Last week, the mortgage industry welcomed the government’s announcement regarding the regulation by the Financial Services Authority (FSA) of home reversion schemes and Islamic mortgages, which is due to begin on 6 April 2007.
As long as the motion is passed in October, the new legislation will further expand the Financial Services and Markets Act 2000 – the main law under which the FSA operates – and will allow the regulator to bring these products within its regulatory spectrum.
What remains to be seen is the impact FSA regulation will have on this sometimes contentious market.
Growth potential?
Andy Pratt, chief operations director at Alexander Hall, argued that the legislation may lead to brokers re-considering their position within the market and looking at the opportunities of home reversion schemes. He said: “Looking at lifetime and home reversions, there is significant growth to come as people start to realise the gap in their retirement and pension provisions.”
Stuart Wilson, managing director at Equity Release Advisory Service agreed adviser numbers would alter as a result of FSA intervention. However he dispelled the belief that regulation would greatly affect the number of plans sold. “Some intermediaries have been attracted over the past few years to home reversion because it has not been regulated and they haven’t had to worry about it. Following regulation, those intermediaries will probably stop, which will cause a drop.
“On the other hand, intermediaries who may have been worried about giving advice may start to enter the market because it has become regulated, so there are greater controls and guidelines in place. The net result will be little, as one should cancel out the other. The main result will be that the standards and quality of advice should improve.”
Responding to market needs
Fundamentally, the mutually desired impact of regulation is greater protection for the consumer – both for clients who want to release equity from their home and for those taking out Islamic mortgages – also known as home purchase plans – so they do not have to compromise their beliefs by taking out a conventional mortgage product.
Mehrdad Yousefi, head of intermediary mortgages at Alliance and Leicester, said: “The regulation of home reversion plans was a natural extension of lifetime mortgages to ensure the consumer was not mislead into losing their life savings from the equity of their home. The new regulations will have a great impact on consumer protection.”
Yousefi added that regulation of Islamic mortgages was not unexpected. Commenting on the impact of FSA regulation on the Islamic market, he said demand would only be seen in parts of the country where there was a high Muslim population. He said: “Regulation of the Islamic mortgage market will not have a great impact across the whole of the UK, but brokers advising on it will need to ensure they explain the particulars and differences of this product from a more mainstream product, for example, the payment of interest, or riba, which is forbidden under the terms of Islam.”
Market diversity
We live in a diverse society, and as the housing and mortgage markets respond to socio-economic trends and demands, we have seen more diverse, responsive and innovative products being launched into the marketplace. Central to this innovation is the launch and growth of niche sectors, such as the Islamic mortgage market.
The growth of niche, specialist markets is set to continue, brought on by lifestyle choices and cultural influences. Not so long ago, the buy-to-let market was seen as a niche sector, but now accounts for a substancial percentage of all mortgage lending in the UK.
Although growth in the Islamic market is never likely to surpass the increase in activity in previous niche sectors, Pratt says he expected to see growth in the Islamic market. “The market is customer-driven and will respond to demand. We have written some Islamic mortgages, but I think consumers will go to a broker who specialises in that area.”
The ever-evolving mortgage industry will have to wait some time to realise the full and true impact of FSA regulation of reversion schemes and Islamic mortgages. Whatever the outcome, the general consensus among experts is that regulation is no bad thing and will certainly help to create a level playing field.
