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Key issues to boost business

Lee Jones and Christopher Jarvis survey the equity-release scene and find that despite some firms pulling out in recent months, the sector has held up well and could forge ahead in 2010 with advisers leading the way

The equity-release sector suffered a mini-exodus at the end of the summer as four providers and two tied advisers quit the sector due to funding issues. The bigger equity release players remain bullish for the future of the sector but the question is will equity release bounce back in 2010?

The first casualty in the sector was Retirement Plus, which suspended lending for new home-reversion plans in April. Single-tied adviser firm In Retirement Services followed in July when it went into administration.

Next to leave the market was Coventry Building Society which decided to stop new equity-release business in September and it was followed swiftly by Newcastle Building Society which shut its tied equity-release adviser proposition. Ten days later, Saffron Building Society stopped new equity- release lending for the rest of the year. Finally, Northern Rock announced that it was withdrawing its lifetime loans at the start of October, with no plans to return to equity-release lending.

Coventry, which through its Godiva brand offered a very popular lifetime loan without early redemption charges, admitted the decision was purely down to funding.

A spokesman for Coventry says: “We could see that the long-term costs of providing equity-release deals was heading up. We could simply have passed those costs on to borrowers,but we would prefer not to pass costs on, particularly with this sort of lend- ing where you have long- term bills with interest compounding up.”

Key Retirement Solutions group director Dean Mirfin says the strict regulations forced on building societies mean the smallest changes in the sector may have forced them out as a demand for more funding or higher rates would have pushed them over the edge.

He says: “For building societies, their main challenge is their mix of business, it is very tightly regulated.”

But has the exodus affected lending? CBK Colchester partner Peter Wright does not think so. He says those who have left the market lacked strength and depth of products and, apart from Coventry, they are not particularly missed.

He says: “They needed to look at their products because obviously the likes of Just Retirement, Prudential et al are still out there lending. There is market share to be had, it is just that those who have left were not getting at it.”

Equity Advice managing partner Stuart Wilson says says there is as much choice for equity-release advisers as there was three years ago.

“Most of the providers that have pulled out were the ones that only recently came in. There is a feeling that enquiries are starting to pick up and the political agenda is moving the product into the mainstream so I think the sector might have a relatively OK time.”

There might be fewer equity-release lenders but demand remains at a reasonably constant level. The latest figures from Safe Homes Income Plans shows that although the number of new equity-release customers is down on this time last year, they have remained stable in 2009. The number of new plans taken out in the third quarter of this year was 5,198, down from 5,333 in the second quarter but up from 5,074 in the first three months.

Key Retirement Solutions’ figures for its own business shows the number of new plans has risen by 19 per cent between the second and third quarters this year from 5,143 to 6,123.

Aviva director of annuity business, pricing and retention Clive Bolton says bigger equity-release businesses have not been affected thanks to different funding structures.

He says: “The economic situation has caused us to really understand the cost of the guarantee because this is a question of funding a guarantee. But for a firm like Aviva, where we can invest annuity money into equity release, we do not have the same issues.

“I do not think we have had to shift our business as a result of these exits, I just think we have all learned a bit more this year.”

But Bolton thinks more light will be shed on how the remaining providers have performed when results are published at the end of the year. He says: “It will be interesting to see how the business has been shared round this year. House prices have fallen but the market has remained relatively stable, so something is compensating for that.”

So far, tied advisers and direct sales operations seem to have been hardest hit. Newcastle Building Society scrapped its tied adviser arm, Newcastle Building Society Equity Release Services, blaming “considerable contraction” in the sector. IRS, another tied adviser, was forced into administration. Northern Rock, which sold many of its lifetime loans direct, has made no mention of a return to the sector. Ship says 74 per cent of plans were sold through advisers in the third quarter and KRS believes that its market share has increased from a fifth to a quarter over the last few months, so will next year’s sector be adviser-led?

Wilson thinks so. He says: “I suspect that providers will offer products through intermediaries at better rates, even to the point where I could see maybe in a couple of years time that the provider will not sell the product direct at all. It just is not making them any money by the time they factor in the cost of advice and ultimately liability.”

Most agree that unwavering demand, coupled with imp- rov-ing adviser figures will mean that the equity-release sector will experience a revival of sorts next year.

Ship director-general Andrea Rozario thinks she will be taking on more members in 2010 but only after the financial markets settle down.
She says: “There is a lot of demand for equity release and that is going to increase as time goes on. It is also moving up the political agenda so I think that towards the end of 2010 we will have some new members.”

Rozario says the key to a recovery in the numbers of equity-release lenders lies in convincing big financial institutions that it is a viable asset class, worthy of investment.

Ship will be publishing a paper this month to try to dispel the ignorance over equity-release loans as investment-grade assets and to try to increase funds flowing into the sector.

Wright agrees that improving funding is key. He says: “Capital adequacy levels are what are probably affecting these providers. I think that could be why a lot of pro- viders are holding back.”

Rozario says: “There tends to be a lot of ignorance over equity release as an asset class. It is a natural longevity hedge for pension funds and institutional investors and we have to promote that.”

The equity-release sector has been affected like other sectors but advisers and providers agree that demographics will ensure a healthy demand in future equity release.

Mirfin expects to see the numbers of lenders increase as the basic demand for the product still exists.

He says: “There is a huge undercurrent of providers interested and many will see these lenders dropping out as a huge opportunity, what a time to come in. Also, the bulk of business is currently done by intermediaries, so if you can step in with the right broker product, at the right price, you can definitely reap the rewards.”

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