Article | May 2007 | by Duncan Young
How can we improve the reputation of equity release?
This question suggests that equity release has a universally poor reputation, and yet surveys of customers who have taken out equity release products show that they are generally pleased with both the process and the outcome. So if concern over the reputation of equity release does not come from customers where does it come from?
It should not come from product providers who, by abiding by SHIP rules, have a comprehensive set of safeguards and product features. Nor from advisers as the FSA has been regulating, mystery shopping and so on for some time now and significant improvements have come through. Added to this, product development over the last few years has been substantial in both lifetime mortgages and home reversions with drawdown products rapidly approaching half of all sales.
I would suggest that in fact the reputation for the equity release market is, to a major extent, lost in a circular argument.
Two or three years ago the equity release market was growing quickly and much was made of it as new product providers launched fresh initiatives and many advisers sat the requisite exams. However, the market then slowed down at a time when all commentators were predicting substantial growth. The CML, the Institute of Actuaries and publicity seeking consultancies all forecast £2bn a year, £5bn a year or even £10bn a year of sales. The latest SHIP statistics show an annualised sales figure of just over £1bn. This means that current sales do not match the forecasts –something must be wrong, so let’s blame reputation is the commentators cry. It could be that demand is simply not there and the forecasters got it wrong.
In saying this, I do not deny that the impact of newspaper articles and TV shows, which hark back to pre SHIP days, is negative. Sales will undoubtedly have been lost. If sales were growing briskly, however, the atmosphere would be one of support and confidence not navel gazing and breast beating.
My argument is perhaps a tad complacent in that I do believe that the reputation concern is one that will be overcome with a few more sales. The need, therefore, is to increase sales and much will then fall into place.
If analysing the lack of sales it is worth approaching it as an economist. What are the demand factors and what is the supply situation?
In demand there is the aging population, the Labour party induced pension crisis, debt consolidation and a change of attitude towards inheritance by baby boomers. Each of these could cause a significant change in equity release sales. On the supply side many more advisers have taken their exams. Interest rates have been reduced, both in absolute terms and in relation to government gilts, to the extent that some product providers are losing money. New products have been introduced especially in the areas of drawdown and modern home reversions.
Nonetheless there are still drawbacks. Some early redemption penalties are not only draconian but also incomprehensible and products are still generally sold by product providers as the last major financial contract that a person enters into – so who can blame the customer for thinking that equity release is a product of last resort?
Demand should be there. Supply has never been so large and never been at such a good price. So what is this analysis missing? Because if that missing ingredient could be found then sales would rise and reputation would be unsullied.
Most research amongst the public focuses on those who have completed a transaction, as I mentioned earlier. There has been little work done with the person who is simply a member of the public. I am aware of one piece of privately commissioned clip board research carried out in the north of England outside supermarkets. The research results highlighted the normal demand factors of inadequate income coming through but it also showed a lack of awareness of equity release – only just over half of those interviewed had heard the term equity release. Therefore, by implication, these people would be unaware of the benefits and drawbacks of the products available.
Another major point highlighted in the research was the answer to where respondents would go for advice – 40% said that they would go to their bank. Yet no high street bank has embraced equity release. One has to wonder as to the reaction received by a member of the public enquiring about equity release.
These two issues can be helped considerably by advertising and different ways of making the product available, such as affinity deals. SHIP has a major role to play here.
There is also a major supply side question thrown up by the research which current products do not fully address. People were asked why they would enter into an equity release transaction and over half said for a regular income – not a lump sum, not a drawdown, but a regular income. This suggests that the proceeds of equity release should be invested in an annuity, but for an adviser to recommend this would be to go against the cannons of the FSA.
But, what if the customer is right? What if a regular income for life is what people want and need from these products? Then the supply side of the economics equation is deficient and demand will not materialise.
Every time I look at annuity rates I wince at what I perceive to be poor value. But if the aim of an equity release transaction is to provide an income for people then perhaps an annuity has a role to play. Not necessarily the current design of annuities but maybe the use of a temporary annuity, or a development of some of the ideas of Living Time or the MetLife and Hartford products, could create a solution that would not cause an explosion at the FSA headquarters in Canary Wharf and still legitimately meet public demand. Sales and reputation would then both be enhanced.