Stakeholder positions: The Association British Insurers

 

 

Introduction

 

The ABI is the trade association for Britain’s insurance industry. It has around 400 member companies who provide over 94% of the insurance business in the UK. These members include a number of equity release providers active in both the lifetime mortgage and the home reversion equity release market.

 

The ABI welcomes the government’s intention to regulate Home Reversion Plans (HRPs). 

 

There is support amongst a broad sweep of consumer and industry groups, and Members of Parliament of all parties, for urgent regulation of HRPs, to bring them under the same regulatory framework as life mortgages.

 

Potentially HRPs provide a source of income for many elderly homeowners.  Bringing this financial vehicle within the regulatory regime will provide protection for vulnerable consumers.  It will enable them to make an informed decision as to whether any equity release product may be appropriate for them and, if so, which will best meet their particular circumstances and needs.

 

Background - Equity release products

 

An equity release product provides for a homeowner to obtain the value, or a part of the value, of their home to provide a lump sum or income to finance the remainder of their lifetime, without having to move home.  The equity release market offers two types of product:

• Lifetime mortgages; and
• Home reversion plans. 

 

There are several types of lifetime mortgage.  Essentially they offer a homeowner a cash sum in return for a mortgage charge over their home.  When the homeowner dies, or leaves their home, the property is sold.  The loan is then repaid to the mortgagee.  The terms of the particular type of lifetime mortgage will determine the terms of the repayment, including the treatment of interest.

 

Under a home reversion plan a homeowner sells all or part of their home at a discounted rate.   In return they receive a lump sum payment or income and retain the right to live in the house until they die or leave the property.  When the homeowner dies or leaves the provider is free to sell the property.  The sale value of the property and the proportion of the property retained by the homeowner determine the amount the provider receives.

 

A fuller explanation of HRPs is provided at Appendix 1.

 

Often their home is the most valuable or only asset of value of retired and elderly people.  Both lifetime mortgages and HRPs enable the release of this asset to provide a source of income.  It can be a solution for homeowners who have not otherwise saved, or not saved enough for their retirement, by providing a crucial means of avoiding poverty and minimising burdens on the state.

 

Why HRPs need to be regulated

 

Since 31 October 2004 the Financial Services Authority (FSA) has regulated lifetime mortgages.  HRPs are designed for the same group of vulnerable customers in similar circumstances.  Regulation of HRPs by the FSA would:

 

•           remove the potential for regulatory arbitrage and possible resultant abuse in the equity release market;

•           facilitate provision and use of equity release products:

o          major and trusted providers have been reluctant to enter an unregulated or semi-regulated market;  and

o          consumers have been distrustful of the products - more than 70% of those questioned in research conducted for the ABI said they would have more confidence in equity release products if they were regulated by the FSA;  and

•           provide consumers with rights of redress and compensation from the Financial Ombudsman Service and the Financial Services Compensation Scheme.

 

 

Risks arising from continued lack of regulation

 

At a time when savings and retirement provision are under scrutiny, neither the government, nor the FSA and the industry can afford the reputational risk that could arise from a delay in regulating this area of the equity release market. 

Equity release products are complex and may well be the consumer’s last major financial transaction.  Devised for vulnerable consumer groups, who may have no or only limited means of securing alternative income or financial security:

•           they may have an impact on the individual’s wider financial position including their:

o          tax and benefits;

o          general household outgoings and costs;

o          other options for releasing the value of this asset;  and

o          family and inheritance expectations;

•           potential mis-selling could result in pensioners being thrown totally back on the state for their means of survival;  and

•           there is scope for abuse in the marketing, selling, terms and guarantees for HRPs, and hence a need for:

o          regulation of intermediaries, their advice and conduct of business in the light of an individual’s wider financial circumstances;  and

o          redress and compensation through the regulatory regime.

 

 

Conclusion

 

The inclusion of HRPs in the equity release regulatory regime is urgent.  This view has been expressed by a wide array of both consumer groups and industry bodies who have campaigned for over a year to achieve this end.

 

Enactment of the Bill will allow the process for introducing the regulatory regime to start.  This entails:

•           necessary secondary legislation and changes to the Financial Services Authority’s rules for conduct of business;  and

•           implementation by providers and advisers.

 

This will then bring HRPs fully under the FSA regulatory regime.

Any delays now will further delay the start of this already lengthy process and bring the risk of undesirable impact on consumers.  It also risks a loss of trust in a potentially valuable financial product for elderly people.  This is at a time when expressed government intention is to increase confidence in saving and in increased self-reliance during retirement.   

 

 

Appendix 1

 

Home reversion plans – an outline

 

A home reversion plan is a sale and leaseback arrangement under which an individual sells all or part of his or her residential accommodation (at least 40% of which is occupied by the customer and his or her family) at a discounted rate to another party, with the aim of providing an income or lump sum in retirement.  He or she is permitted to continue living in the property at no or often a minimal rent.

 

For example the owner of a property sells his or her interest (or part interest) in that property for a sum of money and is granted a lease to remain living in the property until their death or until they leave the property, for example, to go in to long term care.

 

The amount paid for the property depends on the age of the customer.  Typically it will be 25% to 55% of the value of the property, or the portion of it.  The percentage applied increases with a member’s age.  In order to be eligible to participate in a home reversion plan the property (or the portion of it) will have to be worth a minimum value of usually around £40,000.

 

When the individual dies, or otherwise leaves the property to go into long-term care, it is sold and the amount the provider receives is determined by the sale value of the property or the proportion of the property originally sold to the provider.

 

Key features of home reversion plans can include:

•           enabling the individual to guarantee a portion of the property as inheritance for their heirs;

•           allowing customers to release more equity in the property in the future;  and

•           allowing customers the flexibility to move house after taking out a reversion plan.

 

They also require that the provider:

•           borrows the money to provide the loan or the annuity income;

•           estimates the life expectancy and state of health of the customer in order to estimate when the money will be repaid; and

•           allows for the risk the value of the property may fall or may rise less than expected.

 

For further information, please contact Helen McCarthy, Head of Pension and Savings Development on 020 7216 7480.