January 2006 was a tough month for anyone selling or involved with the selling of equity release – both the FSA and the consumer association group Which? issued reports which Jon King, chairman of Safe Home Income Plans (SHIP) admits were “less than flattering”.
Despite being pleased with attempts to increase the standard of sales the FSA said it would be continuing attempts to make sure advisers adhered to their regulatory requirements, while Which? slammed equity release schemes as expensive, inflexible and severely limiting of client’s choices.
The FSA has long committed itself to reviewing equity release selling practices, and made it a priority during the first year of mortgage regulation; early last year a mystery shopping exercise revealed around 60 per cent of advisers were failing to explain the downsides of equity release to clients.
Robin Gordon-Walker, press officer at the FSA, said the watchdog’s concerns were been taken seriously by the entire industry but that further mystery shopping as well as individual visits to firms to discuss approaches to equity release are planned for this year.
Which? report
Which?’s damning report, which believes such schemes should be used only as a last resort, is being taken seriously too. The consumer watchdog looked at 39 schemes and said many were being marketed irresponsibly. It is insistent other options such as downsizing or even borrowing from family, who could be paid back when the house is eventually sold, are explored by advisers.
Chris Cummings, director-general of AIFA/AMI, said the Which? recommendations were already being taken on board. He said its ideas could be incorporated into a sales check list which would require advisers to check their client eligibility for state benefits or even a local authority grant.
It is not the first time equity release has found itself the subject of mis-selling concerns. King claims the latest FSA push has a hint of deja-vu about it. “In the late 1980s it was sales of inappropriate schemes and the subsequent loss of investors money that gave rise to SHIP,” he says.
SHIP was borne out of an industry attempt to regulate itself and its results can be seen in the birth of today’s consumer-friendly equity release products. These, says King, include the right to move home, a no-negative equity guarantee and the right to independent legal advice. “Now what’s happening is that the advice being offered is being scrutinised, the products themselves are no longer the real issue,” says King.
Aide memoir
SHIP is suggesting all advisers stick to a simple aide memoir when selling equity release. Such a guide, King feels, would ease the pressure on advisers and may encourage more into the market. “We are working on a list which will have around a dozen questions, no more. This will make sure the adviser includes all options with the client before deciding on an equity release product,” he says.
The proposed checklist will include a review of the client’s other options, such as trading down. It will also ensure a client is advised to talk to their family and to take a health check in case they negate their social security benefits by release equity in their home.
This checklist is one of the options being discussed by the Equity Release Forum, a group including representatives from the CML, AIFA, AMI and the FSA. Having this dialogue should reassure advisers that the industry and regulator appreciate the pressure that selling equity release schemes puts them under, claims Cummings. AMI along with AIFA is looking at making more lifetime mortgage training available as well as promoted the use of the Fintel system, which helps advisers work out whether a client will lose out on welfare payments.
Cummings says: “It’s a high-risk market but there is a need for equity release. It’s unlike a lot of products, there are huge technical and political issues surrounding it and these have to be addressed as part of the sales process.”
Nervousness
AMI’s latest survey of its members showed increased nervousness and a number of advisers thinking about quitting the market altogether. The survey revealed three main attitudes towards equity release.
Cummings said there were advisers who saw equity release in terms of client need, but were wary of its high-risk nature. These advisers were torn between their regulatory obligations, i.e. the cost of being compliant, and in wanting to service those who really needed the product.
The second type of adviser, recognised their lack of experience and the cost of PI cover. Cummings says: “These advisers are not willing to change their business model and don’t see equity release as the right market for them.”
The third, and smallest group, were those willing to make a long-term commitment to equity release. “They are prepared to invest the money in compliance, training and IT systems. It is the last group that needs the most encouragement, because they are committed to making sure all equity release sales are appropriate,” says Cummings.
Like King he approves of a standard checklist to be used by advisers; information from clients allows advisers to inform them of all the risks involved. “Clients should be given an idea of how much equity will be left in their house. They should also be made to consider downsizing.”
Product upsides
But at the same time advisers should be pointing out the upsides of equity release. For some it’s a much better option emotionally, claims Cummings, which is when it becomes a minefield for advisers to sell. “A client may be financially better off if they downsize but then they may end up having to move from an area where all their friends and possibly family live. Will they really be happy doing this, for some it may be better off to opt for equity release for their own peace of mind,” says Cummings.
