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Equity Release Schemes

I join the hon. Member for Twickenham (Dr. Cable) in congratulating the hon. Member for Leeds, East (Mr. Mudie) on securing this important debate, and on the way in which he introduced it. He rightly pointed out that the schemes exist to address a need. Many pensioners who find themselves asset rich but income poor look for some form of financial security by trying to use the equity in their house. The hon. Member for Leeds, East was right to point out the complexity of the schemes, the problems that people have understanding them and the need to ensure that consumers understand their consequences. One duty of the Financial Services Authority is the promotion of financial literacy and education. It is important that consumers understand the product, and are not reliant on the sales process undertaken by an independent financial adviser or a direct sales force. The hon. Gentleman identified some of the issues involved in that process, which were brought out by the FSA's mystery shopper programme. Customers must be able to understand the consequences of what they are attempting, and organisations such as Age Concern, which focus on supporting people in retirement in particular, must take part in that education. The importance of the mystery shopper campaign was not just to identify problems in the sales process and tie up those loose ends; I was pleased to hear the FSA say in August that enforcement action would be taken against continuing problems. Crucially, that means that issues arising from the sale of such products will be identified now, rather than when the person dies, or 10 to 15 years down the track, when a significant problem with the products is found. Enforcement will accelerate the regulatory process and ensure—I hope—that the proposed regulations for home reversion plans reflect some of the issues that were identified earlier. One point on which I would question the hon. Member for Leeds, East is the minimum draw-down and the minimum amount borrowed. Setting a minimum, even at a high level, forces—or perhaps ““should force”” is the right way of putting it—independent financial advisers, direct sales forces and the consumer to think, ““Is this the right route? Do I really need to borrow £25,000 when all I want to do is go on a £5,000 holiday?”” The other factor to bear in mind is that the cost of selling such products can be significant, and the greater the regulation of those products, the higher the costs incurred by the provider, which need to be recovered. Regulation increases either up-front charges or interest rates, so a balance needs to be struck. The hon. Member for Twickenham was right to say that including a de minimus level in regulation would encourage smaller loans. Rather than one £25,000 loan, there would be a series of £5,000 loans, if the de minimus happened to be £6,000 or £7,000, for example. We must be careful about the use of de minimus limits in terms of regulation and the amounts borrowed, because borrowing larger amounts can work in the consumer's favour. The hon. Member for Twickenham touched on the issue of shared appreciation mortgages. I, too, have come across examples in my constituency of people taking out such mortgages. In the marketing literature supplied, I was struck by the crystal clear calculation of the amount that—in this case—Barclays would take. The obligation or liability that the customer would take on was apparent; however, the complexity of the decision making that one would have to go through to take out a shared appreciation mortgage in the first place was not clear. That is the issue with such products, and it applies to all equity release schemes. With a shared appreciation mortgage, one is taking a bet on one's longevity, on interest rates and on the appreciation of the value of one's house. In the cases concerned, it turned out that the lender achieved a good deal at the end of the day—but if circumstances had been slightly different, the lender could have suffered and the borrower could have been better off. The decisions are complex. People need to understand them, and they need to be taken through the sales process. As the hon. Members for Twickenham and for Leeds, East have identified, there is a legitimate demand for equity release schemes. A report yesterday said that the value of pensioners' housing assets had reached £1 trillion. Many pensioners who consider themselves asset rich but cash poor—in particular, those who have been retired for some time and have seen their pension eroded through inflation or higher costs such as council tax, or those who have relied on the returns from lump-sum investments or savings and seen those returns diminish—want to use their equity to meet some of the costs of retirement. They want to use it to help themselves and, perhaps, their families too. Given that demand, it is right for the financial services sector to respond to it with products that can meet the needs of consumers. There is rightly some concern about some products, and we must analyse the sales process. One of my concerns, which was touched on earlier, is about the delay in the regulation of the home reversion market, given that the Regulation of Financial Services (Land Transactions) Bill went through this House last year. The hon. Member for Leeds, East noted that the sale of home reversions is on the increase. I suspect that that is in part because of the heavier regulation of lifetime mortgages, with people squeezed into the home reversion market because of the lighter regulatory touch on it. In a report from The Times last August, one comment speaks volumes:"““A further brake on sales growth is expected as the second part of the equity release market””—" home reversions—"becomes regulated.””" The report implies, first, the need for firms selling such products to tighten up their sales process, and secondly, the suspicion that business that would otherwise have gone through the regulated lifetime mortgage schemes has been channelled through home reversion schemes. Prompt action is important. I look to the Financial Secretary to give us an update on that process and say what discussions are taking place with the FSA. Regulation is important. Two thirds of advisers in the mystery shopper exercise were not gathering sufficient information about their clients. The hon. Member for Leeds, East gave examples of that. How can products be sold properly if the information process has not been gone through? I hope that the FSA will learn from the lessons of the mystery shopper exercise when looking at home reversion plans to see how it can further tighten regulation of lifetime mortgages to deal with the concerns, and that it will repeat the exercise at regular intervals to see how member firms are tackling the problem. As I said earlier, mystery shopper exercises will help to reduce incidents of mis-selling later in life. Regulation leads to increased costs being imposed on providers. Those costs are recovered from their clients. The up-front fees that some advisers charge on equity release schemes can be greater than 2.5 per cent. of the loan value. Obviously, that will recover in part some of the cost of regulation, so we must make sure that the regulation is right, but does not inhibit the condition of the market and lead to a bad deal for consumers. Complementary to regulation is the importance of competition in the market. We need more providers. The hon. Member for Leeds, East referred to Prudential. Some in the industry said last year that its involvement in that market would add new stimulus to sales by reducing cost. When Prudential published details of its scheme, Saga reduced its loan costs to 6.39 per cent. That was still quite high, but competition was acting to spur the reduction of the costs. Given the importance of the interest rate in calculating the final liability for lifetime mortgages, the further interest costs are driven down by competition in the market, the better deal it will be for the consumer. Last year, Dean Mirfin from Key Retirement Solutions said:"““Interest rates on equity release plans have been falling since the start of the year and are likely to fall further as competition becomes more intense.””" There will be a benefit to customers. More competition will lead also to more sophisticated products being introduced. The hon. Member for Leeds, East referred to the Prudential policy with the draw-down. That is an important benefit for customers because it reduces costs. If people draw down sensibly when they require it, there will be a lower interest bill. That process has been spurred on by competition and by the involvement of more sophisticated providers in the marketplace. It works to the advantage of customers. Competition by itself is not the only answer. We need better regulation, but we must bear in mind that the products are of interest to constituents. They look to use the equity in their houses, perhaps to help their families, and to provide some income in retirement, given the threat that many people now see their to pensions. We need a regulatory competition regime that helps to meet the aspirations of our constituents, but in a way that encourages the market and protects customers.