Equity release plans to be regulated

HOME reversion plans, the financial products used by older people to tap into the rising value of their homes, are to be regulated following a wave of concern about possible mis-selling.

Announcing the decision, financial secretary Ruth Kelly said that buying such a policy represented a huge decision concerning what was often the most important and sometimes only significant asset of elderly people.

She added: 'It can have significant implications for tax, benefits, inheritance and long-term financial planning.

'Regulation will help people to make informed choices, offer valuable consumer protection and ensure that there is a level playing field in the equity release market.'

The Treasury will begin a consultation exercise to agree a definition of the plans to be caught by the new legislation.

The Government‘s decision was praised by consumer bodies and financial services organisations, who feared the plans were being sold to people who didn't understand the implications.

Consumer groups said the Government was prompted to act amid fears that it could be allowing a mis-selling scandal - to rival the endowment and pension mis-selling crises - to develop.

The Council of Mortgage Lenders and the Association of British Insurers also welcomed the move, saying it was a market that needed strong consumer protection.

Demand for equity release is predicted to explode from £1bn to £50bn a year over the next five years as elderly homeowners use the huge increase in the value of their homes to make up for underperforming pension plans.

Consumer groups expressed concern, however, that many homeowners were making decisions based on incomplete or inadequate information.

The Government said there was still 'no evidence' of any widespread problems but said the fact that the home was such an important asset for so many people meant it was important to oversee the market fully.

The Consumers' Association has previously warned that equity release schemes should be used only as a last resort. It says the complexity of individual plans means it is crucial to seek independent advice.

'Home reversion' is the most popular form of equity release, where customers trade in part or all of their property in exchange for a lump sum or income, living in the house 'rent-free' until they die.

Other types of policies include the 'roll-up' plan, which provides cash, usually a lump sum, for those willing to take out a mortgage. Interest on the loan rolls up and adds to the outstanding debt, which is cleared by the sale of the house on death.

There are also 'home income' plans, which will become known as lifetime mortgages under the new regime. An interest-only mortgage* is taken out and the cash is used to buy an annuity, which pays a monthly income. Mortgage interest is paid monthly and the capital is repayable on death.

Mortgage-backed equity release schemes will be covered by the mortgage regulations to be introduced in October.