Unlocking the potential

There is substantial demand in the equity release market but distribution is becoming a problem as advisers shy away from what they see as a high risk sale, says Harvey Jones.

The most optimistic predictions suggest the equity release market could be worth a massive 7bn in 2008, but we can expect a few hiccups along the way.

The recent Financial Services Authority mystery shopping exercise was an embarrassing eruption, revealing that seven out of 10 advisers fail to gather enough information on their clients to offer adequate advice, while too many fail to explain the potential downside of equity release.

The regulator also found advisTers were encouraging clients to draw more money than they needed and invest in unnecessarily risky products, sparking inevitable cries that equity release would be the next mis-selling scandal.

All this appears to have put the wind up advisers, many of whom are shying away from the market. Latest figures reveal that equity release business has fallen 3% on intermediary cases – at a time when direct business rose by the same amount, according to industry body Safe Home Income Plans.

Further evidence of advisers’ discomfort was revealed by GE Life, whose research showed one in five wouldn’t touch the product because they view it as high risk. And more than half feared it would be the next mis-selling scandal, citing fears about the vulnerability of customers and lack of consumer understanding.

This caution is understandable. As Mortgage Strategy exclusively revealed, the FSA is already undertaking enforcement action over the most serious cases of poor quality advice.

So was the mystery shopper exercise a mere hiccup or the prelude to an unsavoury and lingering burp?

Few in the industry dispute the importance or the accuracy of the FSA’s findings. Dean Mirfin, business development director at Key Retirement Solutions, which claims to have 25% of the equity release intermediary market, says advisers must meet the FSA’s criticisms head on. “We have been asking ourselves – was that us? Can we do it better? Can we do it smarter? That kind of questioning can be really healthy for your business.”

But he says the mystery shopping exercise has left many smaller advisers teetering in their commitment to this area. “The lion’s share of equity release is still done by small IFAs doing the odd case here and there,” he says. “They are the ones most scared by the FSA and they are now asking themselves whether the risks are worth the tiny amount of income they earn from this work.”

KRS is targeting these advisers, setting up partnerships with more than 150 smaller IFAs who pass on clients needing advice on equity release. “Many don’t feel confident doing this work themselves but realise that if they turn their client away they could lose all their business to a broker who does do equity release,” says Mirfin. “They can refer them to us knowing we don’t cross-sell and will share commission straight down the middle.”

Consumer interest continues to rise. “We are busier than ever, but demand isn’t growing as fast as it should because advisers are walking away, he says. “This is a big concern for providers and distributors. Equity release needs more people advising to maintain the pace of growth.”

Mirfin stands by his prediction that the market will rise from about 1.5bn this year to 7bn in 2008, saying there is plenty of good news out there to offset the bad. “Lenders are putting a lot of time into developing their offerings,” he says. “This year has been good for customers with a rate war and more product innovation. There are now more than 40 companies in the market. We just have to make sure the distribution holds up.”

Brendan Kearns, proposition development manager for equity release at Norwich Union, says the 7bn prediction is far too optimistic. “The Institute of Actuaries recently predicted the market might reach 2bn by 2010, and I broadly agree with that,” he says. “And even that will require significant investment from providers to increase distribution and develop new products.”

There is certainly a long way to go. Recent sales growth has been solid but unspectacular. Nearly 11,000 equity release loans were made in the first six months of 2005, worth a total of 492m, according to figures from the Council of Mortgage Lenders. That compares with 15,000 loans worth 693m in the last six months of 2004, a drop the CML puts down to seasonal factors and the slowing property market which have made people more unwilling or unable to unlock the capital in their homes.

Simon Little, product and marketing manager for GE Life, which predicts the market will triple in five years, insists demand will be driven by demographic fundamentals, client needs and the savings gap, which could reach 125bn by 2009.

“In the next 25 years the number of people of pensionable age will grow nearly 50% to 15 million,” he says. “These people will need additional capital or income in retirement either because they face hardship or because they want to improve their quality of life.”

Advisers must work hard to avoid squandering such an opportunity. Ben Stafford, head of policy at the Association of Mortgage Intermediaries, says the message from the mystery shopping exercise is that if you want to do equity release, you’d better do it properly.

“This isn’t just another mortgage product but a new type of business altogether,” he says. “You can’t dabble, you have to be committed and make the right changes to your business. But it’s worth it. This is an excellent market and demand should continue to increase.”

So what should businesses do? “Advisers must be trained and competent – the Institute of Financial Services and the Chartered Insurance Institute now offer relevant qualifications,” Stafford says. “If you aren’t prepared to do the training, you shouldn’t sell this product. It’s as simple as that.”

In April, the CII introduced its CF7 lifetime mortgage activities exam, attracting 219 candidates, while the second exam on July 19 attracted 403 candidates. A further exam follows on October 18.

Richard Fox, chief executive of the Society of Mortgage Professionals, says with equity release firmly in the FSA’s sights, all advisers working in this area should complete the unit.

“Existing advisers may think they have been grandfathered but the market is changing so much I feel they could leave themselves exposed to claims of inadequate training and competence unless they pass the exam,” he says.

