The Council of Mortgage Lenders (CML) has called for equity release products to come under the regulation of the Financial Services Authority (FSA), and the removal of the sector from the scope of the Consumer Credit Act.
In a speech given at the Property Business Show, held recently in London’s Docklands, Jackie Bennett, senior policy adviser for the CML, outlined the council’s views on opportunities in the equity release market and expressed the hope that the FSA regulates the market.
The Consumer Credit Act limits protection to £25,000, but there are other issues. Bennett said: ‘If something falls under the Consumer Credit Act and the client does not have an ongoing relationship with the lender, through a mortgage for example, it increases lenders’ administration. There is a lot more paperwork and if it is not done properly then the loan is invalid.’
Another market issue is the Government’s confused attitude to the schemes. Bennett pointed out the Lord Chancellor’s proposals to make people use equity in their homes if it is above a certain level, before qualifying for legal aid, while at the same time the Chancellor is removing tax relief on equity release, making schemes less attractive. Using equity release for necessary home improvement can also affect any income support that borrowers would qualify for.
The market for equity release products is huge, especially for those needing home improvements. Homeowners make up half those defined as poor, yet they receive less than 10% of Government benefits. With limited public spending on private housing, the CML estimates that 55% of unfit homes are in the private sector.
The CML intends to set up meetings with the relevant Government departments to discuss this point. In her speech Bennett said: ‘We want to get all the relevant departments together to make them understand they are not working in the same direction and to point out the pitfalls of this.’
As far as lenders are concerned, market views are mixed, but becoming more positive. The number of products is growing, but there are still reputational and regulatory risks. The market is still suffering in the eyes of the public, from the problems equity release plans ran into in the 1980s while plans can also affect a lender’s cash reserves.
Bennett said: ‘If there is a lot of equity release on the balance sheet it affects the amount of capital they must set aside. With some of the plans, such as shared appreciation they never quite know when they will get their money back.’
The CML has estimated the current market size as £5bn, and believes this is set to grow by £4bn-£5bn annually for the next 10 years, and could be worth £50bn by 2008. The lender’s trade body also announced that it intends to publish a consumer checklist for equity release products, due to be released in the summer.