The FSA recently unveiled its independent mystery shopping exercise on equity release. Amid talk of a boom in this sector, the mystery shopping report should send people rushing to update their compliance manuals. It is not good.As ever, the problems stem from know your customer, best advice and disclosure. Products make up in comp-lexity what they can lack in flexibility. Customers tend to be elderly and vulnerable. Often, their home is easily their biggest asset and the most likely to fund nursing care if needed. The range of different plans complicates matters and makes generalisation almost impossible. Portab-ility and its extent, the poss-ible addition of future part-ners to the plan, the availa-bility of drawdown options may all affect suitability. So do future house price moves and family relationships. Some 44 per cent of myst-ery shoppers did not receive an initial disclosure docu-ment when they should have done – “on [the firm] first making contact with a customer when it anticipates giving personalised information or advice” on mortgages or reversionsThe mystery shopping results raise eyebrows – 45 per cent of advisers failed to ask about savings and investments, 44 per cent preferences about the estate, 69 per cent the shoppers’ monthly outgoings and 51 per cent health or life expectancy. And 60 per cent never enquired about state benefits. Nobody asked 19 of 23 customers requesting a monthly income whether they needed stable payments. For two years, the FSA has run the same mystery shopping scenario involving a low-income customer asking to release £4,000 for home repairs and increase income modestly. No adviser should recommend equity release. Only 15 per cent of advisers ended the interview early, referring the customer to welfare organisations or the council to enquire about grants. An internet search for “Council grant home improvement” produces a cornucopia of local authorities explaining benefits available. Eighty-five per cent of advisers failed to ask whether the customer had considered alternative methods of raising funds. Equity release can easily cause the loss of means-tested benefits, pension credits notably and reduced council tax. The 2006 results were worse than 2005. Most advisers missed the customers’ health and life expectancy. Problems can exclude unimpaired redemptions. A conventional loan may be cheaper than its lifetime equivalent for customers with low life expectancy. Early repayment charges can affect suitability if a customer has to sell to fund nursing (home) costs. Conversely, though, ill-health may increase the possible loan-to-value ratio and produce an impaired life equity redemption. The FSA factsheet suggests that the regulator now regrets allowing advisers to ignore the possibility of trading down when recommending lifetime mortgages. It suggests that customers should consider this. Stamp duty and moving costs may militate against it. Support from other family members can provide happier if not necessarily fiscally effective solutions. Advisers’ inability to investigate outgoings and alternative sources of income is a major concern. The Factsheet reminds customers of the need to check that they have all their pension benefits. A forg-otten pension can make equity release unnecessary. In all three scenarios, mystery shopping found advisers indicating that the customers could release more equity than necessary. On the third, half did this. This begs the question: what did the customer do with the surplus? Advice to invest in equities would create an old-style home income plan, with the customer risking their major capital asset when they needed their money most. This type of plan bankrupted a generation of financial advisers in the late 80s. Savings accounts should always underperform doing nothing, assuming long-term upward progressions in housing prices. An inflation-proofed annuity can lock the customer into a future standard of living. Value for money and tax can be an issue. The same concerns exist for lump-sum plans. Anything invested incurs a second charge and creates an 80s-style plan. They are unsuitable for customers wanting income. Customers must also appreciate that equity cannot be replacedValue-for-money concerns affect all these transactions. Advisers may argue that the customer desperately wanted the cash. All advice, though, must be justifiable by objective standards. Consultants must consider the different types of plans available, even if they cannot recommend them. This may cause problems for equity redemption. This involves a not over-optimistic view of future house prices over the long term. Conventional wisdom currently seems to point the other way. Drawdown lifetime mortgages cause other worries. The adviser must know whether withdrawals selected are guaranteed and inflation-proofed. If adjustments need to be made, this will often happen late in the investor’s life when he is most vulnerable. Remarriage or cohabitation with someone not covered or protected by the lifetime mortgage can cause havoc if the borrower dies or moves to sheltered housing. Advisers must broach this awkward subject with the client. If such an arrangement is being considered, the customer should use a plan which facilitates party alterations. Advisers recommending equity release to avoid IHT must justify this. The FSA is sceptical. Essentially, all these points have to be explained where relevant. The FSA recommends that advisers insist on clients having independent legal advice. That does not relieve the adviser of his regulatory responsibilities. An awkward issue concerns family involvement in the discussion. Equity release usually reduces any estate. However, if the customer does not want to involve his relatives, a letter in his handwriting to this effect should be on file. Self-preservation against a complaint makes sense. The adviser’s biggest task is going through all the various scenarios and explaining their consequences by reference to the product. For example, the FSA factsheet mentions that trading down at a later date may require the customer to repay some of the loan. Equally, the addition of a party may depend on age or product. This all costs. Arrangement, valuation and lawyers’ fees and early repayment charges must be explained along with the possibility of adding them to the borrowing. Finally, with a product this complicated, is it acceptable that some firms are selling without giving face-to-face advice? Is that TCF?