Mortgage Regulation (Hansard, 17 December 2003)

§ Mr. Barry Gardiner (Brent, North) (Lab)
This is not the first time that I have risen in the Chamber to speak in a debate called "Mortgage Regulation". I am sure that the Minister and her officials entertain the hope that it might be the last-a hope that I freely admit to sharing.
The subject of mortgage regulation is better when it is in the background. When it is to the fore, it almost certainly means that a large number of people are being taken for a ride. Only one central principle informs my remarks today: if it looks like a horse, smells like horse, bites like a horse and kicks like a horse, then it is a horse and should be treated like a horse. Applied to mortgages, the message translates like this: if it looks like a mortgage and loans money like a mortgage, and if that money is secured against a house like a mortgage and does not have to be repaid until some time in the future like a mortgage, then it is a mortgage and should be regulated like a mortgage.
My remarks relate mainly to the market for the financial products commonly known as equity release mortgages. That market requires comprehensive, simple and transparent regulation, because the products on sale are multifarious, complex and opaque. In short, this is a high-risk market. How and why has this market developed, and why does it present such a high risk of mis-selling? Let us consider the good news. Despite rises in house prices, inflation in the United Kingdom is the lowest that it has been for more than 30 years, and our interest and mortgage rates are the lowest for more than 40 years. That means that the average mortgage payer is saving £2,750 a year under this Government compared with the previous Conservative Administration, and is spending 10 per cent. less of its disposable income on housing costs.
However, all that has a dramatic effect on the market. As yesterday's Evening Standard reported on its front page:
House prices in the south east of England are predicted to rise by 8 per cent. next year. That phenomenon is not restricted to London. The front page of The Western Mail today predicts that prices in Wales will rise by an astonishing 14 per cent. next year. For anyone who is still upwardly mobile in the housing market, and who is buying a larger house, the money that they are saving on their mortgage payments does not go into their bank account, but accrues to them in the form of equity in their home. Only those who are static or trading down receive the full benefits of the reduced mortgage rates over time.
We therefore have a market in which the following have come together: a dramatic increase in property prices at the same time as a low in equity performance; an ageing population at the same time as a savings crisis of £27 billion; and increased confidence in the housing market just when confidence in the stock market has dipped. Those indicators all point to an increase in the equity release market, which appears to be the perfect solution to these problems and just what is needed for a property-rich but cash-poor older generation. Estimates put the unmortgaged equity of pensioners at some £459 billion, so it is clear that there is a market to be tapped. 275WH The Council of Mortgage Lenders estimates that that market could be worth more than £50 billion over the next 10 years, from a starting point of what Prudential estimates was only £850 million taken out in equity release schemes last year.
It is clear that we are entering new territory. Who is entering that territory? It is not the young or even the middle-aged couple who still dream of moving up one more time to their perfect home, but the couple who have found that their pension pot did not quite buy them the annuity that they had imagined it would. They may be the victims of pension mis-selling or of the Equitable Life debacle, who are finding that life in retirement on less than half their projected income is not at all comfortable. They have a lovely big house but they cannot afford its upkeep.
Equity release is then suggested, perhaps to people who are getting on in years, who may be impatient with long forms or contracts and complicated explanations. Some may have got to the stage in life where they are not as sharp as they once were, and are therefore vulnerable to those who would sell them a product that does not correspond to their real needs. Equity rich, cash poor and slightly senile: the perfect victim for a whole new generation of financial service vultures.
My attacks are not aimed at the industry as a whole. Equity release is a valuable product, and in a carefully regulated environment with informed consumers, it is a worthwhile one. It can be a good and efficient way to ease financial worry for those in retirement who want to top up their pensions and for those with additional savings who understand the dangers associated with the product. Disreputable companies are in the minority, but we are discussing high-risk products, and with such products a proper regulatory structure is essential. That structure is even more important when it is clear that the industry will face great changes over the next few years.
We are on a new frontier with the equity release market. The next few years will see the industry drive hard into that territory. Increased longevity, an ageing population and a shortfall in pensions contributions make it a fertile land that is increasingly attractive for companies speculating on the fortunes that lie ahead. It is therefore essential to put in place a regulatory system that will prevent the cowboys from exploiting that market.
