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Should the Treasury give in to industry pressure and regulate home reversion schemes?

Ali Crossley is head of equity release at Prudential

Home reversions will not be regulated as these products are seen by the Treasury as sale and leaseback arrangements rather than mortgages. We, along with other industry players, have been lobbying the Treasury to bring these schemes under the FSA. The Treasury is reviewing the decision and a pronouncement is expected any time now.

We believe that if these schemes remain unregulated it will allow unscrupulous operators to exploit the market and encourage elderly people to sell their homes without discussing other potentially more suitable options.

It will also mean an uneven playing field in terms of provision of advice. Lack of regulation will make selling home reversion schemes easier than lifetime mortgages but leave the consumer open to potential mis-selling – something the industry could do without.

Compounding all this is the fact that the target market for these schemes is a vulnerable group with a greater need consumer protection.

To have different regulatory rules for schemes that are ostensibly meeting the same customer needs can only cause confusion and be to the detriment of the industry. We should not expect consumers to be able to distinguish between regulated and unregulated products nor understand the advantages that come from taking out a regulated product. Only by bringing home reversion schemes under the same regulatory umbrella can we be certain of mitigating this confusion as well as ensuring that providers are adhering to the best standards of practice.

Our research has shown that consumer confidence in the lifetime mortgage market is likely to increase with the arrival of regulation. The number of those over 55 with a mortgage who would consider equity release, if regulated, has nearly tripled to 31%. The number of people releasing equity in their homes has already doubled in the past year to 300,000. With rising house prices set against pension uncertainty and lacklustre stock markets we believe demand could grow to £6.8bn by 2008.

The same rosy picture cannot be predicted for home reversion. Uncertainty over its regulatory status will stall any likely new entrants and ultimately put customers off. It could even precipitate its demise which would be to the detriment of both the customer and the industry.

Its share of an expanding market is plummeting and will remain on that trajectory until the confusion over regulation is cleared up.

Jon King is chairman at Safe Home Income Plans

On November 11 last year the Treasury issued a consultation document entitled Regulating home reversion plans, raising the question – to regulate or not to regulate?

For some this action came out of the blue but for equity release trade body SHIP it was no surprise. This was the result of several months&#39 work with various agencies once it had become clear that home reversion schemes had been excluded from the FSA&#39s plans to regulate mortgages, including lifetime mortgages, from October this year. It was immediately obvious to most commentators that failing to regulate home reversions would create a two-tier system that would benefit nobody, resulting in a united call for regulation.

SHIP believes clients would find it difficult to distinguish between regulated mortgages and unregulated reversions. Brokers would be obliged to draw clients&#39 attention to home reversion while discussing the suitability of lifetime mortgages. As it stands, from October if a client chooses the reversion option, FSA protection will not be there.

The second reason for our call for regulation is market confidence. Home reversion business transacted through SHIP companies fell by 43% between 2000 and 2003. While this can be partially explained by product providers withdrawing from direct sales, a proportion must be because of falling confidence among market professionals.

This is a worrying trend which, if taken to its logical conclusion, could lead to the demise of an important product. Reversions have existed in the UK since the mid-1960s and represent a robust product design suited to many clients and market conditions. They are also rapidly becoming an effective tool in inheritance tax planning.

Regulation would improve customer choice, too. A number of product providers have indicated that they would consider introducing a home reversion scheme if the plans were regulated.

And lack of regulation could lead to product favouritism by brokers based purely on regulatory considerations. Providers offering both plan types could suffer regulatory creep whereby unregulated firms gain an unfair advantage based on the absence of regulatory influence.

Whatever the outcome of the consultation, SHIP is working with major intermediary groups to put into place interim measures to underpin confidence. Even if regulation is introduced it seems that primary legislation will be required which will mean further delays, possibly until after a general election.


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