Then of course there is the whole ‘family’ issue. Equity release, either lifetime mortgage or home reversion, will inevitably erode the value of any estate that can be passed on after death. The likelihood of potential mis-selling cases, not from clients, but from a family who feel they’ve been cheated out of an inheritance, is something Cummings considers a major worry for advisers. He says: “It’s a dilemma, because we don’t have the right to tell people what to not do with their money.”
One Hertfordshire adviser, who did not want to be named, said this was one of the reasons why he had opted to pass on equity release cases.
He says: “We are based in a commuter town where property prices have gone through the roof in recent years. In fact most of the obvious wealth in the town is generated by people remortgaging. We do get the odd query about equity release and we were considering training one of our mortgage advisers, but we are too scared really to do any of this kind of business. The FSA report and the mystery shop it carried out last year has convinced us that should we get any of this kind of business we will pass it on to a specialist.”
The adviser admits it is not the cost of training but the cost of compliance and the fear that a relation may come back and try and sue them, that puts them off selling equity release.
Falling numbers
Dean Mirfin, business development director at equity release specialists Key Retirement Solutions, claims there is a dip in the number of advisers offering equity release. He says the reason he knows this is because Key Retirement is getting more business referred by advisers who do not want to sell equity release.
“Their saving grace is to have a partner who is a specialist. That way they can be seen to look after clients. Advisers know equity release is under the spotlight and they are worried.”
Mirfin says there is still not enough support available for advisers who get the “odd” request for equity release. He says: “There is a huge burden of research on advisers with equity release products. They really do need to keep abreast of all new products, and there is no one place where you can compare rates. So to offer best advice they need to be in it full time. The Exchange does have most of the rates but not all of them.”
Mirfin says even knowledge of products may not be enough to keep the regulator happy. “With equity release it is not just about the rates either. The growth of more flexible products, like drawdown, can be more appropriate for one customer than a lower interest rate. Advisers need to know the nitty gritty.”
Market complaints
Mike Lewis, equity release operations manager at Help the Aged equity release service says, in general, brokers don’t do enough equity release business to justify even selling the product on an occasional basis, and this is not likely to change.
“It’s not just the sales process, the market is getting too complex to give best advice,” he says.
Like Mirfin he claims the introduction of more flexible lifetime mortgages, allowing clients to take out cash as and when they need it, has added in an extra layer to the sales process.
“It’s good for the clients but an adviser will need to weigh up flexibility versus interest rates and unless you are doing equity release business day-in and day-out you will not know the nuances of some of these products.”
Lewis says he is concerned some advisers are opting for brands rather than the best product, simply because the market is not developed enough. “I am finding that many advisers are going for the big names, above the product specifications. That is a real danger.”
Kenneth Chapman, senior lifetime mortgage adviser at Colchester-based Thorgmorton, admits brands are extremely important to smaller advisers.
“It’s very intensive work and if you don’t have as much time to research the product you will go for the big names. We have a specialist equity release division so we have time to spend on looking at each product when it comes to market.”
Lewis thinks the market will become polarised between those who sell and those who don’t. He says: “An adviser is going to decide it’s not worth the hassle and you will see the growth of equity release broker of brokers.”
Worth it?
But some advisers believe that even a small amount of equity release business is worth it. Tim Case, adviser manager at AMD MoneyExtra, says equity release will still be sold by larger advisers, not necessarily specialist ones. He claims demand for equity release will continue and says the qualification needed by advisers selling equity release will remain popular. The lifetime mortgage paper, the CF7, which is in addition to CeMAP, is required by anyone who started to sell equity release schemes after the introduction of mortgage regulation on 31 October 2004.
“We have seven specialist advisers with the CF7 lifetime mortgage paper and I am sure we will continue to train up advisers. The exam is already well established,” says Case. “Equity release is not a massive business for us, I would say only one in eight who enquire about it end up going forward with it. We do try and steer them towards other options. Essentially equity release is a last resort product for people who don’t have any other investments.”
SHIP is claiming that equity release sales, although flat in 2005, will be ‘revitalised’ with the new drawdown products in 2006, but only if advisers are supported. In its fourth quarter sales figures the eighteen members of SHIP wrote £297.6 million of new business in the last quarter of 2005. That was a rise of 3 per cent from the previous three months but total sales were of £1,103.5 million compared to £1,151.8 million in 2004.
“Drawdown is becoming more popular, people are asking about it and it’s encouraging more people to choose equity release,” says King. He now believes the future of equity release is on advisers shoulders.
“In the last six months the growth of drawdown lifetime mortgages has revitalised the market. We are constantly getting asked for our leaflet. This shows people want equity release and there aren’t enough advisers selling it. They need our support.”
Samantha Downes is a freelance journalist
