OVER the last few weeks, I’ve covered much of the lending and debt market and how to manage it ethically and effectively. And now to another area of lending – equity release.
In June last year, the Financial Conduct Authority laid out its concerns for customers who may be susceptible to buying unsuitable equity release products, or products that are unsuitable.
‘Equity’ is the gap between the debt you have on your property and its value. It has also been a great opportunity for salesmen to sell an ‘unequitable’ product for a commission.
Some prime examples our readers have responded to us with, have been quite the ticket. Convinced by a salesman they had ‘equity’ in their home, one lady completed an equity release which went straight into her bank account at virtually zero interest, and that which she did receive was taxed. Meanwhile, interest was rolling up on her home at a hefty rate, wiping out her wealth at nearly 4.5 per cent per year.
When I checked with her why that was recommended, she was told it was good to have the money next to her rather than in the attic in equity.
The technical term for that advice is ‘pure nuts’.
She simply could have applied for a drawdown for whatever she needed, and take that as and when she needed, or just not bother and apply when money was needed. This was poor advice and the customer was refunded.
A common theme where bad advice occurs is when the ‘adviser’ is motivated to sell a product to you where they create a sense of you missing out, particularly in today’s ugly cost of living crisis.
‘You have lots of money in your attic, why don’t you use it, and I can receive an unhealthy commission’ is a theme I thought I had seen the last of.
There are many solutions available before equity release is the right choice. There are examples of customers releasing small amounts to pay energy bills where the fees payable are nearly half that amount. Insane advice.
The FCA gave some warnings back in 2020 and will look at it again this year, but in the meantime you should all be careful about those encouraging for the wrong reasons and look out for those elderly around you.
I agree that it is not sufficient for an adviser to provide you with documents (Key facts illustrations) explaining risks that you would simply not be able to contextualise. An adviser really needs to hold your hand, test you, scare you, and create enough examples that allows you and your family to see what the real risks are and what they mean to you.
Forgive this science as an example, but it’s a good one – measuring risk in an investment fund. You can measure risk in many ways. If a fund has a low deviation from its normal return you might class it as less volatile. (ie averages 0.5 per cent per month but each month is 0.4 per cent or 0.6 per cent).
However, a fund producing 0.5 per cent per month on average, which produces 11 per cent one month and -10 per cent the next would be classed as high volatility (and high standard deviation).
So, low is good and high is bad. There. Easy.
If standard deviation is put in a nice Key facts document and given to you to explain the risk of a fund of zero dividend preference shares as the measure, and the real risks not explained by the hand holding of the adviser, you might be more than miffed when your £100,000 investment was returning pence.
And they did. Documents hide sins. Ask questions.
It is the requirement of the adviser to ensure you are fully versed and I believe they should also be gathering your family around so they can understand it from many sides.
I’ll cover some great tips over the next two weeks, but for the moment, remember the FCA have made it clear in their handbook to advisers about the issues relating to using Equity Release to debt consolidate.
Look carefully at the extra costs associated by the extra term; consider that if you are closing off debt that is currently not secured on your property, it will now be secured and that has risks; if you are having payment issues on debts, it’s natural to panic and be ashamed/anxious. It’s normal. When emotive however, we might easily forget to talk to creditors and just renegotiate terms. Start there – more in the next two weeks.
Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a query on equity release get in touch with mortgage director Pat Greene on pgreene@wwfp.net or call 028 6863 2692
