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Will intermediaries continue selling equity release after regulation?

  • 15/12/2003
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Will intermediaries be comfortable selling non-regulated products (home reversion) over-regulated products (lifetime mortgages) in the equity release market? And will borrowers be affected by the lack of FSA protection?

To look at this issue we should, in the first instance, look at what is happening at the moment. Intermediaries are staying away from equity release as a whole because of lack of confidence, from an advice aspect and from a suitability aspect. Also pressures are prevalent from compliance and PI insurers.

Advising on both and having to justify one product type (reversion or mortgage) is difficult without a clear notion of what the fundamental differences are and therefore where one may be more appropriate.

The question for many advisers is whether this will all be answered by the FSA only regulating one of the options available. It may be a fair assumption to say that unless a clear advice structure is in place regarding both options that some may remain unwilling to enter this market.

Many advisers are looking forward to regulation as it is anticipated that this will make them feel more secure in how they structure and present their advice and recommendations for a client. If the option exists to opt out of considering reversions then this may well be the route adopted.

There are two considerations from the perspective of the borrower. The first is whether the broker is advising on all options and the second being the issues of considering a non-regulated option. At the moment protection is offered to mortgage customers through the Mortgage Code as well as a path for recourse. This does not exist for reversions, and reversions do account for 25% of the current market.

Clearly, at the moment customers are still happy to take out a reversion despite regulation. Will this view change? It may well do once the lifetime mortgage has the weight and the protection of the FSA behind it. The lack of regulation may well be the way for advisers to offer only one solution if they choose to do so purely on the basis that they are afforded better protection.

The Home Reversion market is an established one but lending volume is now well exceeded by equity release schemes. In the last year the lender count offering equity release schemes has doubled in a sector that many perceive to have the potential to be the fastest growing element of the mortgage market. The basics are all there; continuing pension concerns, low stock market investment returns and growing property equity.

Advisers have never been comfortable offering advice with equity release schemes or reversions. They come fraught with concerns as to whether or not the adviser has got it right. Many either walk away from the enquiry or, quite rightly, refer them to specialists. And moving into a fully regulated environment will only heighten these concerns. As a consequence, the choice is stark; do it properly or not at all and that means that those wishing to continue in the market must revisit their procedures and ensure they are well trained and qualified to give advice on both solutions. To fail to do so comes with massive penalties.

The complexity of the market confuses the average adviser and client alike. It is this greyness that has given rise to the call for the Government to ensure that reversions are also fully regulated and that a specialist qualification is absolutely warranted.

Frankly, it does not take much to confuse the average client and the complexity of these schemes are worse than most. To find a client that can draw a distinction would be the exception rather than the rule and they certainly would not understand the intricacies of protection under the FSA versus the limited offerings of reversions under SHIP. It would take some serious marketing to rectify this and, at this stage of the game with reversions certainly coming under regulation, it would only add to the mess that has been created by the Government.

The fact that reversion schemes will not be regulated as they fall outside the technical definition of a mortgage is regrettable. This anomaly is generally opposed by the market and even reversion scheme providers wish to be included in regulation. And the result is that many brokers will not offer reversionary schemes to their elderly clients, which could ultimately lead to consumer detriment.

For equity release mortgages, the new regulatory regime will strengthen sales processes and training and competence, and also give the regulator disciplinary powers. But consumers might not immediately realise that a home reversion scheme is unregulated.

As is clearly known, reversion schemes can be right for some clients. Yet, given that these products remain unregulated, many consumers and brokers will give them a wode berth.

The appeal of the equity release model is that it is the only mortgage with a rate fixed for life, with interest rolling up until redemption (normally death, moving into long term care, or sale of property), and on disposal the mortgage is cleared and the balance goes to the estate. The fact that after next year such deals will benefit from full regulatory protection is also bound to increase interest and take up of this type of product.

However, supporters of reversionary schemes point out that equity release mortgages have some downsides, such as the fact that the ultimate amount which is passed to the estate is unquantifiable. The mortgage may consume all the equity in a prolonged period of low house price inflation, for instance.

Notwithstanding the clear pros and cons of both equity release mortgages and home reversion plans, the regulatory treatment is bound to mean that reversion plans become the poor relation. Brokers and consumers alike will favour the regulated product, to be as certain as they can that the client is fully protected.


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