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Older and vulnerable homeowners are being lured into expensive equity release plans without being offered proper advice by some firms in the sector.
A review by the City watchdog, the Financial Conduct Authority, found multiple failings in the equity release market. In some cases, firms had not properly analysed a customer’s personal circumstances and finances before selling them a plan.
When challenged by the regulator, there were occasions when companies were unable to demonstrate that the advice given was suitable. This included instances where customers looking for equity release were not challenged on whether such plans were cost-effective.
Equity release plans have boomed in popularity in recent years as older homeowners have looked to release cash from properties which have risen significantly in value.
However the sector has been dogged by controversy. The cost of loans can quickly mount given the compounded way interest is charged, something which can leave older people with little or nothing to pass on to their heirs.
Providers have also been criticised for applying hefty exit penalties to customers looking to escape their loans. Telegraph Money has reported on cases where older homeowners have been asked to pay tens of thousands of pounds in charges to switch their loan to a cheaper interest rate with another provider.
The FCA said many aspects of the market were working well for customers, but it warned that the coronavirus pandemic could lead to an increase in the number of homeowners releasing equity.
Many will be looking to pass wealth on to children and grandchildren who are struggling financially because of the crisis. All equity release sales must be done through a financial adviser, but the watchdog said customers should be informed when other forms of borrowing would be much cheaper.
Jonathan Davidson, of the FCA, said: “Deciding to enter into a lifetime mortgage is a big decision with a big financial impact for consumers.
“It is therefore critical that advice offered to consumers looking at lifetime mortgages is suitable to their personal circumstances. It is clear from our review that advice being offered to such consumers, including some vulnerable consumers, is still not up to scratch.”
The Equity Release Council, the industry pressure group, said that equity release represented fewer than 2pc of all complaints about home finance.
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