There are various reasons why consumers choose to draw down equity in their homes. The fact is that many of those who would once have left their whole estates to their family are now using equity release to top up their pensions or repay debt. the rising cost of living are creating a need for extra income in retirement.
Given longer life expectancy and an ageing population it is not surprising that the equity release market is predicted to expand considerably in the coming years.
Many potential clients still approach equity release with trepidation due to a historical mistrust of such products and the perception that they do not offer good value for money.
But the concept of older people drawing on money from their properties to achieve a higher standard of living is becoming more widely accepted.
Importantly, as a relative newcomer to the financial services scene at least equity release remains largely unaffected by the controversies that have tainted sectors such as payment protection insurance, sub-prime mortgages and, given the events of recent months, the banking sector as a whole.
If it is to achieve sustainable growth and become established as a mainstream product in the way mortgages are, the sector needs to safeguard its reputation and win the confidence of the public at large.
Should allegations of mis-selling come to light – even if they affect only a small minority of cases – it could be damaging to the industry as a whole, particularly at this stage in its development.
The onus is on product providers to set high standards and advisers to act with the utmost caution and integrity.
They must fully explain products and explore the implications with clients. There are various factors they must take into account.
Careful consideration must be given to choosing the most suitable schemes for clients’ needs.
Equity release advisers must also document and assess clients’ entitlement to means-tested benefits along with their tax situation to ensure that they are aware of how these may be affected by proposed equity release schemes.
Despite being asset-rich many home owners over the age of 60 who are on low incomes are entitled to means-tested benefits such as Council Tax Benefit and pension credits although a significant proportion will not be claiming them, either through ignorance or choice. This is one of the thorniest areas of compliance because these benefits are widely available to the most vulnerable sector of society – those who are elderly and possibly in poor health – but this is also the sector most reluctant to claim means-tested benefits.
On top of this, benefits are hugely complex to calculate. So it is not enough for advisers to simply ask clients if they are receiving benefits. They must also ascertain their entitlement through other channels. If they discover that clients can claim benefits they should provide a comprehensive assessment of how this entitlement would be affected by the various income and capital combinations under consideration.
The most practical and accurate way to do this is through the use of specialist software.
Advisers should also assess the tax implications of equity release as an increase in income may take clients over their current tax thresholds.
It is vital that clients fully understand the implications of all the options open to them before making a final decision and close family members should also be consulted where appropriate. It should be remembered that they are the ultimate beneficiaries of estates and any equity release scheme will affect the amount of money they receive.
Strict adherence to compliance guidelines may seem onerous but it helps to maintain professional standards.
Allegations of malpractice or mis-selling can be devastating as the adverse publicity can not only kill off a product line but also tarnish the reputation of any companies or products associated with it.
I witnessed this during my time as operations director at a general insurance company, when adverse publicity surrounding the mis-selling of PPI on the part of a number of companies dented confidence in the separate area of mortgage payment protection insurance.
Reputable MPPI providers were left fighting a rearguard action to try and shore up faith in their products and educate consumers about the difference between the two types of cover.
The loss of confidence spread beyond the public to advisers, who became reluctant to risk clients’ goodwill by selling MPPI products even where these may have been in the interests of home buyers.
It is vital that the equity release market does not suffer the same fate but recognises the potential pitfalls and addresses these by adhering to a robust and comprehensive sales process.
The industry must take a long-term view and safeguard its reputation if it is to become an established feature on the financial services landscape.