The Retail Distribution Review Interim Report had the unenviable task of suggesting viable ways to make the retail investment market simpler while bringing the ongoing debate about the separation needed between advice and sales into focus. This debate has supporters on both sides of the financial industry. However, if one was to enquire about the leaning of the equity release sector, there would be no confusion or hesitation. Equity release is one market where advice is key.
Safe Home Income Plans (SHIP), the trade body for equity release, has always insisted on the importance of advice during the equity release process. All sales through members must be made on an advised basis and SHIP will not permit execution-only business. As the market became regulated and the prospect for growing consumer interest arose, SHIP increased its stipulations on advice and fairness to protect the consumer.
On 1 August 2007, SHIP introduced mandatory examinations in lifetime mortgages for all advisers wishing to work with its members, and on 1 April 2008, these were extended to home reversions.
The value of advice in the equity release process is evident at many of its stages and manifests itself in both initial and ongoing decisions. The importance of the broker is paramount, and at no stage could this be more apparent than with regards to the current debate surrounding dual-pricing. Unlike the mainstream mortgage market, equity release plans sold through intermediaries can often be cheaper than if the client had gone to a provider directly, meaning that the eventual debt to the client can be considerably reduced by taking qualified independent advice.
The importance of brokers’ advice and in-depth knowledge of the sector can also be seen with regards to impaired life options and redemption penalties. Many clients who consider equity release suffer from health problems ranging from minor to critical. For these clients, an impaired life option for equity release might be most appropriate for their needs and enhanced terms might work in their favour. However, with the range of products available, it is not immediately obvious which product is best suited for the client’s individual circumstances, and in these situations, brokers’ advice comes into its own.
Equally, with the present differentiation between provider redemption penalties, broker advice regarding the options to reduce a client’s debt in the long run has additional value.
By regularly reviewing the state of an equity release plan and the options to remortgage so as to reduce future debt, clients are offered the full services of their intermediary and brokers are guaranteed future consultations. In the first quarter of this year, a total of £275.7m of equity was released by SHIP members, and with rates starting to come down, advice about remortgaging will become more important.
Unlike mainstream mortgage decisions, equity release planning also has the additional consideration of the client’s family. With loans repayable upon death, the involvement of family members in the advice process is more necessary and is stipulated in all SHIP guidelines. Easing concerns and addressing issues from multiple generations requires knowledgeable and qualified advice, but also offers additional business leads for intermediaries.
The need for advice within equity release could therefore not be more apparent. In the first quarter of 2008, SHIP figures reported that distribution through intermediaries accounted for 71% of all loans advanced among members. This figure has been steadily increasing over the years, and given the examples set out above, it is not hard to appreciate why. Equity release is not an option clients will make flippantly. It requires in-depth understanding of product intricacies and advice regarding individual circumstances.
Intermediaries form the cornerstone for equity release and demonstrate the real value that advice can offer to a market sector. When it comes to equity release planning, few in the sector could stand on the sales side of the fence when debating the Retail Distribution Review. n
Jon King is managing director of Hodge Equity Release
