Consumer Duty and later life lending

The Consumer Duty requires firms to focus on delivering good outcomes for retail customers. It is built around four key outcomes: products and services, price and value, consumer understanding, and consumer support.

All four outcomes have significant implications for later life lending. Advisers also need to keep the Consumer Duty's cross-cutting rules in mind by acting in good faith, avoiding foreseeable harm, and enabling and supporting customers to pursue their financial objectives.

The Duty should therefore not be viewed as a separate compliance exercise or something that is considered only when a case is reviewed. Its principles should be evident throughout the advice journey, from establishing the customer's objectives through to making a recommendation and providing appropriate ongoing support.

Why is Consumer Duty particularly important in later life lending?

Later life lending can involve financial decisions with consequences that extend many years into the future. A customer may be borrowing against a property they have owned for decades or taking out a mortgage that could remain in place for the rest of their life.

There are many reasons why a customer may consider later life borrowing. They might need to repay an existing interest-only mortgage, supplement their retirement income, provide financial assistance to children or grandchildren, or avoid having to sell their home. Other customers may be borrowing following a significant life event such as bereavement or divorce, while some may be considering future care needs or looking to improve their quality of life during retirement.

Whatever the objective, borrowing against the home can have long-term consequences. For example, it may reduce the value of the estate ultimately passed to beneficiaries or affect the customer's financial options later in life.

The customer's immediate objective may sound relatively simple - "I need £50,000" - but the implications of achieving that objective can be considerably more complicated. Consumer Duty encourages advisers to look beyond completion of the transaction and consider the customer's likely short- and long-term outcomes.

Outcome 1: Products and services

Products and services should meet the needs, characteristics and objectives of the customers for whom they are intended. From an adviser's perspective, an important consideration is whether the recommended solution genuinely meets the individual customer's needs rather than simply providing the amount they have requested.

For example, consider a 72-year-old homeowner who wants to release £40,000. A lifetime mortgage may provide the required money, but that alone does not demonstrate a good outcome.

The adviser needs to understand why the customer requires £40,000 and whether they need the full amount immediately. It may be appropriate to consider whether a drawdown arrangement could better suit their circumstances, whether they could afford monthly interest payments, or whether a RIO mortgage or another mortgage product could meet their needs.

The customer's wider financial position is also important. Savings or investments may be available to meet some of the expenditure, while downsizing could be a realistic alternative for some customers. Their plans to move home, inheritance objectives and potential future financial requirements should also form part of the discussion.

A product that meets the customer's immediate need does not necessarily represent the best solution for their wider circumstances. The recommendation should reflect both what the customer wants to achieve today and the potential effect on their future.

Outcome 2: Price and value

Price and value involves more than simply finding the lowest available interest rate.

When assessing a later life lending recommendation, advisers may need to consider the interest rate alongside arrangement or application fees, advice fees, valuation and legal costs, and any potential early repayment charges. Product features and protections, the ability to make repayments, and provisions relating to moving home may also contribute to the overall value provided.

For lifetime mortgages in particular, the long-term cost can be significant because unpaid interest may be added to the loan and then attract further interest. Advisers therefore need to help customers understand not only what the borrowing costs today, but what it could potentially cost over a much longer period.

The cheapest product will not necessarily provide the best value. A product with a slightly higher interest rate could offer flexibility or protections that are particularly important to an individual customer. Conversely, there may be little benefit in a customer paying for additional features that they are unlikely to use.

Value therefore needs to be considered in the context of the customer's individual needs, circumstances and objectives rather than focusing solely on headline price.

Outcome 3: Consumer understanding

Consumer understanding is particularly important in later life lending because the products involved can have significant long-term consequences.

Providing documentation does not, by itself, demonstrate that a customer understands the recommendation. Advisers should consider whether the information has been communicated in a way that enables the individual customer to make an informed decision.

For a lifetime mortgage, this could mean ensuring that the customer understands how interest is charged, whether it is paid or added to the loan, and how compound interest could increase the outstanding balance over time. They should also understand the potential effect on their estate and any relevant early repayment charges.

Depending on the product, customers may also need to understand what happens if they move home, whether repayments are required, the consequences of missing required payments, and how the loan will ultimately be repaid. Releasing capital could also have implications for means-tested benefits or the customer's ability to borrow further money in the future.

Advisers should consider both the complexity of the information being communicated and the customer's individual communication needs.

Checking understanding properly

There is an important difference between asking a customer "Do you understand?" and actually establishing that they understand.

Customers may answer yes because they are embarrassed about asking further questions, do not want to appear difficult, or simply want to continue with the application. Open questions can provide a much better indication of genuine understanding.

For example, an adviser might ask, "Can you explain what you expect to happen to the mortgage balance if you don't make any repayments?" If moving home is relevant, they could ask, "If you decided to sell the property in three years, what do you understand might happen?"

