It doesn't seem that long ago that I was sending a memo to our national salesforce advising that our remaining two participant lenders had withdrawn from the equity-release market. We had been arranging such schemes for clients from the mid to the late 1980s and providing appropriate specialist advice.
Many schemes were launched, including the less desirable roll-up mortgages with variable interest rates. Some such schemes – thankfully not those we had been recommending – left many elderly people in financial difficulties and in 1990 they were outlawed.
With hindsight, it was a disaster waiting to happen. Simple protection mechanisms were completely absent, including the basic questions a client must ask today:
”Do I have a right to live in my property for life?”
”Do I have the freedom to move to a suitable alternative property without financial penalties?”
”Will I receive a cash sum or regular income payments?”
I have been a great fan of voluntary regulation – codes of conduct and the like – as these regimes can increase consumer protection significantly but avoid the inherently disproportionate cost and burden of statutory regulation. The mortgage code is an example of non-statutory regulation doing wonders in a previously unregulated market.
Safe Home Income Plans' positive initiative in the early 1990s to bring about a safe equity-release environment should be applauded. But, of course, such a scheme can only regulate its handful of member lenders and could not hope to police the entire marketplace, including the activities of thousands of brokers. So, statutory regulation is clearly the answer if the market is to ensure that the mistakes of a decade ago are not repeated.
I am delighted that equity release is to become a key focus of the FSA's regulatory regime but I regret that reversionary schemes will escape it. The argument is clear for excluding a vehicle which does not constitute a mortgage but it leaves a massive consumer threat.
Yet most of the firms offering reversionary schemes would welcome inclusion in the regulatory regime. One lender recently reflected on this with me confidentially. He said: “Most of the people who offer reversionary deals are very concerned as they are increasingly considered the cowboys of the market. This reputational disadvantage becomes worse if they do not get included in the regulation.”
Such is the desire of these product providers to be included as FSA-authorised firms that one of the lenders offering reversionary schemes is alleged to be considering paying a £1 a month annuity in the hope that it will automatically be included.
Some say that the likelihood of consumer detriment is small as equity release is a niche area of the mortgage market but this is a highly blinkered or misguided view. The market grew from £572m in 2001 to £852m in 2002 – an increase of 49 per cent.
One specialist lender estimates that 90,000 customers are actively considering releasing £3.2bn of equity in their homes so the market is huge and consequently so is the risk to consumers of negligent advice.
Some mortgage advisers regard equity release as a variant of remortgaging but this is oversimplifying the reality. This category of business could be a misselling scandal waiting to happen if untrained advisers become increasingly involved. Even if you are a completely professional and experienced adviser, it is conceivable that you might inadvertently give inappropriate advice.
Financial services is an industry which can provide a home for commission-focused, silver-tongued salespeople. My real fear is that a burgeoning but partly unregulated market such as equity release will not be able to avoid attracting some sharp and dangerous operators.
I can completely understand the concerns that some lenders have. Several have pulled up the drawbridge and either declined to lend in this area or restricted access to such products.
For example, Norwich Union will generally only accept equity-release business from FSA-authorised individuals and Nationwide has said it will not enter the market until it is fully regulated.
Abbey National is apparently evaluating the opportunity for entry into the equityrelease market but only on a limited pilot basis via very small numbers of branches.
I just hope that the intermediary market will keep its house in order and treat equity release with the vigilance and respect it deserves.
Robert Clifford is chief executive of national broker franchise mortgageforce
The Institute of Financial Services Register's Westminster Lecture will be given this year by FSA managing director Michael Foot.
It will be held on May 7 at the Cavendish Conference Centre in London starting at 5.45pm for 6.15pm. Entry will be free for members while non-members will be charged £10.
A regular series of Prestige Lectures is organised by the IFSR, the official brand of the Chartered Institute of Bankers. The IFSR provides education and career support services for the financial services industry and acts as an assessing and awarding body.