In the second part of his article on equity release, Ross Milnes considers the obligations on legal advisers:

I mentioned in my previous article that the equity release home reversion market became regulated by the Financial Services Authority (FSA) on 6 April 2008. A home reversion plan is where a borrower decides to sell all or part of their home to unlock the equity.

The FSA sets down the circumstances where a product will be deemed to be a home reversion plan. In summary it is an arrangement where a person (reversion provider) buys all or part of an interest in land (other than timeshare accommodation) from a homeowner and the homeowner is entitled to use at least 40% of the land as a dwelling until such a time as one of the following events occur:

• The end of a fixed period of at least 20 years; or
• The individual dies; or
• The individual enters a care home.

An agreement must contain at least one of these elements. It would not be a home reversion plan if:

• The occupier is not an individual; or
• The land is to be used for the purpose of letting as a dwelling to someone other than a ‘related person’ (such as a spouse, partner or parent – there is a full definition) of the individual (or beneficiary under the trust) who owns it; or
• The land is used primarily for business purposes; or
• The land is overseas.

Getting the regulations right

Where the plan falls within the FSA’s scope, the purchaser will usually be required to be authorised by the FSA to provide home reversion and home purchase plan products. The legal adviser should be aware that, if a provider satisfies the FSA’s ‘not by way of business test’, they would not need to be authorised. The legal adviser should refer to the FSA for further details of the criteria.

The client should be informed whether the product should be regulated and, if so, whether the provider is authorised to offer it. A failure to inform the client may mislead them and they may be making an uninformed decision, leaving the legal adviser open to claims of misrepresentation or possibly negligence.

Where the legal adviser establishes that a person providing the plan should be, but is not, regulated, they will need to ensure that by proceeding to act for their client, they are not in breach of any professional code of conduct. The legal adviser may also want to consider whether or not a failure to report the provider to the FSA would be a breach of those rules.

As these products fall under the umbrella of FSA-regulated activities, the Law Society has set rules that prohibit law firms from entering into regulated plans as a provider or administrator – see the Solicitors Financial Services (Scope) > Rules 2001 with consolidated amendments to 1 July 2007. However, these rules allow solicitors’ firms to enter into such arrangements where it ‘is in the firm’s capacity as a trustee or personal representative and the home purchaser/reversion seller is a beneficiary under the trust, will or intestacy’.

Plan providers are required to comply with numerous regulations when offering these products. This impacts on the legal adviser, as under rule 2.6A.SR (2) of the Mortgages and Home Finance Conduct of Business (MCOB), a plan provider will need to obtain confirmation that the borrower has obtained independent legal advice and have had the legal rights and obligations explained to them.

Careful advice

The legal adviser will need to undertake a thorough review of the plan > documentation and report the obligations that it places on the client in an easy-to-digest format given the age profile of the clients undertaking the plan. The client should be left in no doubt as to the obligations the plan will place on them and it should always be made clear that the client is selling part or all of their home.

Some plans allow a provider to take an option over the property which they are entitled to exercise on the happening of certain events. It is usual in these cases for the property to be held on trust for the borrower and the plan provider; the full implications will need to be explained to a client.

Most plan providers provide a certificate to be completed by the legal adviser and request that this is provided to them prior to completion. This certificate sets out written statements to be confirmed by the legal adviser and could also then be used by the provider to confirm that they have complied with obtaining the necessary confirmation under MCOB.

The legal adviser will also be requested by most plan providers to confirm that their client is satisfied with the advice they have received from their financial adviser. The legal adviser should always ensure that, by giving such a confirmation, they are not seen to be giving a warranty to the financial advice that a client has received. It would be best practice to ensure that any confirmation or information that the legal adviser gives to a plan provider does not place them in breach of their duty of care to their client, or in breach of any professional code.

Those advising clients undertaking the plans will need to ensure that they have complied with the terms of any confirmations to the plan provider in respect of the legal advice given. It is therefore important that the legal adviser obtains evidence that their client has understood all of the obligations. Checklists can be extremely useful to ensure the client has received the required advice.

A legal adviser will always want to ensure that they are providing their client with expert advice. It is not simply the case of just being a straight-forward sale and leaseback, as the legal adviser will not only be binding their firm by providing a certificate to the plan provider, but they will also want to ensure they are implementing best practices to minimise the risk of any future claims and satisfy themselves that the advice given to their client is high quality and up-to-date.

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If you would like to assess your circumstances to confirm whether you can apply for the equity release, please email ask@simply.law.