denotes premium content | Jan 7 2009 Feature
posted 1 Mar 2000 in Volume 5 Issue 3
Equity Release - Latest Developments
in the Market and at SHIP
There is an increasing tendency amongst financial services companies
to target the elderly with their products. This reflects demographic trends and
the increasing wealth of elderly people as well as rising house prices. Such
marketing has its downside, in that the elderly are more vulnerable to
mis-selling due to lack of financial awareness, possible failing health and the
inability to recover from any financial disasters. Highlighting this risk, the
Daily Mail has been running a campaign for tighter standards to be followed in
the marketing of financial services to the elderly.
A key product in assisting the
elderly is equity release and the risks of mis-selling were recognised some 9 years
ago resulting in the formation of SHIP - the organisation of product providers
dedicated to the promotion of safe home income plans.
A brief history of Equity
Release
Home
income plans and equity release plans have been around for over 30 years and,
correctly structured, can provide a safe and successful method of releasing
capital from one's house when in retirement.
Originally only reversion plans were
offered, whereby part or all of the home was sold to the provider in return for
a lifetime tenancy. The proceeds were used either to purchase a life annuity or
release cash. Later on during the 1970s, mortgage based schemes were launched.
During
the 1980s a number of providers entered the market, offering products which
were not suitable for the elderly people they were being sold to - so
called 'unsafe schemes' including investment bond schemes and roll-up plans with
variable interest rates. The 'home income plan scandal' erupted in the late 1980s as
interest rates soared and property values fell, putting a number of elderly
people into financial difficulties.
Safe Home Income Plans
It was in this set of
circumstances that SHIP was launched in 1991 to promote safe schemes. The
founder members of SHIP were the leading providers at the time, Allchurches
Life, Carlyle Life, Home and Capital Trust and Stalwart Assurance. The founding
members felt it necessary to launch the organisation to bring confidence back to
the market place by being dedicated entirely to the protection of planholders
and the promotion of safe home income and equity release plans.
Protection offered by
SHIP Members
All participating companies are pledged to observe the SHIP Code of
Practice (which is backed by a more detailed set of rules governing the conduct
of this business), and to display the SHIP Logo in their brochures and other
printed material as a guarantee to their customers. The Code binds these
companies to provide a fair, easy to understand and full presentation of their
plans. Any scheme endorsed with the SHIP logo will be properly explained and
safe. As a further safeguard, the client's own solicitors will oversee the
transaction on his or her behalf and must sign a certificate to acknowledge that
the essential features and implications of the chosen plan have been brought to
their client's attention. No SHIP protected plan can proceed without a signed
certificate.
The SHIP Code of Practice
1. Members of SHIP agree to provide a
fair, simple and complete presentation of their plans. The benefits,
obligations, variables and limitations must be clearly set out in their
literature, including all costs which the applicant has to bear in setting up
the scheme, the position on moving, the tax situation and the effective changes
in house values.
2. The client's legal work will always be performed by the solicitor of
his or her choice. In all cases prior to the completion of the plan the
solicitors will be provided with full details of the benefits the client will
receive. The solicitor will be required to sign a certificate to the effect that
the scheme has been explained to the client.
3. The SHIP certificate will set out
the main costs to the householder, stating, for example, whether the loan is
repayable on death or when part or all of the property has been sold.
The SHIP
Guarantee ensures three fundamental questions are answered with a 'yes' :
A SHIP Plan guarantees that the customer cannot lose their home
whatever happens to the stock market or to interest rates.
SHIP has been
instrumental in bringing confidence back to the market place and by 1995 the
home income plan market began to expand again. The SHIP Code became recognised
as a kite mark that protected customers in the way it was intended.
Developments in the
Market Place
A measure of the success of the campaign has been the interest shown by
larger institutions in entering the equity release market place. Starting in
1998, the following plans were launched with considerable success:
- The Shared Appreciation Mortgage from the Bank of Scotland
- The Protected Appreciation Mortgage from Barclays
- The Capital Access Plan from Norwich Union
- The Home Equity Release Mortgage from Northern Rock
All of these plans have built on the original product designs to
reflect the changing needs of the elderly, and provide more flexibility. However not
all of the plans would meet SHIP requirements - the ability to move house being a
key concern. The plans have concentrated on providing a cash payment for the
release of equity in the homes of elderly people and have opened up a wider
market than was previously available and being targeted by the original SHIP
founders. For the more traditional plans, income tended to be the primary need,
but the newer plans have increasingly been attractive to retired people for whom
additional income is not the only requirement. The strong brand names of these
new entrants, and the strength of their distribution, has enabled the market for
equity release to expand rapidly. Perhaps the only difficulty experienced with
these newer plans has been the availability of finance for the product
providers, which has resulted in some providers withdrawing their products after
initial success. From the list above, only Norwich Union and Northern Rock are
currently active.
