Why funders must look closely at vulnerability in later life lending
John Barbour discusses how funders must strengthen long-term risk oversight in later life lending to address vulnerability and Consumer Duty obligations.
The Financial Conduct Authority’s (FCA’s) recently announced market study into later life mortgages is a necessary and timely intervention in a sector that is poised for significant expansion. With 43% of people currently undersaving for retirement and over-55s holding an aggregate £3.7tn in property wealth, the structural drivers for lifetime and retirement interest-only (RIO) mortgages are undeniable.
Yet, while the regulatory focus is understandably directed towards provider entry, competition, and consumer decision-making, there is a profound secondary implication that those providing the capital for these loans cannot afford to ignore.
Funders, whether they are insurers matching annuity liabilities, pension funds, or private credit vehicles, operate at a degree of separation from the point of sale. They rely on originators and intermediaries to ensure that the loans they back are underwritten correctly and that the underlying risk profile matches their stated appetite. However, the unique nature of the later life market introduces variables that are notoriously difficult to quantify and even harder to monitor over the lifetime of a loan.
The most critical of these variables is consumer vulnerability. As the FCA rightly notes, vulnerability can become a highly fluid factor as consumers age, particularly if cognitive abilities decline or if they are compelled to release equity to meet urgent, unforeseen needs. In the context of the Consumer Duty, the requirement to deliver good outcomes is not a static obligation fulfilled at the point of origination. It is an ongoing responsibility that persists for the duration of the product.
For funders, this presents a complex challenge. A loan that appears perfectly aligned with risk parameters on day one may look very different five or 10 years later if the borrower’s circumstances change materially.
The ‘one and done’ nature of these products, where consumers rarely exit before a specified life event, means that the underlying asset and the borrower’s capacity to understand their ongoing obligations are locked into a long-term trajectory. If the original advice was flawed, or if subsequent vulnerability is not identified and managed appropriately by the servicing entity, the resulting regulatory and reputational risk ultimately flows back up the funding chain.
The market study’s explicit focus on effective consumer decision-making and the role of holistic advice should serve as a clear signal. The regulator is looking closely at how commercial arrangements, including commissions and referral fees, might create incentives that do not align with consumers’ best interests. For those funding these portfolios, relying solely on the initial underwriting criteria or the originator’s internal quality assurance is no longer a sufficient safeguard.
The gap between theoretical risk appetite and practical reality is often where systemic issues begin.
In our experience, it is entirely possible for a portfolio to look robust on paper while containing latent risks related to how the loans were distributed and how ongoing vulnerability is being assessed. Recognising this and broadening risk review scopes are key. Funders must be able to demonstrate that the assets they hold are not just financially viable, but that they have been originated and managed in a way that is demonstrably compliant with the Consumer Duty.
This requires a shift in how risk is monitored. Periodic, independent reviews of both the underwriting process and the ongoing servicing of the loans are essential.
These reviews cannot simply be a tick-box exercise checking adherence to lending policy. They must interrogate the qualitative aspects of the lending decision: was the advice genuinely holistic? Was the potential for future vulnerability adequately considered? Is the servicer equipped to identify and respond to cognitive decline or financial distress years after the loan was advanced?
The FCA has indicated that it wants to encourage new entrants and alternative funding mechanisms to support market growth. This is a positive objective that will undoubtedly increase competition and innovation. However, new funding models will only be sustainable if they are built on a foundation of rigorous, independent risk oversight. As the market expands to meet the needs of a growing demographic of older borrowers, the complexity of those borrowers’ lives will inevitably increase.
Funders have a critical role to play in shaping the standards of the market. By insisting on deep, regular risk reviews that go beyond basic credit metrics to encompass Consumer Duty compliance and vulnerability management, they can protect their own investments while simultaneously driving up standards across the sector. The regulator is clearly preparing to look under the bonnet of the later life lending market. Those providing the capital should ensure they have already done the same.
John Barbour is chief executive at Rockstead
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