Secure future

The equity release sector faces significant challenges in the year ahead but is in good shape to meet them thanks to its trade body, says Jon King

This month Safe Home Income Plans celebrates the first anniversary of its enhanced code of conduct for home reversions. The code was launched to mirror the regulatory environment for lifetime mortgages and boost consumer confidence in the equity release industry.

Lifetime mortgages are already regulated by the Financial Services Authority under legislation that came into force last year. Following extensive lobbying by SHIP and other bodies, the government agreed to make home reversions – which represent 5% of the equity release sector – subject to FSA regulation as well. The necessary legislation is currently passing through Parliament and it is expected that the sale of home reversions will be regulated from 2007.

SHIP strengthened its home reversions code to plug the gap until formal regulation comes into place. It requires members offering home reversions to ensure that all customers receive full written information on product features and advice given, irrespective of whether the product is sold directly or through an IFA. We have also established an independent complaints board able to impose fines or compensate customers up to 25,000 for an upheld complaint. Without the introduction of a code there was a danger that interest in home reversions would continue to decline, reducing consumers’ choice in the growing equity release market as well as putting them at risk of being exploited by unscrupulous brokers. With swift action, we helped stabilise the market.

So, one year on, what progress has been made? Equity release appears to be on an upward trajectory and Prudential predicts the industry will grow to 6.8bn by 2008. Dwindling pension funds and unprecedented house price growth make equity release an increasingly attractive option for pensioners looking to supplement their retirement incomes. And SHIP has welcomed two new members in the past few months – Bristol & West and Just Retirement.

But with increasing popularity comes increasing scrutiny. FSA mystery shopping exercises have exposed concerns about IFA advice on equity release that merit serious attention to prevent a future mis-selling crisis. The FSA is monitoring the industry in order to shape its regulation and we have had a major consultative role in this.

A Defaqto report recently warned providers entering the equity release market and considering offering a no negative equity guarantee they could face the double whammy of unrecoverable losses and aggrieved beneficiaries Tif actuarial calculations are inaccurate.

There is no doubting that equity release mortgages are more costly to provide than conventional mortgages, particularly if lenders offer such guarantees. The Institute of Actuaries has calculated the cost of providing a no negative equity guarantee at around 75 basis points per year.

Equity release products attract a higher rate of interest and are more expensive than conventional residential mortgages but there is often a lack of understanding about the reasons why. Financing for equity release mortgages is raised via higher cost, long-term swap rates, unlike variable rate mortgages which follow money market rates. This is due to the type of risks taken on by lenders such as increasing lifespans and long-term property price fluctuations. Equity release also attracts higher sales costs due to the need to involve families in the consultation process. But our members give value for these additional costs through the product guarantees provided.

Latest quarterly figures from SHIP show the continued strength of the sector. It is as strong as it has ever been. Home reversions business has performed particularly strongly – up significantly on the previous quarter from 10.6m to 17.3m. Year on year, home reversions leapt from 9.6m at the same point in 2004 – a rise of 80%. All this despite the fact that the FSA regulation has yet to come into effect.

We believe this is largely because property price inflation is far lower now than in recent years, making reversion products (with the proportion of the home sold fixed) more attractive. The additional security of product guarantees helps further buffer consumers against uncertainty.

The no quibble, no negative equity guarantee is a cornerstone of the SHIP code and offers peace of mind to consumers. It means that, no matter what happens to property prices, a lifetime mortgage will never create a debt greater than the value of the home. In a softening property market and with increasing life expectancy, this guarantee takes on even greater significance.

While SHIP members are not the only providers able to offer a no negative equity guarantee, none are able to offer the comprehensive level of reassurance the SHIP kitemark provides. As well as guaranteeing that customers will have security of tenure and without creating a debt for their estate, SHIP providers insist on clients having independent legal advice, all costs to the client and their estate being set out clearly from the outset. And the client’s own solicitor must sign to verify that the scheme has been fully explained.

SHIP also guarantees that a client will have the freedom to move home in the future without incurring further penalties – something deemed vital by SHIP from the outset and borne out by the failure of shared appreciation mortgages in the 1990s. All these measures mean that SHIP offers protection not only to clients but also to their families and financial advisers. SHIP products enjoy a 98% consumer satisfaction rating.

In the coming year, the equity release industry faces a number of interesting challenges. We are working closely with the FSA on the shape of regulation for the home reversions market. Both bodies have important and complementary roles to play in the future of the equity release market. While the FSA will have a regulatory role to play in the industry, SHIP will continue to act as its conscience. SHIP membership should be like a badge of honour for providers to reassure consumers they will have security of tenure for life, will not create debt for their estate and will be able to move home when they wish.

While not all equity release providers are members, either because they do not meet our standards or for their own reasons, we will continue to be the most authoritative voice for the industry, representing 90% of the sector by volume. Membership is valued by the industry and we are currently talking to several market entrants about their proposed offerings.

Legislation on home reversions looks set to gain the Royal seal of approval early in the new year. As the FSA begins to take on the regulation of the home reversions sector, we will continue to keep a watchful eye on the sector as regulation alone does not guarantee that products will be any good. We will continue to push for the highest standards.

With equity release likely to continue growing, we consider education of advisers about the sector to be a priority for the coming year so they will be better placed to advise clients, and advise with confidence. We see a pivotal role for ourselves in helping to implement FSA aspirations concerning treating customers fairly and shaping a common response from the industry.

We are currently undertaking a comprehensive research study among our members. This broker survey will cover the issues of most concern to the equity release industry and examine possible areas of growth. Topics covered will include remortgaging, advice issues and the effect of the FSA mystery shopping exercises on the confidence of advisers.

We look forward to the challenges of the next year. With more providers seeking to enter the equity release market we are beginning to see real competition in the market in the form of cuts in interest rates and more flexible products such as staggered drawdown. We will continue to provide a voice for the industry and seek to protect consumers by ensuring our logo represents safety, security and peace of mind.

Jon King is chairman of Safe Home Income Plans