The Equity Release Council is facing calls to reform its product standards to increase innovation in the sector.
The call comes a week after the FCA announced it would allow lenders to apply to waive affordability tests for borrowers on interest-charging loans that convert to roll-up loans.
However, experts say more innovation in the sector could be achieved if the ERC watered down some of its product standards or allowed consumers the choice of waiving them.
For the past 25 years the ERC and its predecessor, Safe Home Income Plans, have abided by the following rules:
- Lifetime mortgages must be fixed or, if they are variable, there must be a cap that is fixed for the life of the loan
- Borrowers retain the right to stay in the home for their entire lives or until they need to move into long-term care
- Borrowers must have the right to move to another property, subject to that property being acceptable to their product provider, and
- Providers must offer borrowers a no-negative-equity guarantee.
While many praise these standards for their protection of consumers, some argue that they may be holding back the market.
Key Retirement founding director Dean Mirfin says: “One of the challenges for further innovation is not so much regulatory but around the issue of some of the standards we have through the ERC. They are very dear to our hearts but the challenge is that you can’t have a high-LTV product with some of those guarantees. So you either keep the products safe and therefore stop a group of customers from borrowing, or you give that group the choice to forgo some of the guarantees.”
Equity Advice managing partner Stuart Wilson says: “It is 25 years since those guarantees were put in. Have we been in a position where one size fits all? Maybe we are starting to come into an environment with more competition, pricing challenges and funding challenges. It is about getting it right for the consumer. As long as we stick with that, the product designs and warranties are secondary – they can be tailored to the customer’s needs.”
ERC chairman Nigel Waterson says: “In their 25 years of existence, the industry standards have been vital to establishing consumer confidence and supporting a safe and reliable equity release market.
“This remains the case, and it is important innovation does not come at the expense of continuing protection and long-term sustainability. This means consumers being properly advised on their options and products being ‘future-proofed’ against market developments and changing circumstances.
“It is important to remember these are long-term plans: the idea of a no-negative-equity guarantee may not appeal to some customers in their 50s but things may look very different when those customers reach their 70s.”
Regarding the FCA’s removal of affordability requirements, the industry was welcoming.
The FCA says: “We have decided to make this modification available because we do not consider that an affordability assessment is required where there is no risk of arrears and repossession in the event of missed payments.”
Council of Mortgage Lenders director general Paul Smee says: “This may look like a small change but it is a really significant one that should allow the lifetime mortgage market to develop in a far more sensible and consumer-friendly way.
“It removes one barrier to the provision of sensible, safe and worthwhile lifetime mortgage products.”
BSA head of policy Paul Broadhead says the FCA’s action shows its willingness to review and change older policy.
He says: “There’s an acceptance that the regulator’s stance is doing its job but the world is going to change in the coming years and regulation needs to change with it. That was further cemented when it made the change to affordability on lifetime loans.
“What it did was say: ‘Because the products have changed and the way that people want to take them out has changed, we recognise that we need to change our rules.’ Rather than going through a long convoluted process, it’s just done it.”