Lifetime Mortgages appear to attract a fair amount of scrutiny by the regulator, largely because they define potential buyers as “ vulnerable”. I have to confess I had felt this was a bit of a slight on the older generation and, being someone who may himself qualify for such a loan within the next 10 years, felt this categorisation was a little unjust.
Until recently I had wondered why they thought that older people were less able to make informed financial decisions than younger customers and only became aware of the full facts when listening to a very interesting presentation by the FSA.
The reality is that they are not making a judgement on whether older people can or cannot make good informed choices. They view this audience as “ vulnerable” because they do not have the time to ‘earn themselves’ out of a financial mistake. This I can see, and now fully understand their position.
Availability of advice
One of the most important methods of protecting this customer group is the availability of expert advice and this is where I believe we currently have a problem.
I do not mean by this that there is a mass of advisers deliberately giving bad advice, this is more about the relatively low numbers of advisers who get involved, giving the public a reduced chance of getting the professional advice they deserve. With average procuration fee being around 1% of the loan, and the average loan being around £40,000, each case should deliver £400 in commission alone, assuming a fee based arrangement has not been agreed.
I am not sure why advisers appear reluctant to enter this market. My guess is that there is a perception that it requires a lot of work for mediocre returns and that time may be better spent working in other markets, or that it is riddled with difficulties and best avoided. We have however seen several specialist companies concentrate in this area and as such feel that there must be opportunities for those that embrace the challenge.
A different approach
Recommending an equity release product may require a different approach for some but the same principles of knowing your customer and recommending the most suitable product still applies. I have heard advisers say that recommending so many ‘non commissionable’ options is a turn-off, but in reality this is not much different to helping a client arrange an investment portfolio where such things as National Savings and deposit accounts form part of the overall advice and do not necessarily attract any financial reward.
I am aware that some may feel that the FSA is anti equity release. My view is that this is far from reality and from what I read they see it as forming an important part of financial planning provided it is ‘sold’ properly and that the adviser has fully considered alternative solutions, tax implications and the impact on means tested benefits. This seems perfectly reasonable and fits with the duty of care most advisers follow in other aspects of financial planning. The FSA have also produced a very interesting downloadable ‘Good Practice’ guide that gives practical hints on how to ensure the sales process is more robust to the benefit of the client and adviser alike.
The apparent reluctance from the adviser community to grasp the nettle and capitalise on the obvious opportunity is leading to a shift in the distribution. It’s possible, this may not be in the best interests of the majority of customers. Lenders and life offices have invested heavily to develop systems and processes that support equity release products. I am sure that those that have invested will not wish to see this go to waste and, if they do not see the expected volumes through the intermediary channels, will find other ways to access the large pool of untapped opportunity.
There is also the issue that mandatory qualifications will become a requirement from as early as April this year for those who are not authorised at that time. For those that are authorised before April 6th the ‘grandfathering’ principle will apply up until April 2009 when an appropriate qualification will be mandatory.
The move towards sellers being qualified should further increase customer confidence towards advisers and help the sales of equity release grow further. My concern is that we already have a shortage of advisers willing to enter this arena and that mandatory qualifications may well be a hurdle too high for some. I hope not, as I think this would badly serve an expectant public. I suspect many will choose to become authorised before April to buy time before a qualification becomes compulsory.
For those that wish to investigate which qualifications may be used, the Financial Services Skills Council website at www.FSSC.org.uk contains a list of all the current approved qualifications and links to appropriate websites.
Potential growth
There have been many column inches devoted to the potential growth of equity release. From the recent SHIP figures we see that 2006 advances were less than that of 2005, which on the face of it hardly seems like growth. A closer look at the numbers reveals that the number of advances actually rose and it is, in my view, the growth of the drawdown mortgage that has contributed to the overall decline in value.
I do not however think this is a bad thing. It shows that advisers are protecting their customers by minimising the initial advance. It also demonstrates that we have a maturing market where providers are increasing the variety of products to meet the needs of more customers. The need for the traditional lump-sum equity release product will continue, and satisfies the needs of those that wish to make specific purchases, such as a home abroad or a motor home, and can be used for estate planning and long-term health care.
