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Westminster Hall
Tuesday 17 January 2006
[Sir Nicholas Winterton in the Chair]
Equity Release Schemes
Motion made, and Question proposed, That the sitting be now adjourned.—[Mr. Roy.]
9.30 am
Mr. George Mudie (Leeds, East) (Lab): It is a particular pleasure to speak for the first time under your illustrious chairmanship, Sir Nicholas, and an honour that I did not think would befall me in Parliament.
I am delighted to have the opportunity to discuss equity release schemes and their regulation. I would like to thank the numerous people and organisations who contacted me to offer assistance and information, and I congratulate the Consumers Association on its recent Which? report. It seems to have ruffled some feathers in the financial industry, particularly among some providers, but it offered an objective study and a warning to anyone who is tempted by the often inappropriate marketing of such products.
The products are aimed mainly—I shall touch on that later—at the retired or soon to be retired, and fall into two main types. With lifetime or roll-up mortgages a loan is secured against the home and interest is charged, but not collected until the borrower dies or goes into care and the property is sold. With home reversion schemes the provider takes a share or all of the property in return for a lump sum, the owner continues to live in the house and, when it is sold, the provider takes its share of the property at the full market price.
David Taylor (North-West Leicestershire) (Lab/Co-op): I echo my hon. Friend's praise for the Which? report, and also praise that by Age Concern. He referred to reversion and roll-up mortgages, and the number of reversion mortgages has declined significantly but roll-up mortgages continue to increase in number. Is he concerned that if a 70-year-old widow sold 30 per cent. of her equity, she would have a debt that would wipe out the value of the home at the end of just 20 years? Many women today live to the age of 90 or more.
Mr. Mudie : I share my hon. Friend's concern about the financial effects, and I will deal with them later. I am also greatly concerned about the surge of home reversion sales this year, which means that the market balance is changing.
This subject was last discussed in 2003, when neither of the two main types of equity release were covered by regulation. Since then the Government have moved to deal with lifetime mortgages, which have been regulated since 2004. Although home reversion schemes are still not regulated, the primary legislation went through the House in December 2005, just before the recess, and we await the decision of the Financial Services Authority as to when it will trigger the cover.
The objectives of the financial measures should be non-controversial. As is recognised in the debate on pensions, people are living longer and often find that
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their income is insufficient to meet their needs. It is not difficult to understand that the need for capital may arise, perhaps to fund home improvements, house repairs or even— although this is doubtful—a new car. People who have paid off their mortgage have considerable equity in their homes, and the schemes are designed to release that equity. Estimates of the available equity in the homes of the age group being targeted are in the range of £700 billion to £1,100 billion. That is the market that is being targeted. Only £4.6 billion has been taken up in schemes to date, so the extent of the opportunity becomes clear, in a market that could be as high as £1,100 billion.
The actuarial profession has issued two reports on the subject and suggests that take-up will increase from 6 per cent. to 15 per cent. within the relevant group, but others suggest an increase to four times the present level. That covers a tremendous number of elderly people.
Clearly, the opportunity to release some of the money tied up in a home to provide greater financial freedom for the elderly makes sense. However, as always when large amounts of money are involved, there are dangers for consumers. The 2003 debate took place against the background of an unregulated market, or perhaps a confused market with so many regulators that the matter sometimes fell between regulators, and no one picked up the difficulties. There was also a background of very bad schemes and inappropriate sales. The main demand was for the Government to empower the FSA to take over the regulation. That has largely been met, so why have a debate now?
There is no doubt that things have got better. Regulation is clear and schemes have been developed, but there is, understandably, great concern and nervousness about the products and whether they are being appropriately sold. The Minister could take the line that the products are regulated by the FSA, so what more is there to do? Knowing him as I do, I am sure that he will not say that, but other Ministers could take that line.
Let us look at the concern and nervousness. The major reason for it is that the target group is elderly and includes some of the most vulnerable people. If a younger person makes a bad or inappropriate financial decision, they can recover, but for the elderly on low incomes there is no way back. There is also concern that people who have worked all their lives to buy their house can see that asset drain away as the charging system operates.