The entry of larger companies to the equity release market is proof that
not only has confidence been restored but that the demand from consumers for the
product is large and growing. Indeed, it is estimated that there is between
£300-£400 billion of unmortgaged equity in the homes of those over 65 in the
United Kingdom.
One negative development which hit the traditional mortgage based plans
was the announcement of the withdrawal of MIRAS. Whilst the Revenue have agreed
to protect existing plans, the benefit is not available for new plans which
effectively makes these plans unattractive to all but the very old (85+).
Developments at
SHIP
SHIP is
pleased with the success of its campaign to establish proper minimum standards
for the conduct of home income plans and equity release plans. We believe that
it is vitally important that we stick to the key principles of the Code of
Practice to avoid any return to the unsafe plans of the past. Not only are we
well recognised in the product provider market place, but a number of
organisations, like Age Concern which provide customers with advice recognise
the value of the SHIP Code, as does the personal finance press. Over 6,000
enquiries were handled by the SHIP secretariat in 1999, all generated by press
articles quoting SHIP/the SHIP Code. 'Safe' plans arranged by SHIP members have
increased from £32m in value in 1995 to an estimated £250m in 1999.
For the first
seven years of its life, SHIP membership was unchanged. However, three new
members have joined in the past two years, as confidence has returned to the
market place, and following careful examination of their products and practices
to ensure that they meet the SHIP principles. These were:
- BPT Bridgewater (Home Reversions) Ltd, a subsidiary of Bradford Property
Trust plc.
- NPI (now part of AMP)
- Norwich Union
What these new members recognised was the importance of minimum
standards in this market place and the need to demonstrate to potential
customers that their products and practices meet independently recognised
standards, so that customers can be confident about the company they are doing
business with.
As
well as promoting safe home income plans to the public, SHIP is increasingly
involved in inputting to various bodies involved in regulatory change, such as
The Financial Services Authority, The Department of Trade and Industry (now part
of the FSA), the Treasury and the National Consumer Council to name but a few.
When regulatory change is being considered, particularly when it applies to
specialist areas, it is important that those with specialist experience advise
the decision makers to ensure that any regulation that emerges is appropriately
tailored for the specific audiences. There are two key areas of regulatory
change currently under consideration or in progress:
1. Mortgage regulation. As an
organisation, SHIP is fully supportive of the Government's move to bring
mortgage regulation under statutory control. However without further input the
regulations will be appropriate for the general mortgage market but may not take
into account specific needs and protections required for the elderly and this is
where SHIP will add value by giving advice, based on the collective experiences
of its board members.
2. Welfare reform and long term care. Whilst not concerned directly with
consumer protection in the long term care market place, equity release is one of
the means of funding for long term care which has been mooted on a regular basis
and SHIP has provided input to the debate, particularly through research done by
The National Consumer Council as well as the Treasury.
The future for SHIP
As an organisation, SHIP
is evolving with new membership and changes in the requirements of customers, as
well as the regulatory landscape. With this in mind, SHIP is currently reviewing
its rules to ensure the details are appropriate to today's market without
compromising the key principles. SHIP has also strengthened its complaints
procedures, to harmonise them with the ombudsman arrangements applicable to most
of its members.
SHIP now represents a range of smaller and larger providers of home
income plans and equity release plans. As such it is an increasingly influential
voice in the promotion of minimum standards to ensure consumer protection. The
mission is not over because confidence has returned. We need to be increasingly
active to ensure the lessons of the past are not forgotten as new and larger
institutions recognise the value of the products and the increasing demand in
this sector.
The other main thrust for SHIP is to influence all statutory and
non-statutory regulation that is concerned with the use of these products for
the elderly. For example, the recently announced statutory regulation of
mortgages is welcomed by SHIP, but we are keen to ensure that standards are set
for this class of business which take into account the specific risks from the
consumer point of view. To reiterate a point made earlier, we must learn from
the mistakes of the past and ensure they are not repeated. We believe that the
SHIP Code of Practice and its underlying principles have as much value today and
for the future as they did 9 years ago.
Author - Mark Goodale, Chairman of
SHIP
Safe Home Income Plans, Tolworth Towers, Ewell Road, Surbiton, Surrey
KT6 7EL
Email address: info@ship-ltd.co.uk
(website: www.ship-ltd.co.uk)
