? Are there any grants available? Are they currently receiving any State Benefits? How much do they want to be able to leave to their family? Have they spoken to their family? Adviser Toolkit: Fact Find Example The Equity Release Council : Adviser Guide 11
Needs Why do they need income or capital? Is capital required for a large purchase or ongoing commitments? Are they likely to want to raise further money in future? Risk Assessment of Fact Find data Your assessment of the client's requirements is based on the information provided by the client. The information gathered on the Fact Find should be gathered and recorded in the Suitability Letter. As on all regulatory paperwork, each client party to the mortgage must sign to confirm that they accept the information given is correct. What is the client's attitude to future house inflation? What is the client's view on future interest rates? (to help determine fixed or capped rate) Check affordability can the client afford to pay interest monthly or is roll-up more suitable? Property What type of property is it? What is the construction? Is it the main residence? Is any business conducted on the premises? (or any businesses adjacent to the property) Are there agricultural ties or similar? Is the property freehold? If leasehold what is the unexpired term of the lease? Is it Ex Local authority or MOD? If a joint application is the property owned on a joint tenancy or tenants-in-common basis? The original client Fact Find must be completed in full, signed by all clients and verified with your own signature and date. The date of the fact find should always precede any advice having been given. Copies should be sent to your client for their own records and a copy placed on your client file. You may wish to forward a copy to the clients solicitors to assist them to understand the advice provided and complete the mortgage process. Section 4: Completing the advice process Back to main menu The Equity Release Council : Adviser Guide 12
Created and sponsored by Retirement 3rd Floor, Bush House, North West Wing, Aldwych, London WC2B 4PJ Tel : 0844 669 7085 THE EQUITY RELEASE COUNCIL IS A TRADE ORGANISATION THAT REPRESENTS THE EQUITY RELEASE INDUSTRY. NOT ALL PROVIDERS, ADVISORS, SOLICITORS OR SURVEYORS ARE MEMBERS OF THE COUNCIL. TO MAKE SURE YOU ARE DEALING WITH A GENUINE MEMBER LOOK FOR THE LOGO AND SEARCH OUR WEB SITE UNDER MEMBERS DIRECTORY. THE EQUITY RELEASE COUNCIL IS NOT AUTHORISED TO GIVE OR OFFER ADVICE TO CUSTOMERS. The Equity Release Council, formerly Safe Home Income Plans is a company limited by guarantee and registered in England No 2884568. The company is not authorised under the Financial Services and Markets Act 2000 and is therefore unable to offer advice.