Equity Release & Undue Influence
The phrase ‘equity release’ makes most people think of living a comfortable retirement. This might include moving to somewhere sunnier, creating a loft conversion or helping the grandchildren with a deposit for a house or even helping them with university fees.
However, the reality of accessing wealth that is tied up in one’s home later in life is far more nuanced. In fact, when considering releasing equity from your home, you must balance opportunity with risk.
There is no denying that there are many benefits to releasing equity from your home. However, it is also true that there is considerable risk when it comes to equity release.
One of these risks is undue influence, which is when a homeowner’s choice may be indirectly shaped or even determined by someone else in a way that undermines genuine, independent decision making process [1].
This article explores the importance of safeguarding the equity release process against undue influence and why spotting the signs of undue influence is important.
This article will also explore what undue influence can look like and what you can be doing as a homeowner to avoid falling victim to undue influence.
What is equity release and why does undue influence matter?
Equity release allows homeowners over the age of 55 the chance to release a set amount of money from their home, which only needs to be repaid once they pass away or move into a care home.
The equity released from the property will need to be repaid via the sale of the property, which should cover the loan in full as well as any added interest that has compounded over the years.
All equity release loans are protected by the no negative equity guarantee, which ensures that even if your home decreases in value over the years, and the proceeds from the sale of the home no longer covers the loan amount, you and your family will not be responsible for paying off the remainder of the loan.
The no negative equity guarantee ensures that your lender will be liable for paying off the shortfall, should there be one.
For many, this is a genuine route to freedom in later life. It allows people to boost their retirement funds and income, carry out home improvements around the house and even allows people to tick off a few bucket list items.
However, these benefits also come laden with complexity and risk.
As the Financial Conduct Authority (FCA) has highlighted in its review of lifetime mortgages, advice standards in the sector have sometimes fallen short of what’s needed.
This includes a combination of issues such as inadequate documentation, insufficient exploration of alternatives, and communications that didn’t fully evidence understanding [2].
Sometimes, undue influence can be present. In very simple terms, undue influence is a situation in which someone in a position of trust or authority exerts pressure which can happen either overtly or subtly, on another person.
Undue influence is usually when the decision serves the influencer’s interests, rather than those of the influenced individual. In this case, that includes the homeowner.
When it comes to equity release, the consequences of undue influence are serious.
Usually, the homeowner may find themselves in an agreement they don’t fully understand, or which doesn’t suit their needs, and the risk of future complaints, reputational damage or regulatory scrutiny rises.
What can undue influence look like?
Understanding undue influence helps us spot the tail tale signs and reduce the likelihood of us failing victim to it. Based on industry insight, we can identify several warning signs when it comes to undue influence.
1. Building a close relationship
One of the primary indicators is the presence of a relationship where one party is dependent on, or highly influenced by, another. This could include a spouse, a child or parent or even an equity release adviser. A friend might even start to control your financial situation, which is a major warning sign and red flag.
2. Motives
A big giveaway is when the purpose of the equity release doesn’t align with the homeowner’s broader interests but appears to favour someone else’s agenda.
For example, releasing equity to help a child’s business, paying off someone else’s debt, or funding someone else’s lifestyle. This could include a loved one, a neighbour or even a carer.
3. Taking advantage of vulnerable homeowners
Older homeowners may face certain vulnerabilities, such as health issues, memory issues, grief, loneliness and isolation or even dependency on someone else, or something. This makes them more at risk of being influenced by someone who does not have their best interest at heart.
It is not always obvious, either. Sometimes it’s subtle persuasion in a moment of emotional turmoil or struggle. You should always be on the lookout for someone who is trying to control you, or those you love.
4. Taking advantage of situations and bad timings
Timing matters when it comes to equity release. Some people with negative intentions may put pressure when the homeowner is in crisis.
This could include times of grief, health issues or even financial issues. The combination of urgency mixed with dependency makes homeowners at risk of being influenced by someone with negative intentions.
How to safeguard the equity release journey again undue influence
If you are considering releasing equity from your home but are worried about undue influence, there are a number of things that you can do to safeguard yourself against people who might be trying to take advantage of you and your circumstances.
Below are a number of different things that you can do to ensure that your equity release journey is a positive one:
1. Vulnerability assessments
Advisers and even equity release solicitors can carry out what they call vulnerability assessments. You can assess someone’s vulnerability by checking what their overall goal is, what they want to gain from the process and what support they have in place.
You should also ask if the client is under any pressure or expecting to support others, as well as whether or not the client understands the implications for their home, their family and their future.
The key is to get beneath the surface and not just assume that they know what they are doing and are doing it for the right reasons.
2. Ensuring independent advice and legal support is in place
Equity release is not as straightforward as you might think. Due to the number of complexities involved in the equity release process, it is always recommended that homeowners get independent financial advice as well as independent legal advice.
The solicitor’s role is especially critical when it comes to equity release. They will be responsible for checking the capacity of the homeowner, verifying that the client isn’t signing under pressure and ensuring the purpose is truly theirs.
3. Allowing time, reflection and alternative options for the homeowner
Influence often thrives under urgency, which is why it is important to slow down the process and allow the homeowner some time to reflect on what they are doing.
If you are working on behalf of the client, then it is important to build in pauses and breaks into the process to allow them to think about whether the decision they are making is 100% right for them.
4. Ongoing support
The journey doesn’t end when the funds are released into the homeowner’s account. The equity release homeowner may face life changes during the duration of their equity release loan.
This might include things such as moving home, needing care, or changing family dynamics. This is why ongoing support is needed, to ensure that your client is still doing the best thing for them and their family, long after the equity release loan has gone through.
Emerging challenges and what to watch
As more and more homeowners are looking to equity release, the equity release landscape is changing and adapting. There are now more products and new features than ever before. This is why it is important to seek on top of the changing equity release landscape, so that you can spot when someone might be taking advantage of the system or a homeowner.
Virtual and remote advice, meaning that many meetings regarding equity release are happening online. This makes it harder to read body language or separate influencers from clients. Advisers and solicitors must adapt their processes to ensure independence in virtual settings.
There are now more new and hybrid products and plans than ever before. More lifetime mortgages now offer drawdowns, partial repayments, portability, lifestyle benefits. With greater flexibility comes more decisions, and therefore more potential for influence if not managed carefully.
As more people opt for equity release, there are now more escalating claims and complaints. As the industry matures, claims around undue influence and poor advice become more frequent.
This means that clients and equity release advisers should be alert to higher documentation standards and work to stick to them.
To Conclude
Undue influence is a large concern when it comes to equity release. As the equity release landscape changes, more and more people are at risk of being manipulated into releasing equity when it might not be in their best interests too.
Equity release can be a fantastic option for millions of homeowners across the UK, and it is important for equity release advisers to ensure that their clients are not being manipulated or influenced.
The equity release journey needs to be safe, transparent and most importantly, driven by the homeowner.
If you would like to release equity from your home, then speak to a member of the team at Equity Release Warehouse for free and impartial advice.
Call our team for free on 0330 058 1579 or by visiting our website by searching for www.equityreleasewarehouse.com.
References
[1] https://dictionary.cambridge.org/dictionary/english/undue-influence