There is good news: the Financial Services Authority has already come to the rescue. Mortgage regulation by the FSA starts next year and lifetime mortgages will be included in it. I welcome that move. It will come as no shock to the Minister to hear me welcome the Treasury decision to hand over the regulation of mortgages to the FSA; she knows how hard I campaigned for it. Sadly, however, that is where my praise stops, for the simple reason that that is where the regulatory approach stops and where things start to get a little confusing.
Although the FSA will regulate lifetime mortgages, second charges, which consumers regard as no different from equity release products, will be regulated by the Consumer Credit Act 1974. Well, no, that would be too simple. If one's second charge is more than £25,000, I am afraid that for now and the foreseeable future, it will have no regulatory framework because there is a £25,000 limit in the 1974 Act. The bigger the second charge on one's home, the less regulation is in place for 276WH one's protection. I am confident that the Department of Trade and Industry is committed in principle to lifting the limit, but since it requires primary legislation, we cannot expect to see it for some time.
In that time, we can expect to see many people fall foul of the cowboys and through the gaps in the regulatory system. There is an exception to that: where the second charge has been taken out through one of the main high street banks that are already regulated by the FSA, the constraint in the 1974 Act will not apply and those people will continue to enjoy the protection of the FSA. As far as second charges go, all is clear as mud. A transaction is not regulated by the FSA but by the 1974 Act, unless more than £25,000 is taken out, in which case it is not regulated by anyone, unless it has been done through a high street bank, in which case it is regulated by the FSA. That is perverse. Companies that have good reputations and wide public confidence are subject to the strict regime of the FSA for second charges of more than £25,000, but companies that do not have good reputations and are most likely to pose a threat to the consumer in a high-risk market are encouraged by being exempt from all regulation to pick off second charge customers.
Our story would be simple if it ended there. Sadly, it does not. We now turn to home reversion schemes, which are typically marketed at the elderly, whereby people sell a percentage of their property for an agreed amount. In return, they receive a lump sum, an income or both. On the death of that person, the company still owns a share in the property and will take it when the house is sold. The company will have benefited from any increase in property prices in the intervening years. Therefore, the transaction is largely predicated on an ever-rising property market, so that the equity released when the house is sold is greater than the initial money put in.
The great difficulty with such schemes is that there is no clarity about the true cost of the money that is released. Let me give an example. A home is worth £100,000. The owner agrees to sell to the reversion company 75 per cent. of the property for £30,000. He receives £30,000 now and, when he dies in 15 years' time, the property is sold for £200,000. The company takes £150,000—its 75 per cent. Share—and the estate receives £50,000. Against the company's notional profit of £120,000 must be set the interest on £30,000 for the 15-year period, which would he just over £47,000 at 6.5 per cent. interest. The company's true profit is just under £73,000. That is a terribly expensive deal when compared with interest-only or rolled-up interest equity release products. Of course, it depends on how house prices change during the intervening period. In principle, that is unknowable, but it makes for a product that is highly opaque.
Home reversion is regarded as a property sale and not akin to the standard equity release products, although it is based on similar principles. Sadly, it is not regulated in a similar way; in fact, it is not regulated at all. There is no regulatory structure for home reversion policies—no regulatory authority, no recourse for bad selling and no compensation.
We must remember that the target market for the product is the old and the infirm, who are often the most easily persuaded. That is pure cowboy territory. The current regulatory system leaves us with the good, the 277WH bad and the ugly. The good is the properly regulated system for lifetime mortgages, which will come under the powerful gaze of the FSA next autumn. The bad is the patchwork regulation that is offered for second charge products. It is an over-complicated and under-regulated system. The ugly is the situation in which many people will find themselves if they turn to home reversion schemes, which fall under an unregulated part of the market that will, by its very nature, attract the less reputable and most despicable characters in the industry.
The attraction of home reversion schemes will only increase as the FSA rides into town to regulate lifetime mortgages and kick out the cowboys. Those cowboys will turn to the unregulated section of the market, in which there is no need to consider the consumer's needs and no recourse for consumers if they are offered the wrong product.
