Customers get poor equity release advice

MORE than 70% of mortgage advisers are not gathering enough information from elderly customers before advising them on equity release products.

The Financial Services Authority mystery shopped 42 product providers, IFAs and mortgage brokers and found that once a lifetime mortgage was sold, customers were being advised to invest in products that were not suitable for their needs and exposed them to too much risk.

There are two types of equity release schemes. The most common is a lifetime mortgage, where borrowers receive a lump sum against the value of their property, which is repaid when the house is sold or the owners dies. The other is a reversion scheme, when a percentage of the home value is sold in exchange for a lump sum, which can be reinvested.

Poor pension provision has forced more owners to release equity from their homes in order to fund their retirement. A record £1bn was borrowed through equity release schemes in 2003 - nearly double the amount for 2000 and a world away from the lowly £77m in 1991 when figures were first compiled.

The FSA found that more than 60% of advisers did not explain the downsides of equity release. It was concerned that they were recommending products for three key areas - investing for growth, investing for income and for inheritance tax mitigation - without explaining the implications.

It also found that advisers from some firms were encouraging customers to release more equity than was required for investment growth.

For those whose priority was to boost income, the FSA found that instead of steering customers towards products that would allow them to draw an income from their lifetime mortgage, they were being advised to release a lump sum for reinvestment, often in expensive, higher risk products like investment bonds.

It also commented that releasing equity for the purpose of IHT mitigation needed to be carefully balanced and that in many cases the customer was likely to be worse off than if they had left their financial arrangements as they were.

Clive Briault, Managing Director of Retail Markets at the FSA, said: 'Our work has found another disappointing instance of consumers being given poor quality advice. For example, some people releasing equity from their homes are being advised to borrow more than they need, and to invest these additional funds, which can be a high risk strategy.

'What makes matters worse in this area is that these consumers tend to be elderly and vulnerable people who can ill-afford to be unnecessarily exposed to risk.'

Colin Taylor, managing director of Key Retirement Solutions, the biggest equity release independent financial adviser, says 93% of its customers are solely sold equity release plans, not any investments on top - and 35% of their plans are arranged as drawdowns.

'The industry needs to wake up,' he says. 'Our advisers seek plenty of information from clients - we have a 15 page fact-find and a similarly long recommendation letter'