How many times have I said this before? Are we on the brink of long term consumer friendly lending into retirement and equity release solutions? Sadly, a look back in time shows many false dawns, but I am optimistic for the future. There is no doubt that there is a consumer need for such loans – a report by the Building Society Association [BSA] at the start of 2017 suggested that over 65 year olds hold £21.1 billion of mortgage debt and that the figure will double by 2030. However, from the first home income plans in the 1980’s/1990’s to the shared appreciation mortgages in the mid 2000’s, historic solutions have all suffered ‘conduct risk’ issues (as well as financial loss issues to both lenders and consumers). So where has it all gone wrong and can we learn from history?
The days when ‘interest only’ loans were labelled as ‘ticking time bombs’ appear to be over.
The problem, as I see it, as an expert witness in cases that have ended up in litigation, is not one of market need; the problem is understanding the needs of the market and designing solutions that treat customers fairly. I am not one for re-inventing the wheel when it is not necessary so anyone looking to develop products or arrange solutions where the target market is at the older end of our population could start by studying the thought provoking output from the Financial Service Authority [FSA] of July 2007 titled “Treating Customers Fairly (TCF) in product design”. It can still be found in the National Archives via an internet search. The principles contained within the FSA document are important for any financial product, but especially one where the end user of the product could be identified as a ‘vulnerable customer’, such as elderly borrowers. Getting the benchmarking and oversight foundations of product design and sales are at the heart of sustainable lending solutions as the ‘good practice’ examples in the FSA output show.
So why might 2018 be the right time for long term solutions for this market need? Apart from the market need, the regulatory environment is evolving. The days when ‘interest only’ loans were labelled as ‘ticking time bombs’ appear to be over. The recent Financial Conduct Authority [FCA] paper on ‘older lives’ and the even more recent consultation paper on retirement interest only mortgages [CP 17/32] set the tone of the FCA current thinking. In the latter paper, the FCA highlights the differences between ‘retirement interest only mortgages’ and lifetime mortgages and recognises the different risks in the two distinctly different products. The proposals aim to redress the intended consequences of how the Mortgage Credit Directive [MCD] was implemented. Excluding ‘retirement interest-only mortgages’ from the definition of a ‘lifetime mortgage’ is a good first step, but to enable the market to fully open up, with appropriate long-term solutions, the FCA also needs to consider other regulatory changes, such as a relaxing the position in respect of the sale of home as an appropriate repayment strategy – MCOB 11.6.
So, the ground work is being put in place by the regulator and further movement is likely in 2018. To fully satisfy the market in a long term sustainable way lenders and advisers need to focus on designing products that satisfy customer’s needs, recognising the vulnerabilities of the likely market and treating customers fairly. Now is the time to develop appropriate products and sales procedures to ensure this specific market is satisfied in a conduct and financial risk managed way.
