We believe that formal control is needed across all equity-release products, including reversion schemes and that this should be implemented sooner rather than later.
This is all the more pressing when you consider that people's homes are now their most valuable asset, with the average house price currently at around £160,000.
However, while the UK's homeowners have been accumulating this wealth in their homes, many are finding other assets and investments are being eroded. Smaller pensions and losses experienced by many on stock market investments mean that more people are turning to their home as a means of securing their financial future. This is shown in the recent boom in the equity-release market – not only in terms of growth but in the rate at which new players are entering the fray.
Once considered a niche market, equity release is fast becoming a mainstream product that meets a growing need among people to unlock the money built up in their homes. The latest figures from Ship reveal that equity release had a record third quarter, with almost £300m in new business written and annual sales totalling £881m.
But with growth comes the need for tighter controls. This is particularly true of equity release, which has suffered in the past from flawed products.
Happily, some control is imminent in the form of mortgage regulation in October next year but unfortunately this will only cover mortgage-backed equity release schemes (which must be called “lifetime mortgages”).
Home-reversion schemes will remain unregulated for the time being because they fall outside the scope of the Financial Services and Markets Act 2000.
Lifetime mortgage schemes are currently the most popular loans, accounting for 87 per cent of the market, but reversion schemes have their place. A reversion scheme may be more appropriate for people who want a guaranteed proportion of their property to give as inheritance.
It is essential that the correct controls are in place to enable advisers to discuss and sell these types of plans a reversion scheme may be more appropriate to their clients who must be protected.
Undertaking equity release is a life-changing decision and clients must feel 100 per cent confident that the decision is right for them and that their adviser is providing them with the best available advice.
I believe that regulation of home-reversion plans is essential and, while the Treasury has taken the first step by launching its consultation paper earlier this month, I do not consider this is a guarantee that these types of equity-release plans will be regulated in the future.
If the Treasury has set its objectives as the protection of consumers and the mitigation of misselling risks, then it has set itself on the back foot. The Treasury first acknowledged the need to provide a level playing field for the regulation of equity-release schemes in its Pensions Green Paper published at the end of last year.
The current Treasury consultation will take three months before responses are collated, after which further iterations are likely. If regulation on reversion schemes is accepted as the way forward by the Treasury, it is unlikely that the structure for this proposed regulation will be ready by October 2004 when the regulation of lifetime mortgages is set in place. More realistically, it may be a further two to three years before the inconsistencies are addressed so, without greater impetus, the end looks ever further away.
More worryingly, the paper calls into question the need for regulation, based on the fact that there is no evidence of customer detriment. Yet Norwich Union's own research shows that customers do not understand the differences between the types of schemes available on the market. Protecting the consumer is the key and the longer it takes to set regulatory wheels in motion, the less protection the consumer, and the IFA, will have. There is very much a feeling of having taken one step forward and two steps back.
Another key concern is that this two-speed regulation will increase the likelihood of consumer detriment rather than reduce it, by bringing about a potentially prolonged period where the consumer is afforded different levels of protection depending on the product they select. This is the crux of the issue. Partial regulation will be confusing for consumers, advisers and product providers. It is the likelihood of misunderstanding that may damage confidence in equity release at a crucial stage in its development. However you look at it, a consistent, open, advice-based process is essential.
Norwich Union has always been pro-regulation in the equity-release market because it not only protects consumers but also the IFAs who are selling the plans and we find the current situation disappointing.
In the meantime, the industry cannot and should not wait for the Government to act. The key players in the equity-release market are already members of Ship, a voluntary body set up in 1991 to promote safe equity-release plans and to provide valuable protection for consumers. Ship's members are considering a voluntary code of regulation for reversions, which complements that which will apply to lifetime mortgages.