Posted: 7th March 2016
Is something beginning to change in customer perceptions of equity release?
There’s no doubt that pension freedoms will prompt more customers and advisers to consider different and varied approaches to funding an individual’s retirement, especially given the number of people reaching retirement age asset-rich and cash-poor.
Given the efforts by the industry to improve the image (and functionality) of equity release, and with some consumers now apparently using the product as a way to ease their financial worries during retirement, can it be seen as a viable option within a blended retirement solution?
In recent times, the equity release market has ticked along at a relatively consistent level, with annual advances around the £1bn mark. However, during 2015, increased competition from providers and new entrants saw the market grow by 24%, delivering £1.7bn of advances. This means pensioners have been releasing nearly £5m of property equity per day.
Due to the increasing consumer engagement with the equity release market, pension freedoms appear to be having a direct impact on a customer’s retirement choices and decisions. How do firms ensure equity release products are sold appropriately and deliver good outcomes?
The cause for concern
Historically, equity release has received a bit of a bad press. Home income plans in the late 1990’s soured the consumer’s perception of the product, and the industry has worked hard to build in safeguards, adding protections to this inherently high risk product, such as no-negative-equity guarantees.
However, the product itself can provide a suitable injection to someone’s retirement income if required, and the market has moved to make equity release and related products a more attractive prospect, with interest rates on lifetime mortgages now moving below 5% for the first time ever.
The key conduct risks of equity release that firms must consider are centred on:
- Whether the product has been sold in a suitable way to a customer who needs it
- Whether customers (and often their families) understand the transaction that took place and, importantly, how the product works (for example, around compound interest)
Firms also need to bear in mind that as their equity release customers age, their typical understanding of financial products may well decrease. Some may find themselves no longer able to interact with financial services firms. This makes the need for transparent products absolutely imperative in providing clarity for customers. Equally importantly, evidencing the appropriate information and guidance was given to customers will protect your firm.
Taking the suitability point first; typically, equity release is sold by specialist brokers or intermediaries. Lenders should be considering how they ensure the brokers they deal are set up well and that they deliver fair outcomes for customers.
When entering into a relationship with any third party, firms should conduct a proper assessment of the other organisation. Any new relationships should include a rounded due diligence assessment, where both firms can ensure their objectives are aligned to the business and customer outcomes they want to deliver.
If this was not part of an initial assessment of your intermediaries, then your firm should examine the existing agreement to ensure that you are able to ‘look under the bonnet’ and make changes if necessary.
Once the relationship begins and the intermediary is submitting business, both sides need to consider what assurance and reporting is put in place to ensure that the original intent is being delivered on.
Many firms are actively considering how this works in practice, but it is likely to include some kind of regular assessment or audit of a sample of the intermediaries’ business, plus trend analysis on some agreed key performance or risk indicators, such as:
- Advisor performance
- Advisor and firm quality
- Complaints received
Obtained together, this should provide a valuable picture of the agreement, the suitability of advice being given and the fairness of customer outcomes being delivered.
How you ensure that customers understand what it is they’ve bought, including how the product actually works, is a key part of assessing your equity release customers’ outcomes.
Post-sale customer outcome testing is a valuable tool in ensuring a high level of customer understanding. This typically involves contact with the customer during the first few months of them having the product to ask them questions about how well they understood the equity release product they have.
Engaging with sample cohorts of your equity release customers to test their understanding in further detail (and evidencing you have done so) will:
- Allow you to monitor the true outcomes provided by equity release products more closely, rather than relying on customers’ answers to the question: ‘are you happy?’ just after purchasing the product
- Improve – on an ongoing basis – the identification of suitable customers
- Help you understand customers’ (including those who are vulnerable) typical circumstances and make appropriate improvements to your products, processes, advertising and customer correspondence to cater for these
- Show you take steps to continuously improve the suitability of your offering, helping your firm if the regulator wishes to examine your activity closer
Act now, prosper later
In summary then, the equity release market appears to be waking up as a result of pension freedoms, with advisers and customers actively exploring the opportunities in this market.
With growth is likely to come increased scrutiny from the regulator, and firms need to be proactive in ensuring the delivery of fair outcomes for these customers. Understanding more about the quality and performance of intermediaries and conducting post sale customer outcomes testing can enable lenders to manage their conduct risk in an efficient and effective way.
More viable equity release products, provided to customers for whom they are suitable, could provide further impetus for a change in consumer perception.
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