RIO stuck in its own hinterland until we get regulatory change

The rather startling answer was just 112, albeit in a market in which a number of lenders had yet to launch their own RIO propositions, and where (we suspect) knowledge around where they might fit/who they might be suitable for, etc was at something of a low.

We recently had an update on those figures – as of July just 660 had been sold. Not exactly the figures many in the sector would have been hoping for; in fact we recently talked to a representative from a mutual lender active in the RIO market and their overwhelming view was that take-off has been far slower than many stakeholders might have initially envisaged. These recent stats prove that.

We were recently asked to talk about the later life lending space and the best way we could describe RIO products at the moment was like it being in no-man’s land, caught between the twin armies of interest-only mortgages without a maximum age and the traditional lifetime equity release roll-up products.

Despite plenty of interest in RIO, the facts of the matter are that after over a year of availability the sector cannot be viewed as a success. That’s because it currently offers the worst of both worlds when it comes to later life lending options – while equity release avoids affordability calculations and interest-only mortgages have excellent interest rates (albeit with a term), RIO can’t compete with either side.

RIO products have to be subject to a stricter affordability matrix than a normal mortgage, because the lender has to take into account the worst-case scenario where one applicant dies, and they must consider the pension income/situation for the person who is left. While the interest rates on the products simply can’t be compared with the other two ‘armies’.

There’s no denying that there could be some significant demand for them, but the regulatory tension that exists in this space is doing it no favours whatsoever. It’s clearly not been helped by the decision to place RIO within MCOB, while equity release sits outside with its own authorisation and qualification requirements.

Understandably, advisers have been put off by the constant warnings about their inability to provide full, holistic advice in this area, if they are not able to advise on mainstream/RIO and equity release.

Why would they take a punt on the provision of advice for RIO, knowing full well that the product most suitable for their client might be equity release, on which they can’t advise upon? That is a recipe for future complaints if ever I’ve heard one, and therefore advisers (in the main) are not willing to go there. Neither should they, especially given the potential for serious damage from advisers who don’t have the necessary knowledge or expertise when it comes to how these products impact on a client’s benefits, or their beneficiaries, or long-term care, or IHT. The list goes on.

That means we have an over-riding issue in the later life lending space. Many RIO lenders (rightly so) won’t allow their products to be sold by advisers without the necessary equity release authorisation/qualifications, although some will, while there are also a large number of networks who won’t allow their firms to access all these areas even if they did want to and had everything necessary to be able to offer all types of later life products.

The fact of the matter is this will require regulatory intervention to change. We can’t have a situation where a suitable product is not offered, because a borrower goes to an adviser who can’t access all the available options. Advisers need to be able to offer the full, holistic advice option, and the regulator needs to re-engineer its rules in this area to make that the default setting. We also need a separate, fully-integrated later life qualification which will allow those who achieve it to offer all these products.

If this doesn’t happen, then expect RIO to exist in its own hinterland for the foreseeable future, to a point where eventually it might be squeezed out of existence.