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Sense of release

Sonia Speedy on how the equity-release market needs to plug the holes revealed by the FSA’s mystery shopping and open up consumer access to products to unlock business

The equity-release sector has been spiced up by low interest rates, product innovations and new players but it has also seen flat growth levels and battled with an advice gap and lack of consumer understanding.

Safe Home Income Plans chairman Jon King says 2005 has been a good year, especially from the point of view of product innovation.

He says: “We have got real competition now, particularly with the drawdown mortgage product type, with a number of very innovative new products offering consumers probably the best value for money there has ever been in equity release.”

But earlier in the year, as the mortgage industry continued to find its feet following regulation, an FSA mystery shopping exercise on lifetime mortgages criticised the advice being provided.

It found that 70 per cent of advisers did not gather enough relevant information about their customer’s suitability for equity-release schemes and over 60 per cent of the mystery shoppers were not explained the downside of the products.

King says: “They will be repeating this exercise in 2006 and that is where I think the challenges are for the new year.”

He believes that while Ship has ensured that product standards are in place, the challenge also involves access to the market for clients. “We have got these fantastic products, yet we have not seen the market grow particularly dramatically further on and that is really down to access to the market.”

King says clients are finding it difficult to access quality advice due to a lack of advisers in this sector and there is still a need to further improve the public’s knowledge of equity release.

“I do not think the message has got through that you can get a drawdown mortgage at less than 6 per cent now and take that money in tranches when you need it rather than borrowing a load of money up front.”

Key Retirement Solutions business development director Dean Mirfin says the mystery shopping exercise has caused those IFAs doing the odd bit of equity-release business to shy away.

He says: “These IFAs are clearly going to be the most likely to walk away because it is a minority business for them. What we are trying to do is to encourage advisers to get involved because you have still got a third of consumers going direct to providers for advice.”

London & Country Mortgages head of equity release David McGrath says it is ironic that in the year when exams in lifetime mortgages were sat by advisers for the first time, calls have been made for greater education of both advisers and consumers.

This year has also seen new entrants to the market such as Just Retirement, Retirement Plus and Prudential and there are now over 40 plans available.

McGrath believes 2006 will see even more new entrants and innovations. “I think we will see at least another three or four providers come into the market, big names like perhaps Halifax that have yet to come through.”

But others are not quite so convinced. Mirfin says: “At the moment, there is very little activity of that kind. Barring some great development that has being kept very well under wraps, we do not see a big provider immediately on the horizon. If they are, they are not necessarily consulting with brokers on the level that typically providers have done before they have launched.”

McGrath sees the home reversion market continuing to grow in 2006 but not significantly, suggesting that it will represent no more than 10 per cent of the market by the end of next year from its current level of 6 per cent.

He also predicts some downward pressure on commission in the reversion market next year to create a more level playing field with lifetime mortgages.

“What that would mean is that the reversion companies could put some of their commission cost into providing an enhanced product for the customer that might improve the customer package and that could help to increase sales a little bit, ” he says.

With business growth in the equity-release market having been flat this year at around 1.2bn of lending, some industry experts are predicting little in the way of gain in 2006.

McGrath says: “I think we will see growth in business probably more pronounced in terms of the number of plans sold rather than the actual pound value. More drawdown products will be sold next year but probably of slightly smaller amounts.”

Norwich Union equity release product development manager Brendan Kearns says it has been looking at population trends which indicate a slightly smaller potential customer base available in 2006.

He says: “Combined with falling house prices and a proliferation of the sale of drawdown products, although values may remain steady, we may see smaller loan sizes and a dip in the value of the equity-release market.”

However, he points out that products such as drawdown will bring value in future years.

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