Retirement borrowing - commerciality and meeting ageing customers’ advice needs

Posted: 19th May 2016

We are in an era where life stages are less defined, retirement age is more flexible and our largest purchases are no longer consigned to our early twenties and paid off well ahead of retirement. If you’re in the pensions sector, you might be familiar with the concerns that this new age brings – namely because, until now, there has been much discussion, yet the sector has been slow in responding to this changing life experience.

Again, if you work in pensions, then you won’t have missed the Financial Advice Market Review (FAMR), the recommendations coming out of it and the discussion it is prompting. The assertion that firms are not doing enough to provide accessible, affordable advice is one facet of the current retirement discussion.

Consumers’ own lack of engagement in retirement planning can also severely limit their options when it comes to saving for retirement. This could be down to a lack of judgement over their retirement needs, their lack of awareness of the assistance that’s available to them, the perceived cost of advice against the return on investment, or simply their lack of confidence in engaging in financial matters.

Whatever a consumer’s particular personal circumstances, this intersection of industry issues creates a category of retirees who are asset-rich but cash-poor, having paid off a mortgage in the last decade or two, but not having had the funds, knowledge or inclination to save for retirement in order to guarantee sufficient income until end of life.

So in the event of having little or no savings at the point of retirement, are consumers right to consider the current offering of retirement borrowing products as a potential solution? Are current equity release and lifetime mortgage products able to step into the fray as a contingency for consumers experiencing the above scenario and, importantly, what are the potential blockers to the delivery of good outcomes?

Considering your retirement borrowing products

Here, we examine some of the potential issues around these products, and suggest how firms might develop them in order to deliver a product that offers good outcomes for those consumers who need it.

Options in the market and distribution

Options in the market are relatively few, but are growing, with a number of mainstream lenders recently changing criteria for retired applicants. With this in mind, how can good outcomes around retirement borrowing be guaranteed?

The reasons consumers take out retirement borrowing products vary; with some products providing a vehicle to directly fund retirement and some offering a more traditional form of capital release in order to fund home improvements or other large purchases. Firms will need to develop their products to respond to differing consumer circumstances, preferences and desired outcomes in order to truly avoid customer detriment. How much thinking has your firm done in these areas? What is your process for establishing a consumer’s personal circumstances in regards to the suitability of retirement borrowing products?

Secondly, with good customer outcomes being dependent on a customer’s understanding of the risks, how firms manage their relationships with intermediaries is extremely important, if indeed they are distributing this way. Considering whether your distribution channel is suitable for your target market is of pinnacle importance to assuring your propositions are set up to deliver good outcomes. To this end, do distributors know what the intended market and product intentions are? Are you getting the right data and analysing the right MI in the right way?

Channels of communication must be wide open, and the MI you receive relevant and actionable. The product provider should closely monitor areas such as whether the customer journey enables good outcomes throughout the product lifecycle, and the way the consumer’s personal circumstances are assessed during the sales process. They must also demand evidence of customer understanding of the risks of the product. This is perhaps the most instrumental requirement, as we explore further below.

Financial understanding and unintended consequences

When thinking about your retirement borrowing products and processes, it’s important to think about what happens to a person’s ability to interact with financial institutions as they get older. Typically, financial understanding deteriorates with age (as asserted in FCA Discussion Paper 16 / 01 – Ageing Population and Financial Services), and therefore a ‘one size fits all’ approach may be inappropriate when dealing with this cohort of customers. When selling products, have you made sure the customer fully understands any risks or considerations they may need to make, and has clear knowledge of what they are buying?

All of this shows the importance of evidence in protecting your firm against regulatory scrutiny and demonstrating that the customer is at the heart of what you deliver. How does your firm ensure that all of the potential risks associated with retirement borrowing products, such as compound interest or the decrease in funds or assets to pass on as inheritance, are explained sufficiently and understood?

A family member who is unaware of how retirement products work (and/or was previously unaware their loved one actually had the product) may very well feel detriment has been suffered given that the product can affect what a customer may be able to leave loved ones when they die. Although it is not a categorical requirement when lending into retirement to engage family members of the consumer, it certainly serves to evidence your approach to responsible lending. Is there an opportunity for your firm to make the discussion around a consumer’s retirement borrowing options more of a family-orientated affair?

Consider also whether the release of equity as a mortgage loan into retirement can have unintended consequences for consumers, such as the ability to afford long-term care if required. Customers’ lack of ability to provision for unforeseen circumstances (for example, due to equity in their home being tied up due to their previous borrowing) can mean they may place the burden of these costs onto their families, some of which may not have been aware of the initial decision to take out the product.

Identifying vulnerability and asymmetry whilst retaining commerciality

How will your firm formulate an operating model which can identify vulnerability whilst still retaining commerciality? Obtaining and retaining the capability to have knowledgeable and flexible conversations with customers throughout the product lifecycle is key, and so training and competency plays a big part in ensuring the quality of your product and service, whether you are distributing through intermediaries or directly.

You should consider the level of appropriately qualified staff to be able to recognise the circumstances in which retirement borrowing might be suitable for a customer. Is the sale of your retirement borrowing products performed by QCF Level 4 qualified staff? This is not a regulatory requirement for retirement borrowing, however, is the potential risk of customer detriment worth the extra expertise? Navigating challenges such as vulnerability or inaccuracies in consumers’ own assessment of their needs suggests it is – and it will again demonstrate your dedication to responsible lending.

Identifying any vulnerabilities in customers (and ensuring vulnerability is catered for in the long-term) can be easier if a consumer’s family is engaged during the sales process, especially as the long-term effects of retirement borrowing can decrease any inheritance those family members might receive. Remember, though, engaging a consumer’s family is not a catchall to prevent detriment, so may not protect your firm if consumer outcomes are poor and the FCA scrutinises activities.

gaining commercial advantage with an exacting approach

The underlying message here for firms is that the opportunity to produce solutions for consumers in this area and get to market quickly doesn’t supersede the need for those solutions to be robust and able to deliver good outcomes. This means putting products, processes and oversight in place that will provide sufficient protection for consumers throughout the product lifecycle. Testing the outcomes of retirement borrowing products on a regular basis is an absolute must, as well as keeping a close eye on any distribution channel and its performance against target market in order to spot detriment issues early, if they arise.

With further expansion of the market likely as the aging demographic increases in size, issues driven into the customer base today may well result in costly consequences for firms tomorrow. This is why prior planning and robust controls and governance are pivotal elements of this discussion.

With that in mind, it’s also a good idea to be able to evidence any activity designed to improve customer outcomes, as well as any information relating the individual’s experience of the sales process and any other instances of customer engagement throughout the product lifecycle.

Getting your approach right in the area of retirement borrowing now will be of great commercial advantage, as this market is growing in response to changing consumer needs. Those firms that tackle regulatory challenges head-on in this area will greatly improve the quality and commerciality of their retirement borrowing business.