The Government is fostering a Wild West for home-reversion cowboys, concentrating regulation on the safe majority of the market and leaving the frontier open to lawlessness, according to many industry commentators.
And unfortunately, it seems the industry is not bound to get its wish for regulation of home-reversion schemes when the Treasury lays down its verdict later this month.
Political lobbyists are expecting the Treasury to make its announcement in the last week of April but although there has been industrywide lobbying to bring home reversion into the domain of the FSA when at the same time lifetime mortgages fall under its auspices on October 31, it is anticipated that the Treasury will not budge from its unpopular position to leave it out.
One political source says: “Given that the Treasury clearly asked for the industry's opinion on this matter, it is somewhat unfortunate that it yet again looks to be completely ignoring the results.”
This will mean that home reversion will sit outside the FSA books for a matter of years.
Lobbyists believe that since including home reversion under the regulation of the FSA would require primary legislation, the Government will not be undertaking another review of its possible inclusion until after the next general election, meaning it is not likely to be touched again for another two years.
One lobbyist says: “With other financial issues such as pensions, housing prices and mortgages at the fore, the Government is not going to waste its time on something that, in the end, is only around 12 per cent of the equity-release market.”
The differentiation between more popular lifetime mortgages and home reversion lies in the fact that home reversion is not actually a loan or any other type of strictly defined financial product. It is the sale of part or all of a residential property. This is why the Treasury has so far been able to keep home reversion outside FSA regulation.
But the clear argument from the industry has been that the exclusion of reversion leaves the gap open for cowboys to sully the industry with bad practice and misselling.
Many believe that there is a direct parallel between the Treasury's actions over home reversion and its earlier stance on general insurance.
The lobbyist says: “The Government essentially regulated the good guys, selecting to regulate less difficult products, allowing the tin pot operators to carve out a niche for themselves. Yet again, the Government has missed what regulation is all about, going after the good guys and letting the cowboys consistently fall through the gaps.”
Equity-release providers say this has always been the biggest concern for the industry. Pensions Annuity Friendly Society head of equity release Lee Smith says most providers' regulation concerns are very much in the mindset of making sure that equity release is regulated properly and holistically from the beginning.
Smith has been at the coalface of enormous change in equity release over the years. He began his financial services career as a “salesman” of equity release and went on to become the designer of Britannic Retirement Solutions' innovative equity-release products.
He is now charged with doing the same thing at PAFS, given a blank page and told to come up with an adviserand client-friendly, multi-faceted product.
He says: “We are developing the product from the point of view of the client – what options the consumer needs and what level of flexibility IFAs would like to help their clients. We want to give IFAs a hand of cards that has all the variables their clients will need.”
Smith has been hard at work on his new creation and believes it should be ready to launch, at least as a restricted release, by July.
He has great confidence in the product but wants to make sure he gets it right, both for the consumer and IFAs, before it hits the streets.
“Misselling is always a concern, even if the product is designed to be watertight. This is why all equity-release should be regulated – to provide the industry and consumers with full protection from cowboys,” he says.
GE Life head of strategic development Dave Lowe agrees. He says the greatest danger is that a small group of dodgy operators could undermine a “very important market”.
There is little argument that equity release is growing. ABI trend figures have shown a distinct increase in consumers interested in tapping into the equity in their property. ABI research also shows that over 75 per cent of consumers would feel more confident in equity-release products if they were regulated by the FSA.
Lowe says a surprising two-thirds of equity-release products are now sold through intermediaries. He says historically this figure has been far lower but the last year and a half has seen a distinct shift in the quantity of equity release sold through IFAs.
He praises this shift in focus, arguing that the products should never be sold outside of holistic financial advice.
“They are very useful in many situations but clients need the help of a financial adviser to make sure it is the right product for them,” he says.
For instance, Lowe says generally lifetime mortgages are likely to dominate in the long term but, if bought properly, he believes home-reversion products can prove a far safer way to invest and derive income than other vehicles.
“They also look far better for inheritance tax issues than cash plans or trusts,” he adds.
He says these attractions are the reason why IFAs are looking more closely at home-reversion than they did two or three years ago.
Lowe believes that self-regulation has served the industry well, largely ridding it of practices that gave the market a bad name in the early days, such as gearing up and negative equity. “But the challenge now will be to move the product ahead and into IFAs' main toolkit. Everyone except the Government and the FSA want this to happen in a regulated regime,” he says.