In the current discussion, it must be understood that equity release is complex, long-term and a scheme of last resort. Customers should not enter into such schemes without fully understanding the extensive financial effects and, as the Consumers Association stated, should be aware of the possible effects on other benefits being claimed or to be claimed, and on tax, as well as the problems that could arise for people who downsize and move house, or remarry, or even if a member of the family moves back into the family home.
To touch on the more tangible financial effects of the two schemes, with a lifetime or roll-up mortgage the lump sum is paid immediately with no repayments. It should be realised and understood that the interest charge may be as high as 7 per cent. and compounded monthly or annually. Someone who
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borrows £20,000 would find that after 10 years the repayment would be around £40,000, and after 20 years would rise to around £80,000. The FSA—the regulator itself—gives the example of Hilda, who takes out a roll-up mortgage of £45,000 with a fixed interest rate of 7 per cent. When she dies 10 years later, the lender receives back the original loan plus the rolled-up interest, which totals £88,522. Her family receive the balance from the sale of the home, but 10 years after a £20,000 loan she is charged £88,500.
The financial effect of a home reversion can be equally disturbing. Someone who sells 50 per cent. of their property receives less than market value for that half in the first instance, and all future increases in value are shared with the provider. The FSA gives the example of George—it is certainly not me, because he is 68—who enters a home reversion scheme. He sells half his home for a lump sum of £20,000, which is 40 per cent. of the market value of the half share. When George dies 15 years later, his home is worth £150,000 and the provider—the company—takes £75,000 for that £20,000 loan. Such details of how compound interest eats into the value of a property may mean good business for the lender, but are chilling to the objective onlooker, especially if people who are not entirely clear about the costs and consequences involved.
All those schemes would be acceptable to the regulator, provided that the company had fully explained and advised the old person. Considering that most of the firms involved are household names, one would think that that could be guaranteed, yet the FSA found some worrying practices when it sent people to pose as customers. Mystery shoppers spoke to independent financial advisers and direct sales company providers. The FSA asked whether the question,
had been asked. It is important, as this is a last-resort product. Customers should be asked whether other things such as downsizing, the local authority, banks and so on had been tried. Seventy-seven per cent. said that the independent advisers had not asked that key question for determining the product's suitability for an elderly person. They had not been asked whether they had considered alternative methods. The figure is worse for the direct sales companies: 83 per cent. did not ask.
38 per cent. said that the independent financial advisers had not explained them, and 67 per cent. said that companies with household names had not explained them.
There were many other questions. The conventional wisdom, according to the mystery shopping survey, is that 70 per cent. of the individuals posing as customers were not asked about their financial situation, yet 77 per cent. were told by independent financial advisers, and 83 per cent. were told by direct sales companies, that they were eligible for equity release. If those people do not ask for information that, clearly, the majority of elderly customers are not asked for, they cannot look the
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customer in the eye and say that they are or are not suitable for equity release. The work that the FSA would demand simply had not been done.
David Taylor : My hon. Friend paints a vivid and bleak picture of what is happening with mortgages and reversions. Does he agree that a smallish minority of firms encourage the elderly to borrow more than they need? That drives up the charges that they pay and, of course, lines the pockets of a small group of advisers. Is that not reprehensible? Should the FSA step in there when it eventually produces a regulatory scheme?
Mr. Mudie : As usual, my hon. Friend anticipates an important point that I planned to make. I shall take the opportunity of his intervention to confirm that, for example, Norwich Union requires those who apply for one of the equity release schemes to borrow a minimum amount. Indeed, that is the situation with most, if not all, the providers. Someone may need only £2,000 or £3,000, but they have to take £15,000, £20,000—or, in an example that I have, even £25,000—over a long term. The time ticks away and the amount doubles in 10 years; it is quite frightening.
Clearly, the figures produced by the mystery shoppers suggest that the customer's specific needs are not being investigated. As such products should be taken up only as a last resort, the fact that in too many cases advisers make no real effort to satisfy themselves that the customer has exhausted every consideration, and that equity release is the only way forward, means that the potential for mis-selling is arising, if it has not already arisen.
