The FCA has reached the end of their tether and we’re about to see some major changes
Hands up, who remembers the UK Finance’s Mortgage Code? Between 1997 and 2004, this 15-page voluntary Code was followed by lenders and mortgage intermediaries in their relations with personal customers. It was so good that it was copied word for word by the FCA when they formally made mortgage advice a regulated transaction in 2004 and brought in the MCOBs we know today.
History is about to repeat itself, in my opinion. The Equity Release Council has drawn up excellent standards for all members. Still, they are voluntary and have no statute behind them. The FCA has reached the end of their tether with the equity release marketplace and will be MCOB’ing these standards. That’ll change everything.
What’s Gone Wrong?
Lots, and it hasn’t been fixed by the industry. The problems have been well documented, but they stem from a classic mistake we all make when changing something or evolving a process. We forget to unlearn first before creating something new. Let me give you an example.
The Secret is to Unlearn First
The car industry is re-inventing itself to produce electric vehicles (EVs). We know this. The success stories are currently with the new incumbents such as Tesla, who joined the market from scratch and have created sustainable business models producing first-class EVs. The existing manufacturers who have been making internal combustion engine cars for over 100 years are struggling and making heavy progress in converting all their current production lines and infrastructures to making EVs.
Why are they struggling? Simple because they are battling to unlearn first, preferring to use existing processes, equipment, machine tools and so on to make EVs. Naturally, it is more complex than that; it always is with incumbents because they are drenched in current practices and ingrained methodologies. Tesla wasn’t and soon progressed.
So, we need to unlearn this first and recreate a new setup. It’s not more complex than that
Similarly, our mortgage sector embraced providing finance to release equity but overlayed existing processes and practices onto the new product offering. Hence, the equity release sales process is uncannily like a mortgage application process. Software is re-purposed from mainstream lending. The advisers are experienced and grizzled with mainstream mortgage advice – MCOBs run through them. Supervisors manage their advisers in the same way.
We even remunerate advisers by a percentage of loan size. Marketing and prospecting for business still have the same call to action as all mortgages. Come to us; we’re trustworthy and can help you release money to spend on your children now or go on that cruise you’ve always wanted.
So, we need to unlearn this first and recreate a new setup. It’s not more complex than that. This will allow us to adhere to the new rules that the FCA will copy from the Equity Release Council but with the added teeth of a regulator who can fine you and stop you from doing business.
What Do We Need to Stop Doing?
Here’s a list of current practices we’ve taken from standard mortgage advising and lending that need halting straightaway:
- Using the same sales process as an existing mortgage adviser
- Paying procuration fees as a percentage of the loan amount
- Completely eliminating income and expenditure as a factfind section
- Tightening the sale process where possible to ensure a reasonable fee-to-work ratio is achieved
- Ticking boxes on the Equity Release Council’s checklist shows you’ve adhered.
- Insisting on face-to-face meetings with every client. We can use video.
- Prospecting for new business in the same way as for regular mortgages. Advertising in the local magazine, trusted adviser, intriguing uses for the released money. Product pushing.
- Enveloping customers with enormous amounts of paperwork to show that we’re compliant with the rules.
- A mortgage adviser with a mortgage “hat” will look for reasons why a customer wants to raise money on a mortgage. That’s what they are conditioned to do.
- Insisting on advice from a costly, specially trained lawyer, a conveyancing lawyer and a qualified adviser. Aiding the adviser to do it right first will eliminate professional fee duplication.
What Can We Do Differently?
Again, in no particular order, we are now able to:
- Bring in the right adviser and properly train them. Of course, mortgage knowledge is helpful but not essential, so we don’t need an experienced mortgage adviser. Someone who has experience or has been trained to counsel on:
How to relate to different generations of people and to act as an arbitrator
- Having a more holistic conversation with the customer
- Discuss other methods of releasing equity or raising money on retirement – pensions come to mind, using investments correctly, transferring wealth from one generation to another
- Retirement income options
- Long-term care costs and options
Not a mortgage adviser, they don’t have the permissions, authorisation or experience mostly (there are exceptions). What we now need is a specialised retirement income counsellor.
- Proceed to the next stage only when all the options are clear.
Re-Invent Our Prospecting Message
- Re-invent the way we promote the need and bring in customers. No more product pushing. Instead, promote the process, i.e., advice to generate income and capital in retirement. Prospect in a different pool. They need income and capital as they enter their retirement years or need to create additional capital from their current situation – undrawn pensions, property, investments, etc.
Bring In a New Sales Process
- Start with prospecting, naturally and introduce a new meeting with a fee attached. This meeting is the opportunity to consider all the options available to the customer and to bring in other interested parties to assist, e.g., their children. Trigger your vulnerable customer processes and counsel them on their choices.
- Then comes the formal factfinding, but only when the options have been considered and an equity release arrangement is the desired next step. This leads to sourcing, preparing advice and arranging a mortgage offer. Finally, completion and a regular review every six months is ideal.
- The factfind and the counselling options meeting need a more holistic angle. Since you’re exploring several routes to achieve the customer’s goal, a “big picture” conversation will occur. This must include an income/expenditure conversation added to the assets and liabilities picture. This data will help the adviser consider the right financing option.
Change the Compensation Package
- Change the compensation package to suit the new bazaar. With the ubiquitous percentage of loan advanced going, going, gone, we can now tweak the fee position to reward the new process. There should be a fee for the initial options meeting, payable upfront. This can be financed in several ways – from the customer’s pocket, pension pot preferably, by the lender as part of their marketing costs. A further fee is payable on completion of any loan but a fixed fee per case, not a percentage of the loan, which is ridiculous and a hang-over from mortgage advising. Percentages encourage all sorts of malpractice. A fixed fee rewards time and effort every time. This fee can be financed via the pension pot, the customer, or the lender as part of their marketing costs.
- Always reward for the right practice.
Supervise and Coach
- Likewise, protect and supervise when the wrong practices are being used. The Training and competence (T&C) schemes need to change to ensure the new processes are being followed. Tighter supervision in the early days should be conducted by specialised supervisors, not just compliance officers. Supervision needs to be around conversations, the right questions and rapport. Challenging the customer with the correct language and influencing skills. Not just “was an IDD issued”. Lenders could get on the bandwagon for this and pay for supervisors or supervisor training (it is currently low on the list). This would ensure you have quality advisers fully equipped and skilled to advise.
It’s about doing the right thing, not just doing something right. But sometimes, the right thing must be encouraged more forcefully if the gentle approach doesn’t work. Soon, we’ll see the FCA step up to tighten regulations, which will be mandatory