Equity-release products are complex and are sold to elderly customers at a sensitive stage in their lives with possibly considerable costs.
Some products have also avoided regulation so it is little wonder that lifetime mortgages and home-reversion plans have been pointed out as the products which could face misselling claims.
Are the plans so risky that IFAs should not sell them?After a long period of booming equity-release sales, there was a slowdown in the run-up to mortgage regulation. CML figures show that during the first six months of this year, around 11,200 equity-release loans were made, with a total value of around £517m, compared with 13,240 loans, worth £597m, in the second half of 2003. The CML says the drop is unlikely to be significant and is at least partially a reflection of caution in advance of the new regulatory regime for lifetime mortgages.
It also says that although lifetime mortgage lending is dwarfed by the £800bn seen in the total mortgage market, it expects the market for lifetime mortgages to continue to grow. Director general Michael Coogan says: “All the indications are that lenders and intermediaries are taking a cautious and responsible approach to opening up the equity release-market, which is good news from a consumer protection perspective.”
Most advisers have welcomed regulation, feeling it offers protection for them as well as consumers. Alexander Price IFA Adrian Seager says: “The more barriers put up the better as far as I am concerned. We very much welcome regulation and were annoyed that it took so long and that it took even longer to get home-reversion schemes brought under FSA rule.”
Best Advice Financial Planning director Paul Banfield says: “We are no more worried than before and welcome regulation. We have always given best advice and have always viewed equity release as a last resort.”
Seager’s only gripe with regulation is the FSA’s key facts’ requirements require projections of house prices in the future which only allow for minimal price movement, up or down. He would like to see the projection basis broadened to reflect today’s housing market more accurately . He agrees with the CML that a slowdown in sales is not a long-term pattern and says Alexander Price is seeing rising levels of equity-release enquiries. It expects equity release to be among the single biggest growth areas in the coming years.
But some advisers also anticipate a rise in misselling cases.
Banfield fears that his firm’s stance that equity release is only appropriate when there are no other options is not applied across the industry. He singles out product providers for promoting equity release as a way to fund luxury purchases as falling into the higher-risk category.
He says: “I have seen clients who are insistent that they do not care how much of their property a provider will end up with, they are determined to go on a round-the-world cruise, for example. If we turn them down, they just go somewhere else and get the plan.”
In what might appear to be a belt to the FSA regulatory braces, the CML is launching a range of initiatives to help boost protection for lenders and intermediaries, including a set of good practice notes for the selling of lifetime mortgages.
It is also offering free information and software to help figure out the potential impact on tax and benefits of taking out an equity-release loan.
Seager says: “This is all sensible and proactive stuff. From an adviser’s point of view, the more ammunition the better which will help deliver transparency and clarity to help avoid problems when a policyholder dies.”
This is the time when misselling claims could be most likely to surface. Price’s concern is that lip-service is being paid to making sure clients truly understand the risks.
But he does not think that regulation should specify what cash released should be spent on. “We should not be limiting consumers to this extent, but advisers and providers need to make sure their dealings with clients are watertight,” he says.
Overall, advisers seem upbeat about the future of the market. Research by Norwich Union shows that 70 per cent of IFAs who regularly write equity-release business expect the market to keep on growing.
IFAs say despite the risk warnings being put out by regulators and consumer bodies, awareness and confidence is building, particularly among the growing numbers of homeowners who are being pressured on two sides – pushed into the inheritance tax area by the rising value of their home and seeing their grandchildren unable to get a foot on the first rung of the property ladder.
Seager says: “We are getting more and more enquiries from this sort of client and we expect this to continue.”