The other sad thing about those details is how badly direct sales compare even with the less than satisfactory advice being given by independent financial advisers. The mystery shopping exercise has resulted in solicitors who deal with equity release being advised in a training course to refer any client who has been involved in a direct sale by the producer to an independent financial adviser immediately.
All this information raises a series of questions for the Minister. As mystery shopping demonstrated that complex high-risk products—the FSA's description, not mine—are being sold unsatisfactorily under regulated circumstances, what conversations has the Treasury had with the FSA about putting an end to such practices? Will the Minister discuss with the FSA what follow-up is taking place with the advisers and firms that perform so badly? Will random checks be made with customers to determine whether such practices took place in actual sales?
The Minister should consider how any delay in the FSA's becoming proactive on the checks may allow firms to avoid action. With mis-selling of endowments, not only were paper records available, but in most cases customers could advance arguments and describe the selling experience. With equity release, the elderly person may not have told his or her family what they signed up for, and it is only when the person has died and the estate is wound up that the existence of the contract becomes apparent. The customer would not be there to describe what happened, and the firm would be in a stronger position to deny mis-selling. Random checks seem the least that the FSA can do. Can the Minister can comment on that?
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I congratulate the Government and the Minister on introducing primary legislation on home reversion so promptly in December, but the latest word is that the FSA will not begin regulation until 2007—and that is on home reversion, which is an even fiercer instrument than the roll-up mortgage. I have been told that the timetable is in the hands of the Treasury. Can the Minister tell us whether that is so, and in view of the upsurge in sales of home reversion schemes, can he promise that he will take all steps possible to expedite the start of regulation?
It is almost universally accepted that greater than ever care must be taken with the selling of such products, in view of the vulnerability of the target group. Schemes in the late 1980s and 1990s were ill designed, and are a source of customer unease even today. There is a lack of confidence that providers appreciate the need to ensure that this financial product, which is probably the most sensitive one on the market, is sold only to the most appropriate people. The sort of hard-nosed behaviour illustrated by the mystery shopping exercise, the response to the Which? report and the way in which the industry defends stories such as the one in The Mail on Sunday last week—in which an astonishing interest rate of 367 per cent. was charged, and defended, by a household-name firm—leads the public to worry whether their trust that the elderly are in safe hands is correct.
I suggest that the Minister has immediate discussions with the FSA to agree steps towards telling the industry that investor confidence has been damaged too much in the past few years and that the mis-selling of such products is banned. It should be said that the remedy will be not only compensation but the stiffest financial penalties, and even the barring of firms whose selling of this product is found wanting. That is the least that we can do, bearing in mind the sensitivity of the product and the vulnerability of so many of the customers.
I shall quickly draw the Minister's attention to some other aspects of the sale of such products. I have concentrated my remarks on how important it is that they must not be mis-sold by giving bad advice to the elderly. The way in which the schemes are marketed is also very relevant—not only to the elderly. Norwich Union has been running an advert seeking to sell its product to people at the tender age of 55. My hon. Friend the Member for North-West Leicestershire (David Taylor) obviously comes into this category, so he should perk up—[Interruption.] Or is he 45?
In The Times on Saturday, Norwich Union ran an advert headed "Over 55? Thinking of equity release?" An attractive lady is pictured next to the heading, "New York? New car? Something for the family?" On visiting the website, it transpires that someone of 55 can get a loan for all those purposes, but the minimum loan appears to be an index-linked lifetime mortgage of £25,000. The Mail on Sunday the week before showed a gentleman of 55 in the same advert. According to actuarial tables, a lady of 55 can look forward to being around until she is 85, with a bit of luck, so this trip to New York, the new car or something for the family could end up costing her between £100,000 and £200,000, if we take the amount of compound interest and double up over 30 years. That is a staggering sum.
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Is the Minister content that a provider such as Norwich Union is selling such schemes to someone with five or 10 working years remaining? Would it make financial sense for this lady to commit herself to a possible 30-year loan—for an amount that she clearly does not need to pay for the items mentioned—instead of taking out a perfectly straightforward bank loan? If Norwich Union were doing its job and if someone of 55 asked for an equity release, they would be directed to another product straight away. It is clearly not appropriate for someone to sign up for this product when they have the possibility of earning additional income through work.
