Nigel Hare-Scott analyses the impact regulation will have on the equity release market
Through the TCF initiative, the FSA has established a principles-based compliance system, which must be embedded by senior management into every aspect of the product recommendation and implementation process.
The TCF issue is of particular relevance to the equity release sector because at the key sales and advice stage, it is probable that consumers have in the past not been treated fairly, as they were not always given the option of taking out a home reversion plan, even if this product would have been more appropriate for them.
The FSA set an April deadline by which firms should be able to demonstrate that they are implementing projects to ensure that customers are being treated fairly. With the same April timescale, the regulatory framework for equity release was extended to include home reversions, thus creating a level playing field for the two main product types within the sector.
Prior to April, many advisers and their networks were understandably unwilling to recommend an unregulated product irrespective of its suitability in other respects. Furthermore, there has been a misunderstanding that home reversions were the cause of the bad reputation in the equity release sector, which originated from plans marketed in the 1980s. The negative media image continues to be damaging despite the fact that many of the bad experiences arose from equity release plans, which were sold prior to the formation of SHIP.
With regard to home reversions, the FSA has acknowledged that there has been no evidence of consumer detriment since the first scheme started over 30 years ago when an annuity-based scheme was introduced by Julian Hodge Bank.
Regulation means that home reversions are now subject to the same regulatory framework as lifetime mortgages. Advisers will be obliged to make specific reference to them in their initial disclosure documents, and the designated key facts illustration format is similar in style to that of the lifetime mortgage.
In order to be able to demonstrate that customers are being treated fairly, advisers must in future explain the home reversion alternative to their clients in an objective manner, highlighting the advantages and disadvantages compared with a lifetime mortgage. Thus equal prominence can be given to both product types in the advisory process.
To bolster adviser knowledge in the sector, the FSA (and SHIP) have announced enhanced training and competence requirements, which have accompanied the extension of regulation to home reversions. This move provides additional assurance that impartial guidance is provided to help consumers make the right decision on an informed basis.
Regulation should make advisers more comfortable about promoting home reversions as the obvious alternative to their existing lifetime mortgage arrangement. Selecting the most appropriate type of product is crucial and the most interesting part of the equity release adviser's role. The adviser is required to assess the needs and preferences of the clients, in particular their attitude to risk. With a home reversion, although a share in the home is sold at a discount to its market value in return for the right to remain living there on a rent-free basis, there is greater certainty concerning the retained equity. Moreover, the longer-term needs of a client must be taken into account. With a home reversion, a greater sum can normally be raised over the life of the plan than from a lifetime mortgage. For those consumers who have already reached the maximum loan to value rates from their respective lifetime mortgage provider, the home reversion represents a significant switching opportunity.
Post regulation, home reversion providers are anticipating a resurgence in business as their plans become more widely promoted by intermediaries. Already, the share of the market taken by home reversions is rising. From a low point of 4% two years ago, to 7% in the most recent statistics published by SHIP.
The real growth in the equity release market will most likely be driven by the pensions crisis, leading to people using home reversions and lifetime mortgages as a means of improving their lifestyle in retirement. The recent introduction of a compliance regime, similar to the one governing other financial products, is increasingly expected to encourage those advisers specialising in retirement planning to give serious consideration to equity release as a mainstream product for their clients.
The increase in minimum AE contributions has had little impact on opt-out rates - with cessations after April increasing by less than two percentage points, data from The Pensions Regulator (TPR) shows.
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