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Finance: Equity Release

Volume 709: debated on Thursday 2 April 2009


Asked By

To ask Her Majesty’s Government whether they welcome and will consider promoting equity release schemes that are fully regulated, avoid negative equity and are underpinned by independent legal advice.

My Lords, since 2004 the Financial Services Authority has regulated mortgages, including lifetime mortgages, which are one type of equity release product. In 2007, the Government extended the scope of FSA regulation to cover home reversion plans, which are the other main type of equity release product, to help to ensure a level regulatory playing field for the equity release market. Equity release is a complex financial product. Consumers considering equity release should seek independent financial advice.

My Lords, I thank my noble friend for that reply. Does he agree that well regulated equity release can help to fund the adaptions and social care that will give an older person the choice of staying in their own home, rather than going into residential care? Will the Treasury therefore encourage other departments to assist—for example, by developing partnerships with local authorities and kitemark schemes and by disregarding equity release for pension credit?

My Lords, I certainly believe that equity release can play a valuable part in managing people’s financial affairs, but it is an inherently complex product. My noble friend is therefore right to emphasise the importance of advice. Equity release is a very small part of the housing finance market—less than 0.25 per cent of mortgage loans relate to it—but for those who perhaps find themselves in a position where they have high assets but low income, it can be a valuable and important part of their financial strategy. I would like to see the Government encourage that, as long as the mechanism was well regulated and people were aware of the risk. The trade association representing those active in this area has developed a highly commendable code of practice.

My Lords, will the Minister answer the noble Baroness’s question about a disregard of equity release for pension credit purposes?

My Lords, we would have to be very careful about encouraging a line of financial activity that may be driven by an outcome on pension credit rather than being in the best interests of the individual from a stand-alone financial point of view.

My Lords, is the Minister aware that many analysts are saying that one of the reasons for the low take-up is general discomfort about corporate safety, in terms of both the companies offering the products and the people doing the regulating? Does he not agree that the failure of the FSA in general to cover itself in glory is adding to people’s disquiet about taking up such products?

My Lords, I am not aware of evidence that the FSA’s credibility as protector of consumers’ interest is a serious issue. It is clear that the FSA’s role in prudential supervision has come under challenge and the FSA acknowledges that it needs to do more to improve its standards. Today’s G20 meeting will probably set a framework within which some of that work will be taken forward. I am not aware that the FSA’s deficiencies in consumer protection are as grave as the noble Baroness’s question might suggest. As far as the credibility of those active in the market is concerned, it is clear that some quite major lenders do not want to be involved in this product because they see it as too fraught with hazard. However, the risk lies ultimately with the individual, which is why good regulation and transparency about risks and consequences are critical to the development of this interesting product area.

My Lords, is it not important that the growing number of elderly people can remain in their own homes if those homes are properly adapted? Does the Minister therefore agree that safe schemes that enable them to purchase social care so that they can be with neighbours and friends are very important? Should not the Government try to promote the best of those schemes to enable that to happen, particularly while local authorities are so short of funds?

My Lords, I think that I have already indicated that this financial product has considerable merit and I would like to see the Government take whatever action they can to encourage its growth, although I shall not be drawn further into pension credit at this point. However, if there are other things that the noble Baroness and others believe that the Government could do to encourage an outcome whereby people could remain in their homes, we would be pleased to hear them. I completely agree with the noble Baroness. I know that remaining in the community was important to my own mother in the final years of her life. Being forced to sell one’s home is a very unsatisfactory outcome, which the Government will take all reasonable efforts to avoid occurring.

My Lords, the Minister wants to avoid talking about pension credit, but I would like to probe him a little further. Does pension credit act as a disincentive to elderly people utilising equity release, which may be a very valuable opportunity for them? Will he undertake to look at whether the pension credit rules can be relaxed so that equity release in appropriate circumstances—not all would be released as capital—would not be neutralised by the pension credit?

My Lords, the noble Baroness and I seem to talk of nothing other than pensions at the moment. I am sure that Sir Fred Goodwin will not be looking at an equity release product at this stage, but I will certainly take it upon myself to look at this issue to become more familiar with the points that the noble Baroness is making and no doubt I will speak with my colleagues in the DWP. However, she will appreciate that I cannot make any commitments.

My Lords, the Minister implied earlier that the FSA was entirely clean in relation to its consumer protection. I declare an interest as chair of Consumer Focus and I commend to my noble friend a recent report on regulating regulators from a consumer point of view, in which the FSA did not come out as in the clear as he perhaps implied. I am sure that he is aware of this, but I thought that I should draw it to the attention of the House.

My Lords, I am grateful to my noble friend for reminding me. I think that I was talking about relative concerns as opposed to absolute concerns.