As underfunded pension fund liabilities have been exacerbated by falls in equity markets over the last few years, there is a compelling demand for good equity-release products – or lifetime mortgages as they have been dubbed by the FSA.
Demand for equity-release products in general and lifetime mortgages in particular has been growing dramatically over the last few years. Growth rates in 2003 approached 70 per cent, making it the fastest growing sector in the UK mortgage market.
The number of companies joining Safe Home Income Plans has risen significantly as new lenders have entered the market. However, the number of lender participants is still relatively low, which is not surprising as the sector has historically been dogged by poorly designed products and allegations of misselling.
Home Funding chief executive Tony Ward says: “What the lifetime mortgage market is crying out for is a radical rethink about product design, akin to the launch of current account and offset mortgages into the mainstream mortgage market of 1996, and good dedicated distribution which can explain the nuances of the product and make sensible recommendations.”
He believes greater flexibility is important in new product design. “The flexible features of the current account and offset products are, I think, the key to future lifetime mortgage development and we should expect a new generation of fully-flexible drawdown products to emerge in the coming years,” he says.
The new FSA rules are an important development for the market and will not only offer greater protection for the consumer but also greater clarity and comfort for new entrants to the market. In the short term, they could exacerbate the distribution problem because the new rules make significant demands on advisers and have highlighted inadequacies in most sales processes.
Legal & General director of housing markets Stephen Smith says: “We could see a faltering pattern of distribution as the new regulations bite. Intermediaries will be nervous and principals will want to restrict or restrain who they allow to give advice on lifetime mortgages.” He believes this will balance out during the first half of 2005 as distributors get to grips with the regulatory environment.
Some people think the number of advisers who are active in this market will fall as a result of the new regulations. But Bob Wright of market leader Northern Rock believes intermediaries should take a more positive approach. He says: “Providing that intermediaries have the right sales process, there is nothing to be afraid of.”
This is probably true but new sales processes need to be developed quickly to provide advisers with effective solutions. An intermediary handling lifetime mortgage cases infrequently on a reactive basis will not build up the right degree of experience and competence and will be at greater risk of misselling. It is not just a case of competence but also commitment.
Portman Building Society group development director Mathew Wyles says: “Regulation may ensure that a suitable sales process is constantly applied but there remains the danger that this process will be less than holistic in its scope. Lifetime mortgages are just one of a range of mechanisms which can be deployed in building retirement and inheritance tax planning strategies for the individual client. There is a danger that some distributors tend to concentrate on simply helping the client to select a competitive lifetime mortgage product.”
Simply Lifetime believes this is a unique category which is unlike the mainstream mortgage market. Lifetime mortgages are a mechanism that have an important role to play in creating relevant and targeted retirement solutions and should not be seen as an end in themselves.
This creates a dilemma because the onus is then on the adviser to offer an holistic perspective and, when it is clear that a lifetime mortgage offers the best solution, ensure the right product is selected. This demands understanding and expertise within a specialist framework and the market needs more specialists.
Lenders are extremely concerned about the potential for misselling and are therefore having to fish in a relatively small pond. This cannot be good for the development of a dynamic and professional market. Greater commitment is needed and should be supported by the provision of dedicated tools and increased levels of the right kind of training.
Wyles says: “If the development of the lifetime mortgage market is driven by creative advisers who are focused on meeting real needs, the market will respond with a broader range of product designs and the market will grow exponentially.”
Creativity starts with confidence and, with this in mind, Simply Lifetime recently published a free guide to lifetime mortgage regulation. The aim is to help demystify the issues, create greater clarity and spark a debate on the future needs of this market.
Enhanced distribution capability will give lenders the confidence and motivation to produce the sort of solutions the market needs in future. The onus is on distributors to make a commitment to this market and build effective specialist solutions to meet the real needs of the consumer and grow a strong core of expertise and competence. This market will reward those companies that make the right level of commitment.
The lifetime mortgage regulation guide can be obtained free at www. simplylifetime.com