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Bank of England softens funding stance for ‘no negative equity’ lifetime mortgage guarantees

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  • 10/12/2018
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Bank of England softens funding stance for ‘no negative equity’ lifetime mortgage guarantees
Insurers have been warned by the Bank of England they must properly assess the risks of ‘no negative equity guarantees’ attached to lifetime mortgages, however the regulator has softened its stance over proposed funding rules.

 

The bank’s Prudential Regulation Authority (PRA) said it was generally standing by new requirements first laid out in July for equity release providers to change how they assess liabilities related to house price growth.

However, the regulator has softened its stance over some of the capital requirements for insurers.

It means some lenders will not be required to hold as much capital as initially feared.

Just Group said the “regime envisaged is considerably less onerous” than first set out, but added the requirements are still “very prudent”.

The rules are set to take effect in December 2019, also giving insurers more time to prepare than initially proposed.

 

Core proposals unchanged

Equity release mortgage redemption payments are ultimately funded by the sale of property, and firms therefore remain exposed to the risk that house price growth above the risk-free rate does not materialise, David Rule the PRA’s executive director, insurance supervision warned in a letter to a letter to chief executives.

He said: “While we have made some changes based on consultation responses, the core of our proposals is unchanged.

“We will use our Effective Value Test [EVT] as a diagnostic tool to ensure compliance with Solvency II requirements relating to the calculation of the matching adjustment benefit where liabilities are matched by restructured equity release mortgages, recognising in particular the risks arising from the no negative equity guarantee feature.”

In response, Rodney Cook, group chief executive of Just Group, said: “We welcome the greater clarity provided by the policy statement, and the PRA’s recognition of the important role played by equity release mortgages for our customers as they plan their retirement finances.

“The regime envisaged is considerably less onerous for Just than set out in the consultation, particularly in respect of pre-Solvency II business, and the outcome is well within the range of what we have been planning for.

“However, even at the 13%/1% parameters confirmed today, we view the EVT as very prudent, as for JRL2 it is equivalent to holding capital and technical provisions sufficient for the price of every house in the portfolio to fall immediately by over 35% and then remain there indefinitely.”

David Burrowes, chairman of the Equity Release Council, added: “Equity release is a prudent and highly regulated area of financial services to ensure market stability and good customer outcomes.

“Having fed into the PRA’s consultation process, we welcome the revisions included in today’s policy statement in addition to the extra time provided to implement its proposals.

“We will seek to work closely with the regulator ahead of 31 December 2019 to ensure that implementation supports this socially important product.”

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