The CII exam covers all areas of equity release including home reversion, consumer requirements, risks, legislation and regulation, and the requirements of a lifetime mortgage adviser. The CF7 exam qualifies the holder to advise on lifetime mortgages and counts as a half credit toward the AFPC.

Advisers must also understand the welfare system so clients know what state benefits they might sacrifice by taking out a plan. Chancellor Gordon Brown’s tax and pension credits have made state benefits notoriously complex but a new and highly rated piece of software can now help. Fintal, a welfare benefits, tax and pension credit software program from Ferret Information Systems, has been winning plaudits from advisers.

Jon King, chairman of Hodge Equity Release and director of SHIP, says advisers should be concerned by the mystery shopping results but they should not be deterred.

“I have explained to the FSA that the IFS and CII exams weren’t even ready by Mortgage Day, limiting advisers’ ability to assess themselves in this area,” he says.

The number of complaints about equity release in the past decade has been “absolutely minuscule”.

“Anybody using a SHIP product must take independent financial advice plus legal advice from a separate solicitor to the lender,” he says. “It takes around two months to set up one of these loans which gives clients plenty of time to understand what they are getting into.”

The crucial message to advisers is – don’t panic. “If you set up your business appropriately and give advice in terms of holistic financial planning – raising issues such as state benefits, family, inheritance, wills and the state of health of the client – and take care when providing customers with Initial Disclosure Documents and Key Facts Illustrations, you have nothing to fear,” King says.

He agrees that a shortage of advisers is holding back the market. “There is no doubt the demand is there, the problem is finding a good IFA,” he says. “If you open Yellow Pages in a small market town and look for advisers offering independent advice on equity release, nine times out of 10 you won’t find anything.”

King is delighted by the increasing flexibility of equity release products, with a growing number now offering products with cash drawdown facilities. “If the client arranges a lifetime mortgage for 100,000 but only needs to draw, say, 25,000, they can pay interest only on that amount and draw the rest later, as their needs change. This type of innovation should really help the market grow.”

Growth of the market will also be driven by the swelling roster of big name providers, of which the latest is Prudential, which ditched its tie-up with Northern Rock in May and re-entered the market in September with its lifetime mortgage, the Property Value Release Plan.

Roger Hillier, product development manager at Mortgage Express, says the market has been constrained in the past year which he calls both surprising and disappointing. But he remains optimistic.

“We are fully committed to the lifetime mortgage market,” he says. “We are also happy to see new products and designs which will help boost demand, including monthly income and several drawdown products. And there will be more developments to come.”

There is a growing amount of support for brokers. Hillier says Exweb from The Exchange now offers excellent help to brokers wishing to research the market and adds that advisers can take comfort from initiatives, notably by the CML, aimed at helping them improve advice.

“Equity release may be a higher risk product but that doesn’t make it high risk,” he says.

The CML’s good practice notes sit alongside MCOB rules and “strengthen the integrity of the sale and reinforce confidence throughout the selling process”, says CML spokesman Christopher Dean. These set out what advisers should cover during the six stages of the sales process which are: gathering information, clarifying property and income, clarifying purpose of the loan, collecting information on alternative sources of funds, alerting customers to risk, and recommending the most appropriate product.

Advisers should be painstaking in doing this business because there is no shortage of people ready to jump on them if they get things wrong. The public are trained to be sceptical about financial advisers in general, and commission in particular.

Even providers are happy to exploit this unease, as can be seen in the title of a recent press release from Age Concern which fronts Northern Rock’s product – ‘Age Concern sounds the alarm over commission driven, hard sell tactics in the drive to secure bigger slice of the equity release cake’. Little wonder many advisers are so wary of getting involved.

Howard Levy, consultant at brokers Savills Private Finance, says if advisers stick to their checklists, document everything and keep the client’s family informed, they have nothing to fear. He is surprised by the recent drop in intermediary sales, having seen a small increase in volumes lately.

Long-term trends are working in the product’s favour. “This may be the only option for many people to supplement their pension and maintain their lifestyle in retirement,” he says.

“Sales could still hit 7bn by 2008, but that also depends on what happens to property prices and interest rates.”

Levy says the FSA has a difficult balancing act to perform. “It has to make sure equity release is still worthwhile for intermediaries or more people will end up buying direct, which probably won’t be the best course of action,” he says.

The FSA insists that its main obligation is to customers. “We aren’t telling people not to buy this product but we are here to make sure it is sold properly and the customer is protected,” a spokeswoman says.

It will be visiting advisory firms that have experienced difficulties.

“We will continue to help advisers solve their problems but if they don’t cooperate, enforcement action is always an option,” she says. “Worried advisers should speak to their FSA supervisor or if they don’t have one our contact centre.”

David McGrath, head of equity release at London & Country Mortgages, describes this as a fragile market, saying it won’t take much to dent consumer confidence.

“If too many advisers see this as an opportunity to make a quick buck they could do serious damage,” he says. “I don’t think that will happen but we must all be on our guard.”

Advisers and providers – and SHIP in particular – have worked wonders in restoring public confidence in equity release.

