Vulnerable borrowers risk subscribing to unsuitable capital release products

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The rising cost of living may put older borrowers at greater risk of purchasing unsuitable capital release or lifetime mortgage products, the city watchdog has warned.

The Financial Conduct Authority said it was “particularly concerned” that consumers facing financial difficulties might be more likely to buy unsuitable equity release products.

The regulator, which was updating its smonitoring strategy for lifetime mortgage providers, he says eexpect companies offering capital releases and lifetime mortgages to consider the likely impact of the cost of living crisis on consumers.

In a “Dear CEO” letter to companies, David Raw co-Director, Consumer and Retail Policy Division Oversight at FCA, wrote poor product design and poor governance could lead consumers in the seniors loan market to purchase products they do not fully understand and which do not meet their demands and needs.

Raw said the FCA was fear that borrowers least able to afford increases in the cost of living will be hardest hit.

“While the overall average inflation rate is 9% and rising, the Institute of Fiscal Studies estimates that the poorest households could face average inflation rates of up to 14%. This against the backdrop of a quarter of the population having low financial resilience, a figure likely to rise in the coming months,” he wrote.

The FCA said it identified risks, including poor product design and governance issues, that could lead consumers in the seniors’ loan market to buy products they don’t fully understand and don’t meet their needs. their requests and their needs.

He also highlighted the role of intermediaries in selling lifetime mortgages and releasing capital and noted that he saw evidence that capital releasing was targeted at younger borrowers.

“Company policies and procedures, as well as a lack of ongoing due diligence in relation to the relationship with intermediaries, particularly where these are affiliated or have exclusive agreements, may lead to products being offered outside of their target market,” Raw continued.

Consumer duty

The CAF is proposing to introduce a new consumer obligation that would set a higher standard of care that companies should provide to consumers in retail financial markets. Raw added: “Consumer duty would compel businesses to act to deliver good results for customers, including those in vulnerable circumstances. This reflects our positive and proactive expectation of business conduct, and our desire for businesses to think more about consumer outcomes and put consumer interests at the heart of their business.

The consumer obligation would require businesses to focus on supporting their customers to make good financial decisions, including those in vulnerable circumstances, and to avoid foreseeable harm and verify whether their customers get good results.

The obligation follows a consultation and new rules and guidance will be published by the end of July 2022.

The FCA said it had also identified areas where it expected lifetime mortgage providers to pay particular attention to consumer needs.

These include fair treatment of customers in vulnerable situations, product design and governance, fees and pricing structure, relationships between lenders and intermediaries.

Raw said: “Our monitoring of the lifetime mortgage industry has highlighted a trend where lifetime products are increasingly being sold to younger customers and with higher median loan values. We expect lifetime mortgage providers to have effective oversight frameworks in place to ensure these products are sold to the identified target market and deliver positive results to customers.

He added: “Companies should ensure they have enough visibility, for example in the form of management information, to identify where this is not happening. Businesses should be able to demonstrate that their customers are treated fairly, particularly given the continued impact of the coronavirus, the impact of the rising cost of living and any associated increase in financial vulnerability to across the country.

“We are also concerned that poor product design and governance could lead consumers to buy products later in life that they don’t fully understand and that don’t meet their demands and needs. We expect all companies operating in the seniors’ loan market to treat their customers fairly, especially older borrowers, and to pay close attention to signs of vulnerability. Although the majority of customers taking lifetime products do not make repayments, it is essential that, where applicable, lenders ensure that they apply appropriate affordability criteria, as inadequate affordability checks could make it harder for older borrowers to meet their financial obligations when they move. retirement.”

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