---

Equity Release Schemes

I congratulate the hon. Member for Leeds, East (Mr. Mudie) on raising this subject, not least because it affects substantial numbers of our constituents. I have had some appalling cases, as he has, and it is absolutely right that they be brought to light. Where the Government can help, they should. I have the slight advantage of having participated in the original debate in 2003 when the Minister's predecessor, who is now the Secretary of State for Education and Skills, led for the Government. The context, as the hon. Member for Leeds, East has reminded us, is that there was no regulation of this market at all at that stage, in respect of either lifetime mortgages or home reversion. What there was, and is, is a self-regulating scheme called the SHIP—safe home income plans—scheme, which is important because it protects customers at the moment, until the new regulation comes into effect, which may well not be until 2007. Although it gives some credit to the better firms in the industry that have subscribed to the agreement and offers some protection from negative equity, it is seriously flawed in all sorts of ways. It offers very partial coverage and provides compensation that is far less than would be available through the financial ombudsman system. There is no monitoring, and no sanctions for companies in the industry that break the rules. The structure of self-regulation was flimsy and it was clearly right to move on from it, which the Government have done. Lifetime mortgages are now regulated by the FSA, and when the Regulation of Financial Services (Land Transactions) Act 2005 comes into effect, it will cover home reversion too. My second introductory point echoes the point made by the hon. Member for Leeds, East in his introductory remarks. In principle, there is nothing wrong with equity release; indeed, the concept is attractive in many ways. Many people in our society are asset-rich and income-poor. If market mechanisms can be developed to turn assets into income, we should welcome that. Indeed, Lord Turner, in his report, drew attention to the potential of equity release as a partial solution to the long-term problems of pensions. As the hon. Gentleman emphasised, the vast potential has not even begun to be tapped. Total domestic property assets are worth some £2.2 trillion, and probably half of that, as he said, is realisable under equity release. However, less than 0.25 per cent. of the market has manifested itself in equity release products, so the market is very under-developed, but it has a lot of potential if things are done properly, which involves regulation. I shall raise a series of issues with the Minister. The first and most important question, which the hon. Member for Leeds, East touched on, is what happens now. The Government's responsibility will be to introduce secondary legislation, and the FSA's responsibility will be to consult on the detail of regulation. That process poses a series of questions, some of which I shall list. The first question has already been mentioned: what happens in the intervening period? It may be as long as two years before the regulations come into effect, and during that time people will be unprotected. I imagine that at the very least, the Government can give us some assurance about the speed with which the secondary legislation will be introduced, and urge the FSA to get on quickly with its consultative process. Another way of dealing with the matter, which would give confidence to people in the industry and borrowers, would be for the Government to give an assurance that the protection provided by the new regulation could be backdated, possibly to the date on which the existing lifetime mortgage regulation came into effect, or at the very least, to the point at which the new legislation on home reversion was introduced in the House. If that was available, some of the anxieties about the long hiatus would be dissipated. The second set of questions relates to the scope of the regulations when they are introduced, a matter on which the Minister will be reflecting. The National Consumer Council has produced an extremely good report, posing some of the technical questions that will have to be addressed at the next stage. It asks, for example, whether there should be limitations on protection under the legislation in respect of age. Should this option be simply for older people, or for everyone? I think that the NCC concluded that it should be for everyone; an age division would be arbitrary. What would happen if one person in a household was 65 and their partner 55? Absurd situations would be created. The NCC also raises the question whether there should be a de minimis provision. I am talking about people being able to raise small amounts of equity to go on holiday, rather than going for this option as a big savings decision. That should not necessarily be discouraged by complex and costly regulation. The NCC makes the point that an arbitrary limit would be easily abused by unscrupulous providers and probably is not practical, but it would be interesting to have the Minister's preliminary thoughts on that question. A third issue relating to the forthcoming secondary legislation is value for money. Do the Government intend some protection to be built into the system to ensure not merely that people are not ripped off, but that they get genuine value for money in the transactions? There are various questions about that, one of which is whether there should be a stipulation that an equity release transaction should be accompanied by independent valuation—valuation by an independent valuer rather than by someone from the provider. That seems quite a sensible provision. Various other arguments have been advanced, such as that there should be a minimum threshold for the cash released from a scheme. Should that be specified in the regulations? The conclusion of those who have considered the matter is that that simply is not possible, because there are many different dimensions to the cost of a home reversion scheme, and all that can realistically be demanded of providers is