My customary role is that of a critic of the financial services industry for burying the details in the small print. Sadly, we are one step ahead of that today and I must criticise the regulatory system itself for its lack of clarity and transparency. How can the Government seriously turn to the industry and ask for clarity and transparency—the hallmarks of a properly regulated industry—if they cannot even create a regulatory structure that is simple, transparent and comprehensive?
My fear is that as the market grows, it will attract less reputable companies. We are talking about the least regulated areas of the market and clients who will be some of the most vulnerable people. We have seen that combination before and it is not a good mix. I share those views with many others, including the Council of Mortgage Lenders, which wants home reversion schemes to be regulated; Age Concern, which wants to see the elderly protected; and even John Tiner, the chief executive of the FSA. In a recent speech to the CML, John Tiner pointed out that confused customers are more susceptible to a heavy sales pitch. He asked the rhetorical question: how many borrowers actually understand the value of the product features they have been sold? As the CML notes, the current regulatory regime is likely to lead to confusion among consumers, who will not appreciate the difference between regulated and non-regulated equity release products.
The Treasury is examining the area and has a consultation document on home reversion schemes, but to me it seems all too clear that all the products should be regulated as one under the same regulatory umbrella. If 77 per cent. of consumers complain about confusing advertising and 68 per cent. complain that they cannot understand the term "APR", how will they understand the regulatory structures of equity release products, let alone the products themselves? The products are allied to properties and the buying of properties. To the consumer, that is simple. If it looks, smells, bites and kicks like a horse, it is a horse and should be treated like a horse. If it looks like a mortgage and loans a person money like a mortgage., and if that money is secured against their house like a mortgage and they do not have to repay it until some time in the future like a mortgage, it is a mortgage and should be regulated like a mortgage.

§ The Financial Secretary to the Treasury (Ruth Kelly)
I must congratulate my hon. Friend the Member for Brent, North (Mr. Gardiner) on securing another debate on this important subject. I will respond to some of his more general comments before turning to the specifics of the regulation of equity release. He will acknowledge that, since the Government came to power in 1997, the new framework for regulation has been substantially and radically improved. The setting up of the FSA, which brought together nine sectoral regulators and created a single ombudsman scheme and a single financial services scheme, has clarified the landscape for the typical consumer and made it much easier to negotiate what used to be complicated decisions. We have moved a long way forward in the past six years.
Of course, it is always difficult to draw boundaries, and my hon. Friend points to the operation of consumer credit. He will be aware that, last week, the Secretary of State for Trade and Industry launched the consumer credit White Paper, which introduces greater transparency and simplicity of rules on advertising. It will ensure that consumers understand credit agreements both before they enter into such an agreement and after one has been concluded. It will introduce standardised rules for calculating terms such as the APR. People will have the confidence of knowing the amount that they have to repay. It will enable, for the first time, the conclusion of on-line agreements, making the process much easier for consumers. It will introduce a strengthened licensing regime to enable the Office of Fair Trading to fine rogue traders and to establish whether a firm is fit and proper to be in the consumer credit market. The £25,000 limit will be abolished under the terms of the White Paper. I think my hon. Friend will agree that that will be a significant move forward and will clarify the existing situation.

§ Mr. Gardiner
I am grateful to the Minister for giving way. The abolition of the £25,000 limit will make a difference, but can she shed any light on the time scale in which that will take place? One of the most worrying concerns that people have is that it may be long enough for some serious mis-selling to take place.

§ Ruth Kelly
As I am sure my hon. Friend is aware, the timing will depend on primary legislation. I could not possibly preempt the contents of any future Queen's Speech, but he will realise that this whole area is a priority for the Government. The Consumer Credit Act 1974 had not been reformed for 30 years. We spent considerable time working on the details of the White Paper to ensure that the proposals were sensible and workable, and that we got them right. As soon as parliamentary time allows, we will legislate. That will be a move forward for consumers.