I am guessing that lump sum will account for 30-40 per cent of all equity release sales this coming year, but the real growth will be in drawdowns. It looks like we will see a market worth about £1.2 to £1.3bn for 2007, which is less than 0.5 per cent of the anticipated total mortgage volumes, and some reports have suggested this could grow to £5 or £6bn within a 5 year timeframe.
The predictions are based on the changing profile of our communities. There is no doubt that we have an aging population and there are currently in excess of 9.5 million people over the age of 65 many of whom are reliant, or partially reliant, on the state pensions. This number will grow at a time when retirement earnings will fall compounding the problem further. Not all of today’s 9.5 million over 65s are homeowners, not all households are made up of only 1 person, and not all of them have a low income, but there are still a significant number that could potentially benefit from equity release.
A report published by The Actuary Profession in 2005 concluded that there are currently around 4.3 million homeowners aged over 65 that have an inadequate retirement income. The amount of wealth tied up in domestic property by this group is estimated to be in excess of £1,100 billion. If this is true there is a large pool of people sat on a good chunk of usable equity that would benefit from good quality financial advice.
The statistics above also ignore the ‘aspirant’ retiree who wishes to retire ahead of the normal state pension, and sometimes before their occupational scheme kicks in. It is possible that this category could still have a ‘standard’ mortgage and equity release may be a potential solution to allow them to retire more comfortably. This should not be ignored in any pre-retirement counseling.
Confidence
Historically one of the concerns was about customer confidence but I would contend that this has only grown, as they have become better protected. The majority of schemes available are provided by SHIP members who have to conform to specific standards: these include a No negative equity guarantee, permanent rights to reside in the home, and the right to move without financial penalty.
All Lifetime mortgages are currently regulated by the FSA and Home Reversion schemes will follow suit in April 2007. Whether embraced by sellers or not, the activities of the regulator can only serve to enhance customer confidence going forward. All we need now is the adviser community to follow suit with more practitioners taking up the mantle and adding equity release to their current repertoire and ensuring that all eligible customers get the good quality advice they deserve.
The concept is on customers’ lips; being discussed at dinner parties and has even featured in an episode of Coronation Street, thanks to Ken Barlow. It is no longer a ‘closet’ product and can provide real benefits to many customers. There is a lot of information available from many sources to help brokers and potential customers.
SHIP have designed a checklist to ensure brokers cover all the necessary issues. The FSA have produced a useful customer factsheet called “Raising money from your home” which should help customers though the process and provide the re-assurance their independence brings. There are also some very useful contact details to help brokers and customer alike. Guidance on the impact on benefits is also available from free websites such as www.entitledto.co.uk , or the commercially available options such as Fintel’s Ferret system.
I appreciate that advisers may be in a tricky position with this as not everyone is qualified to make recommendations on equity release products. Having said that, several of the larger specialist equity release brokerages operate a referral service for advisers in that position, taking ownership of the advice and compliance issues whilst sharing the commission with the referring adviser and, I believe, guaranteeing client ownership.
There therefore seems little reason why anyone should not consider it during the advice process if it is a potential option. For those debating whether to become qualified and fully embrace equity release this also provides a useful opportunity to learn more about the sales and advice process whilst being rewarded for the efforts.
Desperately seeking advisers
Product providers have done their bit. There is a wide choice of rates, benefits, criteria, and product types that should suit the majority of potential needs. The capacity is there, there are customers with needs. What is desperately needed is more advisers willing to satisfy the pent-up demand and bring equity release fully into their mainstream financial planning.
Apart from the obvious potential of the immediate financial rewards, it strikes me as a huge opportunity to increase a client bank as this is likely to be a good area for client referrals to potential customers with similar needs. If the family is engaged in the advice process, there is also an opportunity to build the trust of the sons and daughters. The band wagon is on it’s way, jump on it!
