ER1 revision Chapters 1-3 19 March 2013

1. ER1 revision Chapters 1-3 19 March 2013 Thank you for joining us for today’s webinar. The scheduled start time is 11.00am

2. ER1 revision Before we start: • Housekeeping points • Background/context • Timetable

3. ER1 revision Raising a question:

4. ER1 revision • Chapters 1-3 • Georgina Oxton • Equity Release Training Manager • LV=Retirement Solutions

5. ER1 revision Sources of study support • Examination Guide – CII (£12.00) • RevisionMate – www.revisionmate.com • CII updating service (Free) www.cii.co.uk/updates

6. Chapter 1 Introduction to equity release

7. ER1 revision C1 | Introduction to Equity Release Learning objectives: Describe ‘equity’ and ‘equity release’ Explain purpose of equity release products Describe features of and understand differences between lifetime mortgages and home reversion plans Understand the relationship between product provider and customer

8. The residual wealth of a property owner tied up in their property… What is ‘equity’? …can be positive or negative

9. The liquidation of some of the equity tied up in a property… What is ‘equity’? What is equity release? …could be achieved by downsizing, using a conventional mortgage or using equity release

10. ER1 revision C1 | Introduction to Equity Release Why release equity? used either to generate income or liquidate capital, although the underlying reasons may be more diverse Source:UK Equity Release Market Monitor – Quarter 3 2012 | Key Retirement Solutions

11. ER1 revision C1 | Introduction to Equity Release The need for equity release The Perfect Storm? 65+ Changing demographicsPeople living longer | The ‘SKI’ generation A new retirement landscapeDecline of OPS and State pension provision Uncertain marketsLow inflation | poor annuity rates | volatile conditions

12. ER1 revision C1 | Introduction to Equity Release Lifetime mortgages – basic products Home Income Plans Cash plans(interest roll-up) Cash plans(interest repayment) Share Appreciation Mortgages Shared Appreciation • First legal charge • Capital used to generate an income for life • Usually via an annuity • First legal charge • Interest charged increases with compounding • Debt can double in ten years • Suitability not affordability • First legal charge • Some/all interest repaid (regular or ad-hoc basis) • Debt is more controlled • Suitability and affordability • Lender requires no interest repayments • Profit comes from a share in the increase in property value • No longer available

13. ER1 revision C1 | Introduction to Equity Release Home reversion -v- lifetime mortgage

14. ? ? ? Revision questions

15. Chapter 2 Regulation of lifetime mortgages

16. ER1 revision C2 | Regulation of lifetime mortgages Learning objectives: Provide the legal definition of a lifetime mortgage Explain the MCOB disclosure requirements for lifetime mortgages Explain the advising and selling standards imposed by MCOB for lifetime mortgages Understand the self-regulation measures agreed by trade associations and lifetime mortgage providers

17. ER1 revision C2 | Regulation of lifetime mortgages Lifetime mortgage(FSA definitions) • Borrowers above a specified age • May/may not be a specified mortgage term • Repayment will not be sought until a specified occurrence • Continued occupation of property • Potential deferral of capital and interest repayment

18. ER1 revision C2 | Regulation of lifetime mortgages Regulated mortgage contract(FSA definitions) • Granted by first legal charge on land • 40% or more used by borrower/relation for residential purposes • Relation: spouse/partner, parent,grandparent, child, grandchild,brother or sister)

19. ER1 revision C2 | Regulation of lifetime mortgages Regulation of lifetime mortgages • FSA handbook sets out 11 over-arching principles applying to all regulated firms • Lifetime mortgages and home reversion plans are now regulated by MCOB rules – the ‘small print’

20. ER1 revision C2 | Regulation of lifetime mortgages Advising and selling standards (S.8, MCOB) • Amplify FSA principles 6, 7 and 9 • Apply in their entirety to mortgage advisers • All applies to lenders/arrangers except suitability

21. ER1 revision C2 | Regulation of lifetime mortgages Initial disclosure document Regulatory role of the FSA Service to be provided Advice and recommendation/information only Fees and charges payable How to complain Protection provided by the FOS and FSCS

22. ER1 revision C2 | Regulation of lifetime mortgages Proving suitability Suitability can only be assessed once a ‘fact find’ has been completed…

23. MCOB Suitability Tests Benefits outweigh adverse effects on benefits entitlement and tax position Alternatives are less suitable Customer can afford interest repayments if applicable Contract appropriate to customer needs/objectives/circumstances Contract most suitable from the range offered within the stated level of service

24. ER1 revision C2 | Regulation of lifetime mortgages Proving suitability • FSA does not require firms to be experts on State Benefits or income tax regulations • Customer should be referred to an appropriate source of advice:

25. ER1 revision C2 | Regulation of lifetime mortgages Non-advised sales • Firm can ask questions to narrow down available options • Customer chooses based on information provided • Scripted questions are mandatory • If the customer is unsure about making a choice they should be urged to seek advice

26. ER1 revision C2 | Regulation of lifetime mortgages Product disclosure requirements (S.9 MCOB) • Key Facts Illustrations (KFI) is central to pre-application product disclosure where a firm: • Makes a personal recommendation • Provides information on a specific amount/type of mortgage • Provides the means for a customer to make an application Amplify FSA principle 7: clear, fair and not misleading