David Taylor : I saw that advert, and I can also confirm that I am in that age category. Should it not be headed, "Philippines and Hawaii at 55: poverty and homelessness at 85"? That is the roll-up impact of such loans, is it not?
Mr. Mudie : My hon. Friend talks perfect sense. What he describes is a real worry.
In case I am accused of being unfair to Norwich Union, I shall mention another household name: that of Prudential. The Pru is seen—probably deservedly—as a more enlightened provider, which is new to the market. It has an attractive draw-down scheme. Such schemes work on the basis that one can avoid the doubling of interest over 10 years by taking out the money in bits, so people are not charged for the parts of the loan that they do not need at the time. In other schemes they have to take out the whole loan because there is a minimum amount: they may need £5,000, but they have to take £25,000.
On its website, the Pru has an attractive draw-down scheme, which, instead of saddling customers with a big loan with compound interest, allows them to take the money in bits. The only drawback appears to be that the minimum amount that they can borrow is £20,000, so they would have to take a large amount overall. They can take more—the Pru will set a maximum sum and they can draw money up to that amount—but in the first instance they have to take £20,000, and over 10 years, the customer will have to pay back £40,000.
The last point that I want to raise with the Minister relates to the uncertainty in the market about whether the industry can discipline itself to act sensitively on appropriate sales. One of the main reasons for seeking a loan is for house repairs or improvements. Will the Minister begin discussions with the Office of the Deputy Prime Minister and local authorities to see whether the initiatives launched by councils to formulate loan schemes, often as a replacement for grant schemes that have been withdrawn, are worthy of encouragement and wider publicity?
If the Minister contacts Which?, he will be provided with a list of interesting initiatives around the country on the basis of which it would be easy to produce a scheme that could be put into the public domain, which would lead private providers to behave more sensibly.
In his pre-Budget report, the Chancellor introduced measures to encourage pensioners to install central heating and energy conservation in their homes. If a scheme could be introduced that meant pensioners did not have to take a chance on such costly, uncertain,
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long-term commitments as equity release to have urgent repairs or improvements carried out, it might mean that only those who genuinely understood the schemes and their consequential costs would use equity release.
However inadequate my remarks, I hope that I have put across the danger of those products—or, as the FSA describes it, the "high risk" of them. It is a great concern that firms market them as easy, almost painless ways of buying luxuries. Above all, the evidence of products being sold without the customer—who is sometimes frail or vulnerable—being fully advised should be deeply worrying to everyone connected with the product. There is a role for such schemes, but I fear that at this moment in the development of schemes, a number of ordinary decent people are being harmed. That should be made public, and should be addressed.
9.58 am
Dr. Vincent Cable (Twickenham) (LD): 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,
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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.
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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,
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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 answers to the, regrettably, rather large number of questions that I have put to him.
10.12 am
Mr. Mark Hoban (Fareham) (Con): I join the hon. Member for Twickenham (Dr. Cable) in congratulating the hon. Member for Leeds, East (Mr. Mudie) on
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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
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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 the 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:
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
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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 to their 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.
10.23 am
The Financial Secretary to the Treasury (John Healey) : I congratulate my hon. Friend the Member for Leeds, East (Mr. Mudie) on securing the debate. He is a distinguished long-serving member of the Treasury Committee, which in my experience over recent years has acted as an effective inquisitor of the Government. It is also an effective champion of consumers, especially in the financial services sector. My hon. Friend has played a part in giving some high-profile companies a hard time in
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front of the Committee. He has certainly done so with some of the providers referred to in this morning's debate.
I say to my hon. Friend that I will make sure that the chairman and chief executive of the Financial Services Authority receive a full transcript of the debate. I know that they will take carefully into account his specific comments about certain products and companies. I am certain that the FSA will take into account the broader comments that have been made in the debate as it puts in place the full regulatory cover that we intend to result from the legislation passed last year.