“Providers have done well to introduce innovative products in an area where it is difficult to get the pricing right, given uncertainty about mortality and house price inflation,” McGrath says.

“I only hope critical features such as the no negative equity guarantee continued to be sustainable.”

Growth in the equity release market now depends on restoring confidence among advisers. But it would be unlike the mortgage industry to let nerves stand in the way of such a gilt-edged opportunity.

SHIP bridges the gap when it comes to home reversion regulation

Jon King is chairman of SHIP

In the equity release sector, lifetime mortgages – which represent 95% of the market – are regulated by the Financial Services Authority. This means lifetime mortgage providers are governed by FSA rules on adverts, product brochures and other promotional materials and must ensure these are clear, fair and not misleading. Both advantages and disadvantages must be clearly laid out for consumers, the APR must be stated and any arrangement or associated fees made plain.

By contrast, home reversions – which represent 5% of the equity release sector – are not yet regulated by the FSA, but will be in time. The government agreed to this in May 2004 following extensive lobbying by SHIP and others for these schemes to be put on the same footing as lifetime mortgages. The necessary consultation process with the industry is underway.

To fill the gap, SHIP launched a tough code for home reversions last year to coincide with the introduction of FSA mortgage regulation. This includes the establishment of a powerful complaints board able to fine companies up to 25,000 for an upheld complaint.

This action by SHIP was designed to stabilise the home reversions market by bolstering consumer confidence. While SHIP is not a regulatory body, without the introduction of the code there was a real danger that the home reversions market would have vanished completely.

Further regulation of the equity release sector is to be welcomed rather than feared by the industry. SHIP has had an important role to play in shaping the Treating Customers Fairly initiative and is in consultation with the FSA about new regulation. Rather than focus on why, the question should be why not with regard to regulation of the sector, when the result can only be greater clarity and peace of mind for providers, advisers and consumers.

Despite the FSA’s regulatory role in the sales process, SHIP, as an industry body representing product providers and setting product standards, fully intends to continue to play an important role in shaping a common approach that puts customers first and acts as a conscience for the industry.

Lifetime mortgages are a great opportunity

Jan Holt is head of sales of lifetime mortgages at Prudential UK

The lifetime mortgage market represents a great opportunity. It has already boomed from 99m lending in 1998 to more than 1bn by 2003. By 2008 it’s expected to reach 6.9bn. Our research among advisers shows that 91% think people will have to release equity in their home to help fund their retirement.

And many advisers who didn’t do so previously are starting to sell equity release. Among the 57% of advisers who don’t currently sell lifetime mortgages, 25% are planning to start selling them within the year. When you also consider that six million home owners have not yet started saving for their retirement it’s not surprising more people are turning to property to supplement their pension.

Until now, there has not been much, if any, product innovation in the lifetime mortgage market. There have been new entrants but they have all tended to offer similar products. And those that offer flexibility, offer it with time restrictions.

At the Pru, our extensive customer and adviser research shows people want guaranteed flexibility for the life of the loan. Our Prudential Property Value Release Plan gives them that. Product flexibility also goes some way to meet the Financial Services Authority’s recent concerns around using borrowed funds to invest for income and growth.

With a flexible product offering access to drawdowns throughout the life of the loan, there is less reason for customers to borrow to invest. And they don’t need to release ‘just in case’ money upfront.

Lifetime mortgages can play a key part of retirement planning. For many people approaching retirement who have failed to save sufficiently, they are a lifeline. As long as customers and advisers recognise that a lifetime mortgage is not a contract to be entered into lightly – and that customers should talk to their solicitor and children before entering into a deal – then they can be a valuable part of an adviser’s retirement planning portfolio.

Regulator won’t hit the panic button

David Whitely is a spokesman for the Financial Services Authority

The FSA recognises that equity release is an area of concern due to the fact it involves quite complex products and the demographic of the people these products are targeted at tends to be vulnerable and elderly people.

Our work has been part of an overall look at equity release considering the quality of advice and how it is marketed in terms of financial promotions. Work along those lines continues.

The first research we did – the mystery shopper exercise – highlighted a number of issues and it was only right that we brought these to the attention of the industry straight away.

The mystery shopper research revealed that more than 70% of advisers are not gathering enough information about their customers before offering them the product. It also discovered that 60% of advisers had not communicated the downsides of the products to their customers. Once sold, the advisers were encouraging their customers to invest some of the money released in products that were not necessarily best for their needs.

Our work continues and we will be making known our results in the future. The concerns we have about how advice is given are ongoing. There may well be more mystery shopper exercises in the future and there will definitely more research. Mystery shopping is an important tool, particularly in this complex area.

We are still in consultation with the industry and are letting intermediaries know what we expect from them in this context. As we go down the line and get more involved with companies, obviously the leeway diminishes. It is a flexible approach at this stage but if we feel we have highlighted all the issues and they persist, that is when we begin to consider enforcement.

But for now we are still in the process of explaining the new regime and showing people what we want, to help them reach a standard we think is right and that protects consumers. This standard must also protect intermediaries in making sure that the products they sell are appropriate for their clients.

If our research throws up any further issues, we will immediately address them but we will not hit the enforcement button at every opportunity.