The Treasury announced last Monday that home reversion plans will be regulated by FSA. This is the result of a full public consultation which closed in February this year. There were 53 responses of which 46 supported regulation and 7 were opposed.
What are home reversion plans?
Equity release schemes are financial products, or sale and purchase arrangements that allow homeowners to release the value of their property above any amount owed on a mortgage. There are two basic types of schemes; lifetime mortgages and home reversion equity release plans.
A lifetime mortgage is when the homeowner takes out a mortgage loan secured on the property. Ownership remains with the homeowner and the loan with interest is repaid when the property is sold. A home reversion plan is when the homeowner sells part or all of the home in return for a lump sum payment and maintains the right to remain in the house until they die or move home. When the former owner dies or moves house the reversion provider can sell the property.
Both types of equity release schemes are primarily aimed at the same market – older consumers who have paid off their mortgages.
Why are home reversion plans an issue?
Consumer organisations and firms have expressed various concerns that might lead homeowners to end up in an inappropriate financial arrangement. These concerns include:
- Mis-selling: for example being advised to take out one sort of equity release plan when the consumer would be better off trading down to a smaller property or taking out another type of equity release plan;
- Pricing: the consumer being offered a reversion of an unfairly low value, due either to a low valuation of their property, or to a low proportion of that valuation being offered as a reversion;
- Regulatory boundary: From 31 October 2004 the FSA will have the power to regulate the selling of first charge mortgages under the Financial Services and Markets Act 2000. This will be applicable to all first charge mortgages, including life time mortgages on property where at least 40% is used as, or in connection with, a dwelling by the borrower or members of their immediate family.
The FSA also has limited powers to make rules relating to the unregulated activities of regulated firms. Where firms sell both lifetime mortgages and home reversion plans, the FSA has made rules for these regulated firms to cover both products. Also, if a home reversion plan is used to purchase an annuity in order to provide income the sale of the annuity is regulated by the FSA and subject to the Financial Ombudsman and Financial Services Compensation Scheme rules.
However, the FSA regime was not going to extend to firms that offered only reversion plans and carried on no other regulated activities.
The concern was that consumers may not understand the difference between the regulated and unregulated parts of the market, particularly as FSA regulation will require lifetime mortgage providers to consider both lifetime mortgages and reversions. Firms selling only reversions would however not have been caught by FSA regulation. Consumers also may have been confused by the differences in redress arrangements.
Some of the potential benefits deriving from FSA regulating home reversion plans
- By analogy with lifetime mortgages, the FSA may regulate the conduct of business of the selling, marketing, advising on and arranging of reversion plans. This would help to address the concerns about mis-selling.
- The respondents to the consultation paper thought FSA regulation could ensure that valuations would be independent of the reversion provider.
- FSA regulation could also ensure that advisers were trained and able to advise on wider financial planning issues, including the tax and benefit implications.
- Respondents to the consultation paper highlighted that FSA regulation would make it easier for customers to seek redress in the event of mis-selling through the Financial Ombudsman Scheme.
Next steps
The Treasury will consult on the definition of home reversion plans for the forthcoming legislation and once the scope of regulation has been defined FSA will consult on the details of the regulatory regime.
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