Like my hon. Friend, I pay tribute to the work of the Consumers Association, and, in particular, the work of the publication Which?. With other publications, it plays an important job in providing in-depth, well-researched and reliable information to consumers in such matters. He was right to say that the last time that equity release schemes were fully debated, it was before the Government made moves to regulate in this area. I welcome the fact that in opening the debate, he said that there was no doubt that things had got better since then. I welcome the debate; now is a good time to take stock because, as some contributors have said, many anticipate an increasing market in equity release, based on the regulation, and the fact that it should give greater confidence to consumers and lead to better products, and to the better provision of those products.
However, while stressing the potential of this market, it is worth keeping its scale in perspective. The SHIP—safe home income plans—group produced figures that suggested that the value of new lending in the equity release market in 2004 was just above £1.2 billion. That means that the size of the equity release market in that year compared with the volume of overall mortgage lending was less than 1 per cent. While the number of firms specialising in equity release is only 57, lenders and brokers in the more general mortgage market total almost 14,000.As the debate has made clear, it remains a fact that the products are complex. They can be valuable to consumers, but accurate information, good advice and care is required when taking them out.
My hon. Friend the Member for Leeds, East asked specific questions. He referred first to mystery shopping and talked about discussions that Ministers plan to have with the Financial Services Authority about some of the worries that he thinks arose from the mystery shopping exercise. As a result of the exercise and the FSA's review, many main trade bodies have issued new guidance to their members. The FSA remains in active discussion with the industry and consumer groups about how to secure higher standards of advice for consumers. My hon. Friend will know, better than I do, that the FSA holds firms to account and has been clear that it will take a hard line with those that do not sort out the problems about which it is concerned. As he will be aware from his work on the Treasury Committee, the FSA is operationally independent of the Government. However, it is required by law to ensure that regulation is effective and proportionate.
The hon. Member for Twickenham (Dr. Cable) raised his concerns about the timetable and the process for getting the regulation in place, especially for home reversion schemes. The first step towards bringing the arrangements into full FSA regulation was the primary
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legislation that enables home reversion plans to fall within the scope of potential FSA regulation, and that received Royal Assent last year. The second step is the secondary legislation required to amend the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 to bring home reversion plans into FSA regulation. The Government—led, of course, by the Treasury—are preparing for consultation on that stage. The third stage is for the FSA to draw up and consult on the rules that it proposes regarding sales of home reversion plans, and the fourth is for firms then to apply for permission from the FSA to sell home reversion plans.
The Government have a commitment to allow 12 weeks for public consultation based on secondary legislative proposals. Further down the track, the FSA normally needs to allow a minimum of six months between the publishing of its rules and the regulations coming into force. I concede to my hon. Friend the Member for Leeds, East that some may consider that process to be somewhat lengthy, but I assure him and other Members that this process is currently proceeding very smoothly, and my hon. Friend the Economic Secretary to the Treasury and I do not anticipate any unnecessary delays.
I welcomed the presence, and brief contribution, of my hon. Friend the Member for North-West Leicestershire (David Taylor). He is a former accountant and I welcome his interest in, and concern for, the consumer. I regret that he has been unable to stay for the conclusion of the debate, but I will ensure that he receives a copy of the Official Report so that he can catch up with the points that he has missed—perhaps that is a threat rather than a promise.
The hon. Member for Twickenham correctly stated that there is nothing wrong in principle with equity release schemes, although he has concerns that in certain circumstances they may not be fully appropriate for the consumers who purchase them. He asked a number of specific questions about backdating, scope, value for money in transactions and independent valuations. I expect that he will appreciate that those specific matters will be settled during the period when secondary legislation is being made, and in particular, when the FSA draws up proposals for the detailed rules.
The hon. Gentleman made a point of stressing his participation in debates during the passage of the Regulation of Financial Services (Land Transactions) Act 2005, and some of the issues that he raised—such as the de minimis question—were discussed during the consideration of that legislation. I think that on that issue it was agreed on all sides—the hon. Gentleman can correct me if I am wrong—that a de minimis rule risked distorting behaviour; it would probably allow unscrupulous firms to avoid the regulation intended by the legislation by dividing a loan up into more than one loan in order to keep below any de minimis threshold.