For a RIO mortgage, an adviser could ask the customer what they believe would happen if their income reduced and they could no longer afford the monthly interest payments.

These types of questions allow the customer to demonstrate their understanding rather than simply confirm it. If there are gaps in their knowledge, the adviser can explain the issue differently, allow the customer additional time and check their understanding again.

Avoiding foreseeable harm

One of the Consumer Duty's cross-cutting rules is that firms should avoid causing foreseeable harm. This is particularly relevant to later life advice because some of the potential consequences of a recommendation can reasonably be anticipated at the outset.

Consider a customer who wants to release £100,000 to give to their children. The decision could significantly reduce their remaining equity and the inheritance available to other beneficiaries. The customer could subsequently need money for their own needs, while releasing capital could potentially affect entitlement to means-tested benefits. They could also pay a substantial amount of interest over the life of the loan.

There is also the practical consideration that once money has been gifted, the customer may not be able to recover it if their circumstances change.

The adviser's role is not necessarily to prevent the customer from making the gift. Instead, the adviser should ensure that the customer understands the potential consequences and that the relevant risks and realistic alternatives have been properly considered.

Consumer Duty does not mean removing all risk

A good customer outcome does not mean that nothing negative can ever happen. Mortgage products inherently involve risks and trade-offs, and customers may make informed decisions that prioritise one objective over another.

For example, a customer may fully understand that taking a lifetime mortgage is likely to reduce the value of their estate but decide that improving their quality of life today is more important than maximising the inheritance they leave behind.

That can still represent a good customer outcome. The important point is that the decision is informed, suitable and consistent with the customer's needs and objectives.

Considering alternatives

Considering realistic alternatives can be particularly important when demonstrating good customer outcomes.

Depending on the customer's circumstances, alternatives to a particular later life lending recommendation could include using savings or investments, taking pension income, downsizing, selling another asset, or delaying some planned expenditure. Different borrowing solutions could also be considered, including a standard residential mortgage, a retirement interest-only mortgage or a lifetime mortgage. In some circumstances, borrowing a smaller amount or receiving assistance from family could also be relevant.

Not every alternative will be appropriate, and advisers should remain within the limits of their permissions and expertise. However, the client file should demonstrate that realistic alternatives have been considered and explain why the recommended solution was ultimately appropriate.

For example, simply recording "Customer does not want to downsize" provides very little information about the customer's reasoning.

A stronger record might state:

"We discussed downsizing as an alternative to borrowing. The customer has lived in the property for 31 years, wishes to remain close to her daughter who provides regular support, and considers the property suitable for her anticipated future needs. She does not wish to move and understands that remaining in the property while borrowing against it will reduce the equity available in her estate."

The second record provides much stronger evidence of the customer's circumstances, objectives and decision-making.

Vulnerability and Consumer Duty

Vulnerability and Consumer Duty are closely connected, particularly within later life lending. However, customers should not automatically be regarded as vulnerable simply because of their age.

Advisers should instead consider the customer's individual circumstances. Bereavement, physical or cognitive health conditions, hearing or sight impairment, financial difficulty and low financial confidence could all increase the risk of vulnerability. Limited digital capability, caring responsibilities, significant life changes or reliance on another person to make financial decisions may also be relevant.

Where vulnerability is identified, an important question for the adviser is: What did we do differently as a result?

The appropriate response will depend on the individual. It could involve arranging additional or shorter meetings, allowing the customer more time to make a decision, providing information in a different format, or involving a trusted third party with the customer's permission. Additional checks of understanding may also be appropriate.

Simply recording that a customer is vulnerable without considering the support they require is unlikely to demonstrate that an appropriate outcome has been achieved.

Consumer support

Consumer Duty does not end when the mortgage completes. The consumer support outcome requires firms to consider whether customers receive appropriate support throughout the life of the product.

This is particularly important in later life lending because a mortgage may remain in place for many years and the customer's circumstances could change significantly during that time.

A customer may subsequently want to make voluntary repayments, request additional borrowing, move home or repay their mortgage. They could experience bereavement, develop health or care needs, appoint an attorney or encounter financial difficulty. Some customers may simply need additional assistance understanding correspondence or their product options.

Firms should consider whether customers can access appropriate support without unreasonable barriers and whether that support continues to meet the needs of customers who become vulnerable after the original advice has been provided.

Sludge practices

Consumer Duty also requires firms to consider whether customers encounter unreasonable barriers or unnecessary friction when trying to act in their own interests. These barriers are sometimes referred to as “sludge practices”.

Within later life lending, firms should consider whether it is significantly easier for a customer to enter into a product than it is to manage or leave it. Customers should be able to obtain information, understand relevant charges, contact the appropriate team and make permitted repayments without unnecessary difficulty.

