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Special effects

What hope is there for the public to find an equity-release specialist?

Normally journalists ask the questions. But last week, sitting outside a cafe at a sun-blazed Canary Wharf talking to an equity-release specialist IFA, I was quizzed on why hacks were so negative on equity release. It was our negativity, I was informed, that was undermining the growth of the sector.

I have heard at first hand from people who have had problems with equity release and I confess that I have always been suspicious of financial products being heavily promoted.

The actions of some providers do not fill me with confidence. IFAs are being urged to get on board and sell the plans, which “are in huge demand”. Take this quote from Prudential: “This is a good time to be an adviser in the market. There is a risk, if advisers fail to act soon, they could be missing out on an opportunity that the big banks could take advantage of.” It is that type of quote that gives the impression that equity-release plans are an easy sell – whether or not it makes financial sense to the client.

My concerns are once again backed up by the latest mystery shop by the FSA. Last year, an FSA mystery shopping exercise revealed that two-thirds of advisers failed to explain the schemes properly and exposed people to unnecessary risks. One year on and problems still remain.

In its second investigation, the FSA found that on a third of occasions where clients could have been eligible for means-tested benefits or grants, advisers did not pay sufficient attention to this issue. Advisers failed to explore in depth the impact of taking out a lifetime mortgage on their clients’ future options and some advisers recommended to their clients the creation of arbitrary, sometimes excessive “rainy day” funds, often with no clear record of the rationale for doing so. One wonders how many people have been misadvised.

I do not have a problem with the rationale of equity release – it is how the plans are sold that I do. Of course it can have a role to play with financial planning and the products are not packed with flaws. The emergence of the guaranteed no-negative-equity clause has restored some much needed confidence in the market after the home income plan debacle of the 1980s and early 1990s. Lifetime mortgages are already regulated by the FSA and home reversion plans are set to come under its jurisdiction soon.

Plans are becoming more consumer friendly, interest rates are competitive while products have been developed that allow you to draw down equity as and when you need it rather than as a lump sum at the outset – a significant development.

It took a mystery shop for the FSA to decide that existing, as well as new long-term advisers must pass an appropriate examination if they were to advise on long-term care. Surely this is required in the area of equity release. Quite why the FSA has stood back from making a stance on this issue is anyone’s guess?

On a positive note, Ship has taken the bull by the horns and has said that all advisers recommending equity release from its members must have passed accredited qualifications by August 2007 but that will not cover the entire market.

The FSA has warned consumers to be careful because some IFAs merely dabble in the area. The regulator says many specialists were doing a decent job advising on lifetime mortgages but its warning to consumers is of little practical use. How do they know who is and who is not a specialist adviser?

At the coffee meeting, I asked the IFA how many dedicated equity-release IFAs were out there. She was unable to answer the question – more than a dozen perhaps, less than 50 definitely but “there are three women in Birmingham that do”.

If people in the industry do not know who the experts are, how on earth will the public know? FSA, it’s over to you.

Money Marketing50 Poland Street, London W1F 7AXChasing the claim cowboys

The plans for the regulation of claim management firms are better than nothing but leave a lot to be desired.

The Department for Constitutional Affairs has chosen Mark Boleat, former director general of the ABI to head the operation. This is perhaps the best part of the whole plan as Boleat is a smart and determined operator with strong links to the legal profession and the financial services industry.

Now that the compensation bill has become law, claim-chasers are already officially regulated on a transitional basis by the Lord Chancellor’s department although it is unclear what this means in practice.

The new regime proper will bite in November when a registration process will begin, with a deadline for February next year.

Boleat will usher in a system that will see claim companies, for long the bane of IFAs’ lives, required to have professional indemnity cover, capital adequacy and will undergo many of the checks familiar to intermediaries. There will be powers, including prosecution and fines, to discipline those who fall foul of the rules while Boleat will also seek out those who try to stay outside the regime, including IFAs which make referrals to the claims chasers.

The task that Boleat has been given is not an easy one, at least partly because of the odd set-up and the fragmented nature of the claim management sector.

Boleat, as a part-time chief, will have to oversee a process where a local trading standards office will bid to run the whole national system of regulation. He will have a budget of 1m to set the whole system up and this is not just to cover the financial services part of the market but also the personal injury compensation sector as well, which is a much bigger area in terms of claims.

Despite his abilities and expertise, the cards are surely stacked against him despite his tough talking.

Money Marketing finds it difficult to see how this can work although we hope that we are wrong.

It may be a case of right man but wrong job description. It may be a while before regulation really does drive out the cowboys from among claim-chasing companies.

Paul Farrow is deputy finance director of the Sunday Telegraph

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