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Lifetime’s experience

The FSA’s regulations have undoubtedly been a major burden on those operating in the lifetime mortgage sector. This is endorsed by many product providers as well as our own experience.

Last May, Simply Lifetime set up a website which offered a guide to lifetime mortgage regulation called Enlightenment. We have had an enormous response and the requests keep coming. Three reprints later, we have sent out over 1,000 guides to firms operating in all parts of the financial services industry.

I mention this because it highlights the fact that, particularly in the early days, FSA regulation created a sense of concern among advisers and lenders. With the benefit of hindsight, where are we six months down the line?

Many people thought that FSA regulation would reduce the role and importance of Safe Home Income Plans. However, New Life Mortgages chief executive officer Peter Lucas believes this was misguided as he felt that Ship members would continue to offer customer safeguards well beyond those imposed by the FSA, the most important being the insistence on independent legal advice for borrowers and the guarantee of no negative equity.

Ship figures show that regulation had an impact on volumes last year. A market which had grown by 36 per cent in 2003 nearly stalled in 2004 although the trend at the end of the year was encouraging. Bearing in mind that the demand and need is growing, this can only really be attributed to regulation.

Companies on all sides of the industry have had to rework strategies completely and look at compliance and sales processes, with a subsequent impact on systems. In some cases, it was easier to opt out. In the first quarter of this year, Ship figures show very modest growth but this period has never been very big in the equity-release market.

Some wild estimates have been made of how this market will grow. A figure of 50bn in cumulative value by 2012 has been widely quoted but this would require an almost unprecedented growth curve.

What is certain is that the underlying growth drivers are there. More people are reaching retirement with greater lifestyle expectations, poorer pension pots and less Government support. At the same time, they have substantially more equity in their homes than previous generations and there is also less desire to make their children rich through inheritance. Equity release provides a platform for delivering the enhanced lifestyle so many are seeking.

Talking of inheritance, as long as the inheritance tax threshold lags behind property growth, many more will be giving major sums to the Chancellor unless they embark on some IHT planning. Lifetime mortgages offer a potential solution whilet enabling the consumer to enjoy retirement more fully.

For a number of reasons, equity release is going to grow but probably closer to 30bn than 50bn by 2012 – nevertheless, still impressive.

However, one of the main factors that is placing a constraint on growth is distribution. Following M-Day, many adv- isers who were doing a few cases a year have fallen away, because the regulatory requirements have made it unattractive. Those who are left have already made a commitment to this category. The market is dominated by only three or four major specialist distributors who command over 50 per cent share. This is not a healthy position for a dynamic emerging market and needs to be addressed by the interested parties.

Getting into this market is difficult and solving regulatory issues remains a key problem in the development of the lifetime mortgage market. The refusal of some bigger firms and networks to get involved is a clear indication that the risks are too great. Smaller firms are not able to enter the market until they are presented with technological solutions.

Some feel that as firms get to grips with regulation and see the opportunities that the equity-release market offers, a new breed of committed adviser will emerge. Advisers should be aiming to complete between eight and 10 cases a month so that they can sustain a specialist expertise.

Interestingly, a significant number of the requests for our Enlightenment guide to lifetime mortgage regulation came from companies which had not previously been involved in advising on lifetime mortgages, highlighting the growing awareness and interest in the sector.

It also reflects their anxieties. Getting into the market is not necessarily easy, as many of these respondents are no doubt finding out. There are the regulatory issues, the need to make contact with a new group of consumers – retired people, the taking of exams, the persuading of the compliance officer that it is worthwhile and the working out of a business case.

Intermediary activity in the category was reflected in the sell-out attendance at Portman Building Society’s recent IFA seminars but my understanding is that most of the business is still being done by a relatively small panel of producers.

It is important that quality distribution develops in this market to encourage and support product innovation by lenders. Equally, consumers deserve the right to a choice of advice in a market where there is competition for their business.

In this new post-regulatory environment, market forces will drive change. Firms will seek revenues from new sources of distribution as their traditional sources fail to deliver sufficient growth in volumes, further product innovation will begin to emerge and consumer confidence will grow.

The equity-release market needs to be handled with care but, for those with the right vision and commitment, it offers a new sales opportunity as well as a new direction for sustainable business development from a sector that meets a real customer need.

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Richard Verdin on insurance

At Direct Life we measure everything, not just because we can but because it helps us to run our business using hard facts. We capture application progress timings for every event that can occur during the progress of a customer’s application, from the point when the quote was first performed to the policy being issued and beyond.

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