They should also be appropriately supported if they want to raise concerns, exercise contractual options, repay their mortgage or transfer it where the product permits this.

Good consumer support should make legitimate customer actions reasonably straightforward rather than placing unnecessary obstacles in their way.

Example case study

David and Anne, aged 74 and 71, own a property worth £500,000 with no mortgage. They want to release £80,000 using a lifetime mortgage.

They intend to spend £30,000 on home improvements and a new car, while the remaining £50,000 will be given to their daughter to help her purchase a property.

David and Anne have £45,000 in accessible savings but do not want to use them because they feel more comfortable keeping the money "for emergencies." They have no immediate plans to move, although they have discussed potentially downsizing within the next five years.

Neither wants to make monthly mortgage payments, despite having sufficient retirement income to potentially consider other borrowing options. At the same time, they are particularly concerned about leaving an inheritance to their two children.

The lifetime mortgage recommended to them allows voluntary repayments, but David and Anne say they do not expect to make any.

From a Consumer Duty perspective, the adviser would need to explore these potentially competing objectives carefully. The desire to preserve savings and leave an inheritance needs to be considered alongside the cost of borrowing and the proposed £50,000 gift. Their potential plan to downsize is also relevant to the suitability of the recommendation and the product features they may require.

Discussion questions

Consider what additional information you would want before making a recommendation to David and Anne. Think about the foreseeable harms that could arise and how you would establish whether releasing the full £80,000 represents a good outcome.

You should also consider whether their £45,000 of accessible savings should influence the recommendation and what realistic alternatives should be discussed. How would you approach the apparent conflict between gifting £50,000 now and their desire to preserve an inheritance for both children?

Consider how their possible plan to downsize might affect the advice and what you would do to establish that both David and Anne genuinely understand compound interest and its potential impact on their estate.

Finally, consider what evidence you would expect to see on the client file to demonstrate that the recommendation was suitable and designed to deliver a good customer outcome.

What does a good file look like?

Under Consumer Duty, good record keeping should demonstrate why the outcome was appropriate, rather than simply showing that the required documents were issued.

A strong later life lending file should clearly explain the customer's needs and objectives, why they require the amount requested and whether any vulnerability considerations have been identified. It should record the realistic alternatives that were explored and explain why they were accepted or rejected.

Where repayments are required, the file should demonstrate how affordability has been considered. It should also explain the customer's attitude towards interest and future borrowing costs, their inheritance objectives and any potential future financial needs.

The adviser should document foreseeable risks, explain why important product features were selected and record how the customer's understanding was checked. Where additional support has been provided, the file should explain what was done and why.

The overall aim is that another suitably qualified person reviewing the file can clearly understand why the recommendation made sense for that particular customer.

Adviser challenge: Suitable or good outcome?

Consider a 76-year-old customer who needs £20,000 but is recommended a £50,000 lifetime mortgage because they "might need more money later." Does providing access to additional money genuinely improve the customer's outcome, or could it create unnecessary cost?

In another case, a customer wants to release £100,000 to give to their son but has not considered what would happen if they later needed to fund adaptations to their own home. The adviser would need to consider whether this represents a foreseeable risk that should be explored before proceeding.

Consumer understanding also needs to be demonstrated. If a customer knows that a lifetime mortgage charges interest but cannot explain compound interest or how it could affect their outstanding balance, simply providing the required documentation may not be enough.

Record keeping is equally important. If a customer rejects downsizing and the suitability report records only "Customer does not wish to move," there is little evidence that the alternative was meaningfully explored.

Finally, the lowest interest rate does not automatically mean the best outcome. A cheaper product that does not provide a feature particularly important to the customer's future plans could ultimately be less appropriate than a slightly more expensive alternative.

These examples demonstrate why Consumer Duty requires advisers to think beyond simply arranging a product that achieves the customer's immediate objective.

Key takeaways

Consumer Duty should be evident throughout the later life lending advice process. Suitability remains essential, but advisers should also consider the customer's overall outcome and look beyond their immediate borrowing requirement.

Foreseeable consequences should be considered alongside today's needs, and value should be assessed on more than the headline interest rate. Advisers also need to remember that providing information is not the same as achieving consumer understanding. Open questions can help establish whether the customer genuinely understands the recommendation and its potential long-term consequences.

Realistic alternatives should be considered and the reasons for accepting or rejecting them should be documented. Where vulnerability is identified, appropriate adjustments should be made to the advice process. Customer support should also continue after completion, particularly as a customer's circumstances and needs may change over time.

Above all, advisers should record the reasoning behind the recommendation and the customer outcome rather than simply documenting the process that was followed.

A useful question to apply throughout a later life lending case is:

If this file were reviewed several years from now, would it clearly demonstrate that the customer understood the decision, that foreseeable risks were considered, and that the recommendation was designed to deliver a good outcome?