Dr. Cable : I fully understand that there are a lot of complex issues that the Minister and the FSA need to think through, but could I just get his reaction to a specific question that I put to him? Given that this is a complex—and possibly time-consuming—process,
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what are the advantages and disadvantages of backdating the coverage that consumers would derive under the financial ombudsman scheme?
John Healey : I think that that specific issue would be better examined in the context of the introduction of the regulations and rules, rather than in this general debate. However, the hon. Gentleman raised several more general points, to which I can respond.
The first point was about shared appreciation mortgages. I understand the concern arising from the particular cases that the hon. Gentleman cited. All MPs come across such constituents, and they—and certainly Ministers—have every sympathy for consumers who find themselves in financial difficulties having taken out a shared appreciation mortgage. Consumers can access the Financial Ombudsman Service if they feel that they have been badly advised about the mortgage or that it was mis-sold to them. However, the financial ombudsman has not to date found any evidence of mis-selling, and in those circumstances it is difficult to see that there are any grounds for compensation, let alone for the Government to step in and accept some sort of responsibility for compensation.
The hon. Gentleman then turned his attention to property investment clubs. Regulation to deal with collective investment schemes is already in place. In the light of concerns about the activities of property investment clubs, the FSA has reviewed what it calls its perimeter guidance. In general terms and in principle, the Government do not believe that it is appropriate for the FSA to regulate property purchase; that is a very different matter from the financial services regulation that it was specifically set up to deal with. However, the FSA's clarification of the perimeter has made it clear that some schemes that have previously regarded themselves as unregulated might need to be regulated by the FSA.
The hon. Gentleman also raised the question of the provision of free money advice. He may not be aware that only last week the FSA launched, jointly with the BBC, an online advice tool designed to help consumers by offering good advice on financial services. The FSA's more general financial capability work is now looking into what might need to be done further. In addition, the Chancellor—the hon. Gentleman will remember this, because he was shadowing the Chancellor at the time—announced in the 2004 pre-Budget report a £120 million financial inclusion fund, part of which goes towards supporting the development and provision of free face-to-face money advice through providers such as citizens advice bureaux, which the hon. Gentleman mentioned.
That leads me directly on to the contribution of the hon. Member for Fareham (Mr. Hoban). He began by stressing the importance of good financial literacy and understanding by consumers. I hope that he welcomes the moves that we have made and the investment we have put into financial literacy and money advice for consumers. He also stressed the fact that there is a legitimate demand for equity release schemes, and in a reflective contribution he helped to set the broader context for some of the specific issues that have cropped up. He urged us to bear in mind the interests that our constituents have in these financial products and their potential, and emphasised that they help to provide income for some people in retirement. He also rightly
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said that there is a need for regulation, but that we must also regulate in order to meet the aspirations of our constituents and potential consumers.
Regulation has been the crux of the debate. Regulation is not intended to discourage the sale of such products. Instead, our approach is to enable people to make informed choices, to offer necessary consumer protection, and to ensure that there is a competitive level playing field in the equity release market.
I was prepared to set out a degree of detail and background for equity release products and the development of regulation in this field, but the participants in the debate are probably far better informed than many other Members. Therefore, suffice it to say that there are two basic types of scheme: mortgage-based schemes or lifetime mortgages, and reversion plans. The difference between them is clear: in mortgage-based schemes the householder retains ownership of the property, whereas in reversion plans the reversion provider becomes the owner of whatever proportion of the property is sold.
Mortgage-based equity release schemes have been regulated by the FSA since 2004. However, home reversion plans are not currently regulated by the FSA, as they are, effectively, transactions in land and are therefore not covered by the Financial Services and Markets Act 2000. However, the Government fully accepted the case that such schemes needed to be regulated to help people to make informed choices, to offer proper and valuable consumer protection, and to make sure that there is a competitive and fair market in these products.
