Article | March 2008 | by Duncan Young

Equity Release in the UK and comparisons with schemes from abroad

The equity release market is currently attracting a lot of attention and it is for two main reasons: the demise of the sub prime mortgage market and the general tightening up of lending criteria by mortgage providers. This has led many brokers to investigate entry into the equity release market as a way of diversifying their income streams. After much debate a general consensus may be developing that the equity release market is about to embark on an expansion phase.

Recently I went along to a Defaqto seminar which was also attended by luminaries of the equity release scene such as Andrea Rozario of SHIP, Peter Couch of Bridgewater and Simon Little of Home and Capital. There was much debate and no end of disagreements about detail, but the atmosphere was quite noticeably different from two similar seminars which I attended in 2006 and 2007. There is an air of confidence, which was not apparent back then. It is not a feeling that all in the garden is rosy, but one of optimism that future sales will rise strongly over the coming years.

There are many reasons why this might be the case. It could simply be that to date the equity release market has avoided the worst problems that have hit the general mortgage market, and so seems better on comparison. However, the impact of poor media attention is fading and so consumer resistance to the sector is being reduced. FSA mystery shopping is now history and although there are TCF exercises underway these are not specifically targeted at the equity release sector. Home Reversions have been regulated for a year and many advisers have passed their exams to meet SHIP requirements on submitting cases to product providers by its 6 April 2008 deadline. Lastly, but just as importantly, SHIP has a new director general. While Andrea Rozario’s appointment is still relatively fresh and she has not had time to make a consumer impact, it has been a statement of intent by product providers to the broker community.

So, what at the Defaqto seminar was of concern? Undoubtedly a major issue was whether there were sufficient advisers to meet demand for advice from customers. A point that was well made was that many potential customers had never had an adviser and so finding one, who was qualified and interested in equity release, was not straightforward. Some advisers who state that they advise on equity release have only a passing knowledge of the market despite having achieved all the necessary qualifications. Also there was a general worry about the complexity of products and the lack of good databases for advisers to tap into.

Added to this, the credit crunch did not pass without comment. Attention was drawn to the excellent slide in Just Retirement’s interim figures presentation (prepared by Michelle Cutler of Just Retirement who luckily was at the seminar) which shows the build up of committed but undrawn facilities over the next few years. The volumes are large. This then needs to be put into the context of whether future drawdowns are guaranteed or simply best endeavours. I have to admit to getting lost in this argument although I know it is one of increasing concern to advisers.

Knowledge at the seminar was assisted by the Council of Mortgage Lenders publication that week of “Please Release Me! - A review of the equity release market in the UK, its potential and consumer expectations” by Peter Williams, former deputy director general of the CML and currently chairman of IMLA and non-executive chairman of Stonehaven. The report is available on the CML website and I would urge anyone who is interested in equity release to obtain, and closely study, a copy.

The report does not state a whole lot that is new but it has drawn together some decent statistics (marrying CML and SHIP statistics for the first time) and it has put all the literature and research into one available place. It contrasts the growth of the UK market with other countries. I, in particular, appreciated the comparison with the United States. There, the government has a more central role in exams and adviser accreditation than here. If you watch American adverts for roll-up (i.e. lifetime) mortgages then the regulation and safety of products plays a very central part of the message product providers try to convey to potential customers. Maybe this is something customer facing providers in the UK could emphasise the safety net of regulation as an experiment.

It is also interesting to read in the CML report the evidence from Australia on the cultural shift towards equity release – a market which by some calculations is growing at the rate of 43% per year. It would seem that Australians as a whole are changing attitudes. To quote the report “with independence, flexibility, consumer and lifestyle choices taking precedence over rather more traditional views of old age and family obligations.” But equity release was not necessarily the panacea, to quote again from the report “banks and their products were viewed with suspicion. Fees and charges were seen as punitive, as was the compounding of interest.” I think similar views might be expressed here, in the UK.

One area where Australia does lead the UK is the position with regard to State Benefits. In Australia the system is clearer and it allows well designed drawdown products where the provider has a reasonable degree of certainty that State Benefits will not be jeopardised by the releasing of cash under an equity release scheme. This is assisted by an expectation in Australia that benefits assessment starts at a higher level than here. So, in Australia the value of the property, a car and a boat are not put into pension means testing calculations. However the cost may be higher to the consumer as drawdown products are usually guaranteed to the extent that they trigger capital requirements under the Basel II capital adequacy directive.

After a period where I have despaired about the UK system of means testing, there is a faint glimmer of light on the horizon. The complexity of the system either means advisers have to utilise online systems such as Fintal or Equibus or find some other way to inform and educate their customers. All this does not sit easily with the government’s attempts to provide a way of providing low cost financial advice to those who would not normally seek out an adviser. Some rather interesting parties, namely some major charities who work with the elderly, have taken this debate by the scruff of the neck. It is to be hoped that rapid progress will be made. Retirement Plus offered financial support to the initiative but was told a quiet dialogue with the Treasury was more appropriate at this stage. Perhaps it is something for Andrea Rozario to put on her agenda for later in the year.

So, as the anniversary of home reversion regulation comes around, where does the equity release market stand? In pretty good stead, I would say. There are undoubtedly difficulties created by the credit crunch, but the expectation of more brokers, some of them major ones, entering the market alongside a boost in consumer confidence will go some way to providing a solid framework for the year ahead.

www.retirement-plus.co.uk

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