My hon. Friend will also recognise that all banks and building societies are already regulated by the FSA. Irrespective of the value of the loan, consumers still have recourse to the financial ombudsman service. I hope that that goes some way to meet his point. He also, rightly, raised the issue of macro-economic stability, which brings huge benefits for consumers who are planning their future finances. Although the level of debt has risen in recent years, the level of assets has also risen sharply 279WH and net household wealth is up by more than 50 per cent. since 1997. The household financial balance sheet has not slipped significantly into the red as it did in the late 1980s. The macro-economic environment is much more conducive to long-term planning.
I turn now to the specific points that my hon. Friend made about mortgages. Of course, he is right to point out that a mortgage is one of the biggest financial decisions that a consumer makes. Equity release falls into that category too. These are significant financial decisions. It is absolutely essential to protect consumers adequately. Indeed, I should point out that the FSA is the only statutory regulator in the world, as far as we aware, that has consumer protection as one of its statutory objectives. As he knows, there will be better protection for consumers when the regulation of mortgages and mortgage advice comes into force on 31 October 2004. The new regime will give the borrower greater confidence in the decisions that he or she is making.
Regulation of mortgages, alongside the regulation of general insurance, will also simplify the regulatory landscape by ensuring that there is a single regulator for mortgage advice, general insurance and retail investment business. As my hon. Friend said, the FSA will regulate the selling of mortgages by first legal charges on UK property where at least 40 per cent. is residential accommodation to be occupied by the borrower or their immediate family. That definition was derived following consultation and is designed to protect loans when a person's home may be at risk as a result of being sold an unsuitable product.
As my hon. Friend will know, equity release schemes allow home owners to release the value of their property above any amount owed on a mortgage, and as he pointed out, the market is not only fairly large at the moment, but is set to grow even further in the future. Many people would argue that that is good and that people should be allowed to release equity from their homes. Whether one agrees or not, it is probable not only that today's generation of the elderly will want to release equity, but that today's generation of young people will try to build up equity in housing as an alternative to traditional pension provision to secure a decent retirement income. That could prove a risky strategy, but as a Government we must acknowledge it and design sufficiently robust policy to ensure that if it happens, it does so in a secure environment.
As my hon. Friend pointed out, there are two basic schemes: mortgage-backed equity release schemes, which are also called lifetime mortgages, and home reversion equity release plans. The first type, lifetime mortgages, will be regulated by the FSA from 31 October 2004, but the second type, home reversions, are 280WH sale and purchase arrangements rather than financial services products. As such, they fall outside the scope of the Financial Services and Markets Act 2000.
The pensions Green Paper, "Simplicity, Security and Choice: Working and Saving for Retirement", which was published in December 2002, stated that the Treasury would be looking at options to create a level playing field for the regulation of equity release and home reversion plans to protect consumers and make the market work better". In the wake of that Green Paper, my officials held a number of discussions with stakeholders in the first half of this year. Although stakeholders were unable to provide any evidence of significant consumer detriment at present, they were concerned about the projected expansion of the home reversion market and the potential for consumer detriment in the future.
It was in the light of those concerns that we announced that the Government would carry out an open consultation on whether home reversion equity release plans should be regulated by the FSA. We published our consultation paper on 11 November, and responses are expected by 13 February 2004. The primary purpose of the consultation will be to arrive at a more in-depth analysis of the costs and benefits of regulation. As I am sure that my hon. Friend knows, we never extend the scope of regulation without considering the costs and benefits extremely carefully.
We hope that the consultation will provide evidence on consumer detriment in particular, and on the basis of that evidence, we will need to establish whether regulation would be appropriate.

§ Mr. Gardiner
Does my hon. Friend accept that one of the most difficult aspects is that because the scheme's maturity is evident only when the person dies, ipso facto, no one who remembers what was said when the contract was made can make a complaint? In such a situation, it is much more difficult to show the fault.

§ Ruth Kelly
That is precisely the sort of issue that we hope the consultation will draw out. We are also interested in evidence as to whether the current system of voluntary protection works or whether, as my hon. Friend is suggesting, it does not protect consumers adequately. It is only right that we ask people to submit evidence so that we can make an informed judgment on the issues. He is right to draw attention to the issue, and in the interim period, the FSA is already working on information that it can provide to consumers on the pros and cons of engaging in equity release, so that they can make an informed decision without having to wait for any subsequent regulatory decision that the Treasury may make.