27. Lifetime Mortgage KFI Must be personalised to show… Special rules to cover foreign currency and shared appreciation mortgages – additional risks apply • Specific contract • Amount of loan • Estimated amount to be drawn down each year (if applicable) • Property value • Estimated term of contract • Key information relating to customer and/or property to determine eligibility • Specific contract • Amount of loan • Estimated amount to be drawn down each year (if applicable) • Property value • Estimated term of contract • Key information relating to customer and/or property to determine eligibility

28. ER1 revision C2 | Regulation of lifetime mortgages Disclosure at offer stage • Formal statement that lender is prepared to do business with customer plus summary of terms and conditions • Usually has a validity period • Not a binding commitment to lend

29. ER1 revision C2 | Regulation of lifetime mortgages Disclosure at start of contract • Separate requirements depending on whether • Interest payments are required • Interest is on a roll-up basis • Mortgage is a drawdown arrangement • Must also cover the cost of any ‘linked’ insurance products

30. ER1 revision C2 | Regulation of lifetime mortgages Disclosure post-sale • Lender must provide annual statement covering certain information, plus information in the following cases: • changes in payments required • material changes to T&Cs • addition/removal of a party to the mortgage • changes to amounts drawn down/amount owed • Expanded KFI to be provided for further advances

31. ER1 revision C2 | Regulation of lifetime mortgages Equity Release Council • Launched 28 May 2012 • Represents providers, advisers, solicitors and surveyors • Promotes high standards in best interests of customers • Voluntary Code of Conduct incorporating SHIP standards

32. Lifetime right to live in property Fair and clear terms and conditions The right to move without financial penalty Independent legal advice No negative equity guarantee

33. ER1 revision C2 | Regulation of lifetime mortgages Regulatory reform(Financial Services Act 2012) • Financial Policy Committee (FPC)Executive power over financial supervision • Prudential Regulatory Authority (PRA)Responsibility for prudential regulation of financial firms • Financial Conduct Authority (FCA)Promoting confidence in the financial system

34. ? ? ? Revision questions

35. Chapter 3 Regulation of home reversion plans

36. ER1 revision C3 | Regulation of home reversion plans Learning objectives: Define a home reversion plan Understand the rationale for regulation Describe how product providers regulate themselves Describe how consumers are protected by the law

37. ER1 revision C3 | Regulation of home reversion plans FSA definition • Reversion provider buys all/part of a ‘qualifying interest in land’ • Reversion occupier (or related person) is entitled to occupy at least 40% of the land until • Entry into permanent residential care • Death • End of a specified period(min 20 years) Note the definition does NOT refer to elderly customers

38. ER1 revision C3 | Regulation of home reversion plans Home Reversion Plans and MCOB • Regulation began on 6 April 2007 • Lifetime mortgage rules amended and amplified • Clear, fair and not misleading • Plain, intelligible language • May only be referred to as ‘Home Reversion Plans’ in literature and advertisements • No cold-calling permitted (same for lifetime mortgages)

39. Same suitability tests as for lifetime mortgages Again, advisers do not have to be experts on tax legislation & State Benefits Scripted questions must be used as for lifetime mortgages Suitability Non advised sales Specific rules governing regulated firms in connection with home reversion plans Treating Customers Fairly (TCF)

40. ER1 revision C3 | Regulation of home reversion plans Initial disclosure document Role of the FSA Whose products are offered Service to be provided Advice and recommendation/information only Fees and charges payable Are fees refundable Who is the regulator How to complain Protection provided by the FSCS

41. ER1 revision C3 | Regulation of home reversion plans Valuing the property • Must be undertaken by a competent valuer, independent of the provider • Essential to get true and accurate valuation as equity transfer is expressed as a percentage of the open market value

42. ER1 revision C3 | Regulation of home reversion plans Partial Home Reversion Plans • Where customer retains a stake in the property, provider must: • Take steps to sell property within a reasonable time following termination • Achieve the best price reasonably obtainable

43. ER1 revision C3 | Regulation of home reversion plans Why regulate Home Reversion Plans? • Complex products and tenancy agreements • Prevent mis-selling • Protect the vulnerable • Valuations process must be robust • Complaints and compensation – home reversion now also within scope of FOS and FSCS

44. ? ? ? Revision questions

45. ? ? ? Any questions? Give us a moment and we will review any questions we have received.

46. ? ? Queries? Please don’t hesitate to ask us for help. Contact the sales support team on 0800 0288 974 (option 4) Sales contacts: Gwyn Airdrie 07802 463967 Georgina Oxton 07501 224714 For textphone first dial 18001. Calls may be recorded for training and monitoring purposes. ?

47. This is for financial advisers only Not to be used after 30 September 2013 This presentation is based on our understanding of current legislation as at 2 January 2013 applicable in England and Wales and HM Revenue & Customs practice which may change in the future. We cannot accept responsibility for any action arising as a result of the information contained in this presentation. LV Equity Release Limited, Keynes House, Tilehouse Street, Hitchin, Herts, SG5 2DX LV= is a registered trade mark of Liverpool Victoria Friendly Society Limited (LVFS) a trading style of the Liverpool Victoria group of companies. LV Equity Release Limited is registered in England (No 1951289) and is authorised and regulated by the Financial Services Authority (register number 306287). LVFS is a member of the ABI, AFM and ILAG. Registered address: County Gates, Bournemouth BH1 2NF. Tel: 01202 292333. 21331770 01/13