Proposals set out by the Prudential Regulation Authority concerning capital requirements for companies providing equity release mortgages have raised concerns in some industry quarters.
In early July the PRA announced a consultation seeking views on how to provide “greater clarity” for insurers and reinsurers when assessing the risk “arising from the no negative equity guarantee”.
Essentially, the consultation paper states that because equity release redemption payments are funded by property sales, falling house prices are a risk that cannot be avoided, and so insurers must hold adequate capital to cover NNEGs in a scenario where house price growth slows.
In a treasury select committee held on 11 July, Stewart Hosie MP read out a letter penned by the Equity Release Council, which states that the proposals “lead to excessive prudence for insurers holding ERMs and allowance for risk equivalent to assuming a 25 to 30 per cent immediate fall in property prices and no recovery.”
Prudential Regulation Authority chief executive Sam Woods responded by saying that at this stage “this is a consultation, so we’ve put something out there, and we’re going to take views on it, and I’m sure the Equity Release Council will not be shy in giving those views itself.
“At the heart of what we are saying is that for this product (ERMs), which we think… will play an increasingly important role… there is a particular challenge in valuing NNEG… [this is an] enormously complicated instrument and therefore there are a variety of views about how you should handle it.
Woods went on to say that “the more prudent end of current industry practice is not different from what we are suggesting,” before foreseeing some “vigorous debate”.
Request for further comment from the Equity Release Council struck a more conciliatory note. Chairman David Burrowes says: “This is a prudent and highly regulated area of financial services to ensure market stability and good customer outcomes. The Council and its members will continue to engage constructively with the Prudential Regulation Authority PRA on this matter.”
The consultation runs until 30 September, and resulting regulation will be enforced from 31 December 2018.