full transparency. A fourth set of questions relates to compensation, and how much there will be. Will it be £100,000, which I think is the Financial Ombudsman Service limit, or, probably more plausibly, should it be equivalent to the compensation available to people under the existing regulations for mortgages—or should it be another amount? Those are the questions that I wanted to pose on the follow-up to the new legislation, the secondary legislation and the FSA rules. I shall conclude with a series of broader questions about where all this leaves us. First, there are unresolved questions about the lifetime mortgage regulation. Although the regulation is now in place, it is beginning to emerge that there is a lack of clarity about certain points. As I understand it, the lifetime mortgage regulation protects consumers from negative equity, but in practice the definition of negative equity has proved rather difficult to pin down. Some customers find themselves in a serious net debt position, although theoretically they are protected. Another big issue is retrospection for people who have suffered from shared appreciation mortgage mis-selling. I have dealt with two such cases in my constituency—appalling cases of people who were blatantly mis-sold products by Barclays or the Bank of Scotland. I think that there were two particular sub-products in their range, in respect of which quite sophisticated people, who had studied the small print carefully, had a very firm impression of their maximum exposure to risk of loss of capital value under the appreciating mortgage. The banks interpreted that in a totally different way, and their interpretation was utterly lacking in transparency. Those people have never been able to obtain redress. They are not covered by the new mortgage regulation, because what occurred was before the relevant time, and the banks' own self-regulation scheme does not cover them. The banks involved have refused to accept that they have any liability, and some people have lost enormous sums of money because of a not terribly reputable set of arrangements. I wonder whether the Government feel that they have any responsibility for trying to secure some justice for the people concerned. The second broad issue was raised, rightly, by the Minister's colleagues when we had the debate on home reversion protection. The good point was made that when one set of products is regulated and another is not, the more unscrupulous providers in the industry tend simply to migrate from one to the other. One of the main reasons why home reversion protection was introduced was to stop that happening. Now that that loophole has been plugged, the industry will migrate elsewhere. In some bits of the property market there is a serious lack of protection for consumers, the most obvious of which—I encounter a lot of these cases, perhaps because I represent a relatively prosperous part of south-west London—are the so-called property investment clubs, whereby many people are seduced into parting with large amounts of money as a result of totally specious arguments about the endless appreciation of the property market. All kinds of scams will emerge, and people will lose large amounts of money. It is a completely unregulated market, and the FSA is reluctant to take responsibility for it. Are the Government considering the possibility of being proactive on that matter? The third general point was touched on by the hon. Member for Leeds, East—the relationship with the benefits system. It matters enormously to an individual whether the income that they derive from the liquidation of capital is counted, or how the capital is treated, from the point of view of savings disregards under the pension credit system, and the benefits system more generally. The arguments are extremely complex, and I do not want to make a political point about them. I wonder whether it might be helpful for the Minister, in conjunction with the Department for Work and Pensions, to publish a note describing the relationship between the benefit system and equity release, and whether there is any need for reform. I am not proposing anything; I am just suggesting to the Government that there is an issue that somebody needs to address comprehensively. My final point, which the hon. Member for Leeds, East made effectively, is about advice. Large numbers of financial advisers, who vary enormously in quality and integrity, are simply not in a position to give quality advice on this matter, because they have never been trained, they do not understand the complexities of the benefits system, and ultimately, they have an interest in selling products. They do not have an interest in telling people to find a simpler solution such as trading down. As a result, people often receive bad advice. The hon. Gentleman's implication was that the way to deal with that problem is through the framework of regulation. That may be appropriate, and the advisory process may need regulation, but I have a slightly different take on the matter. I thought that the Treasury would broadly agree with the view, which I have expressed for many years, that some kind of independent pro bono system of advice is needed, so that people can go along to a body, be it a citizens advice bureau or some other organisation with no axe to grind, and obtain a financial health check. They should be able to go to an adviser who has no interest in the transaction for some simple, common-sense advice, and ask: ““Do I trade down my house, or do I buy a home reversion product? Do I use cash to pay off my debts? What is a sensible way to approach my family finances?”” I debated the matter with the Minister's predecessor. Three years ago the Government were thinking about putting certainly some energy and possibly some money into a national roll-out of independent financial advice centres, which would provide such advice in order to avoid the difficulties that the hon. Member for Leeds, East so eloquently described. I hope that the Minister will be able to provide some answers to the, regrettably, rather large number of questions that I have put to him.