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Too many equity-release advisers are failing to factor in social security benefits

The findings of the FSA’s mystery shopping exercise on lifetime mortgages make depressing reading. It is now 18 years since the Financial Services Act was implemented – long enough for a whole generation of new financial advisers to enter the market, absorb the new standards, get qualifications and not be tainted by the foot in the door sales mentality of the past. If only.

Perhaps the worst aspect of the FSA’s review is that far too many advisers are failing to take into account the effect that a lifetime mortgage will have on eligibility for free social security benefits and future options. There is absolutely no excuse for this.

The Council of Mortgage Lenders recommends IFAs to use Fintal, Ferret’s software for assessing the impact of equity release on social security benefits. But far too many IFAs are still clearly trying to make what is essentially a complicated calculation after asking nothing more than a few questions about the potential client’s financial situation and with little or no knowledge of the society security system.

Some quite substantial players in the equity-release market still do not use any computer system to evaluate a client’s situation. Others maintain that the software is too expensive. But this is clearly an excuse. It costs 45 plus VAT for a single user. This is peanuts.

Clive Briault of the FSA was spot-on when he said: “There is no place in this market for firms that do not develop the necessary skills and do not implement appro- priate systems to ensure that they give suitable advice. We expect firms to commit to delivering quality advice or to refer the business to firms that have done so.”

Potential equity-release clients are all, by definition, elderly and possibly vulnerable, too, with little or no financial expertise.

It is unacceptable that these homeowners are being badly advised – even if it is simply down to incompetence, rather than deliberately misleading and aggressive salespeople.

Ship, the trade association for equity-release specialist lenders, is doing its bit and from August 2007, members will no longer accept business from advisers who do not hold an appropriate lifetime mortgages qualification.

Ideally, it would have been preferable to impose the ban immediately. But with a desperate shortage of suitably qualified advisers, an immediate ban would probably have created problems.

A one-year delay allows those who are serious about operating in this market to train staff and ensure that they have appropriate qualifications. Ship’s move has been widely welcomed within the industry and will put pressure on advisers to show their commitment to equity release. By insisting that advisers are qualified, Ship believes it will stop “dabbling” in equity release and be left with only those who are serious about the market and their customers.

It is up to Aifa and the AMI to get the message across to their members.

If intermediaries cannot afford the few hundred pounds required to buy Fintal, Ferret’s software or, more likely for older IFAs, are not computer literate enough to use it, they ought not to be in business at all.

There is an enormous incentive to get it right. According to the Institute of Actuaries, there are an estimated 4.3 million retired homeowners sitting on 1,100bn of equity in their homes, many of whom would welcome a little extra income from a lifetime mortgage – if they were not too scared of being ripped off.

The current value of outstanding equity-release debt is only 5.3bn – some 0.56 per cent of all mortgages outstanding, according to the CML, and new business is running at just under 1.04bn in the year to September 2005.

The potential is enormous. Of course, in an ideal world, Gordon Brown would move to simplify the tax and social security system and rationalise the relationship between equity release and means-tested benefits to ensure that the benefits from lifetime mortgages are not wiped out by the loss of state benefits. But that is probably too much to hope for.


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