As I have said, home reversion plans are not currently regulated by the FSA, but that is not to say that purchasers of such plans are completely without protection. The home reversion market is subject to voluntary regulation through the SHIP group. Members of SHIP agree to comply with the code of practice and to undertake a fair, simple and complete presentation of any plan that they offer. Crucially, they also offer a guarantee that consumers will never owe a lender more than the value of their home; in other words, they give a "no negative equity" guarantee. Clearly, those protections are a long way short of the protection offered by statutory regulation and by the FSA's more general regime.
Mr. Mudie : When I looked at the SHIP website, I counted 19 firms that are members of SHIP, which is a voluntary organisation, whereas there are 57 providers. Does the Minister not agree that the home reversion scheme operates in a market in which a minority of providers are in SHIP, and so give some cover? The majority are free to operate as they think appropriate.
John Healey : My hon. Friend makes a reasonable point, but just to be clear, the figure of 57 that I gave earlier is the number of firms operating in the equity release market. The majority offer lifetime mortgages rather than home reversions—in other words, they offer the products that are already regulated—so he should take as an encouraging sign the total number of members of SHIP, as that represents a large part of the biggest providers of the home reversion-type product.
Because the current voluntary system does not provide the sort of protection that consumers need, we launched a consultation in November 2003, and in 2004
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the Government announced that we would in future empower the FSA to regulate those financial products. We introduced the required primary legislation, the Regulation of Financial Services (Land Transactions) Act 2005, last year. I am pleased to say that it received support from both sides of the House. It was debated pretty fully, and my close friend and colleague the Economic Secretary led the debate as the Bill made its passage through Parliament. It gained Royal Assent just before Christmas.
As I have said, as soon as possible, we in the Treasury will introduce the necessary secondary legislation to define precisely which products and activities will be regulated by the FSA. Once the secondary legislation has been consulted on, the FSA will consult on the detailed rules that will apply to those products.
Given the powers granted by the 2005 Act, the sort of rules that one would expect the FSA to apply to home reversions would include rules to ensure that providers advise of risks as well as benefits when advertising reversion schemes, and rules on advice to consumers to ensure that advisers have considered implications for tax and benefits—a point made by my hon. Friend the Member for Leeds, East and the hon. Member for Twickenham—and have matched the consumer's overall needs and circumstances to the product features. Also, one would expect a requirement for firms to issue key product information to consumers in a clear and understandable format. Furthermore, FSA regulation will offer consumers access to the Financial Ombudsman Service in the event that they wish to make a complaint, and that will provide them with cover under the financial services compensation scheme.
Encouragingly, although perhaps not surprisingly, the industry has been a keen proponent of regulation for reversion plans, as it wants to remove any consumer confusion and, of course, boost consumer confidence in the market as a whole. Indeed, when my hon. Friend the Member for Leeds, East secured this debate, my hon. Friend the Economic Secretary was contacted by the Association of British Insurers, which made clear to him directly its support for enhanced consumer protection of home reversion schemes. It makes three recommendations: first, advice provided by firms to consumers should be simple and complete; secondly, advice should include schemes' implications for tax and means-tested benefits; and, thirdly, consumers should have their properties independently valued, a point raised in this debate.
In summing up, it is fair to say that equity release schemes can help people—particularly the asset rich but cash poor—to enjoy a higher standard of life, but they are complex products and are not suitable for everyone. It is important to understand what they will mean in practice, and consumers should always seek independent financial advice. I direct consumers and hon. Members, if they do not have copies to hand in their constituency office, to a leaflet on equity release published by the FSA called "Thinking of Raising Money from your Home?"
FSA regulation ensures that consumers have the right information and advice to hand when choosing a mortgage, and it provides redress mechanisms in the event of complaints. Proportionate and effective regulation should protect elderly people, who are some of the most vulnerable people in our society, allowing
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them to make informed choices about the financial arrangements that are best for them. Of course, increased consumer confidence is an essential foundation for a competitive, diverse and fair mortgage market in the UK—a general economic aim that I am sure all hon. Members who participated in this debate would support.
Sir Nicholas Winterton (in the Chair): I congratulate the Chamber on an interesting and well argued debate, and we thank the Minister for his full response. I now suspend the sitting until 11 o'clock.
10.46 am
Sitting suspended.
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