Article | April 2007 | by Duncan Young
What is happening in the equity release market?
It is a common misconception that the equity release market is one size fits all, but those actively involved in it are all too aware that each case has to be treated as separate and the nature of the advice required bespoke. This has led to some criticism of the equity release sector being overly complex, but on the positive side it has also led to brokers using the market to achieve a range of solutions to individual problems with increasing levels of confidence. This practice will continue and gradually the flexibility of the market will sway even its fiercest critics. In turn this will mean higher volumes of completions and satisfied customers.
Looking back over 2006 there are two trends in the market which exemplify this belief. One is the significant and sustained growth of drawdown products. For some brokers as much as 70% of their business is in selling this form of equity release. The second major characteristic is the reduction in the age of applicants. There was a time when every broker’s average applicant was 74 years old, but this is no longer the case with many brokers seeing over 50 % of their applicants being below an age of 65 and the latest SHIP member, Stonehaven, advancing cash to 55 year old clients. This moves equity release firmly away from being a customer’s last major financial contract and places it as a centre piece of financial planning for those at retirement age. It is easy to see this developing just by looking at the various examples of trade associations that incorporate equity release with other products aimed at the elderly rather than look at it as a product in its own right - immediate care annuities are just one example.
These are all positive steps forward but they do not cover up the fact that the equity release market has a number of significant issues to address. One of these is the subject of broker remuneration. The reversion market has always paid significant procuration fees – usually between 2.5% and 3% - but lifetime mortgages have simply added a little to prime mortgage fees and come up with procuration fees starting as low as 0.75%. With an equity release product there are two forces at work to justify higher fees – one is the amount of effort required to complete a case. There is MCOB 8, family conversations, difficult solicitors and the reticence of clients to sign on the bottom line. And in addition there are few automatic add-on sales to make – there is unlikely to be building and contents insurance, certainly not MPPI and, thanks to the FSA’s strictures, few investment sales, so brokers’ remuneration has to come mainly from charging the customer or procuration fees.
To charge the customer too highly is a turn off to business, so it is up to product providers to make up the difference. There is no “right” level of procuration fees, all one can do is set a bench mark which meets the needs of most brokers. However what is also coming to the fore is the need to create value within the brokerage itself. A general mortgage or IFA brokerage builds up a client bank for repeat business and has a base income of investment business trail fees or insurance commissions. A specialist equity release broker is unable to achieve either of these. Income is dependent on each month’s completions and that is not a happy situation for the development of the market whether it be for specialist brokers or the market as a whole. There are only one or two brokerages in the market have grown to a sufficient enough size to overcome the almost daily concerns on profitability.
This is reinforced by the amount of training and knowledge a broker has to have to advise clients on equity release. The FSA will begin regulating the reversion sector of equity release in April. This will not be a problem for around half a dozen reversion product providers, but for brokers it means they will be faced with fresh exams and a divergence of scarce time. Yet not to do the exams will preclude them from being whole of market and missing an opportunity to avail themselves of the higher reversion procuration fees on offer when that product is suitable for their clients.
A way to address this is for brokers to group together and refer business amongst themselves. This has been happening on an informal basis for some time and 2006 saw the introduction of the Key Retirement Solutions and Professional Mortgage Services initiatives which can only be positive for the market. One thing that is missing though - how can the consumer find the right broker? There is a lack of a directory or listing where consumers can be assured of good service. Using Google for example produces a whole raft of brokers in the advertising section, some of whom are leading brokers with high standards, but some of whom are pushing non-regulated products of dubious quality. This is an area where the trade bodies should unite and, in the first instance, produce education materials followed by a referral service to lead customers into the arms of competent brokers rather than any non regulated broker.
Another way the market is attempting to address the above issues is the move to direct selling of equity release by product providers rather than working with and supporting the whole of market broker community. People hold strong views on this subject and it will be interesting to see if the initiatives launched in 2006 bear fruit in significant volumes. This will very much depend on whether the broker community supports direct sell organisations fully. A direct sales force needs a voracious supply of leads and it is doubtful whether advertising alone will supply these. This therefore necessitates other forms of lead generation such as affinity relationships. However, the major affinity deals to date have gone to whole of market brokers rather than direct sales force teams.
The move to direct sales has partly been as a result of the slow growth of the equity release market as a whole as well as of the product providers need for volume to justify their investment in infrastructure and marketing. 2006 saw some new SHIP members but also the potential demise of a couple. It is difficult to see many new entrants until the market starts growing at a significant rate and also until the FSA clarifies its approach to the capital adequacy rules governing lifetime mortgages. This is scheduled to happen in January 2007 but delay seems inevitable. The problem is that new rules are to be implemented in 2008 and FSA regulated businesses might have to have put more resources behind their lifetime mortgage business. At best this may mean a small increase in interest rates but at worst the equity release market could see some providers dropping out due to the returns being too low for the resources that have to be committed to the market. Corporate finance people have been talking to the providers to ascertain their plans and see if they are buyers or sellers of pools of lifetime mortgages. One possibility is that white labelling will become more common – it would allow institutions to maintain their retail presence while allowing a single product provider to build up sufficient critical mass to achieve a securitisable amount of advances. There is no doubt that these types of conversation are more frequent than they were a year ago.
However, despite these somewhat negative influences, they do not really touch the consumer and the choices facing them. It is for this reason that 2007 will be the year when the inevitability of equity release will become totally accepted and the market will move onto a new growth track. This view can be summed up in one word – expectations. Baby boomers are now coming to retirement age. They have enjoyed substantial improvements in lifestyle and life expectancy, but with the pension gap widening it is becoming increasingly likely that their plans for a fruitful and enjoyable old age will not be matched by their cash resources. This is nothing new– so why should 2007 be the year of transformation? The Pension Commission dismissed equity release as an alternative for pensions. All the forecasts from the Institute of Actuaries and other industry bodies have failed to come to fruition as yet. The reason is simply one that even civil service pensions – the index linked ones that we would all love but wouldn’t want to pay for – are not producing the right levels of lifestyle. These pensions are usually based on eightieths and therefore normally a maximum pension of half basic pay. But with all the increases in fixed living costs of recent years these pensions are not at the required level to fund the future for senior civil servants in the desired manner. So even for civil servants equity release is becoming an important part of their financial planning at retirement. And where civil servants lead can the rest of us be far behind?