Equity Release Council response to Adam Smith Institute report

7 August 2018 | Equity Release Council

Equity Release Council response to Adam Smith Institute report

Keeping equity release customers safe


Equity release products – including lifetime mortgages and home reversion plans – are among the most highly regulated financial services products in the UK.


As well as formal regulation by the Financial Conduct Authority and Prudential Regulation Authority, Equity Release Council members also follow a strict set of consumer-focused industry standards, established in 1991, to ensure a safe and reliable market. These standards are regularly reviewed so they remain fit for purpose.


Support for equity release


Recent growth in the equity release market has been driven by genuine consumer needs among UK’s ageing population[1] in response to wide-ranging financial challenges. Common uses of housing wealth include supplementing pension incomes, paying for social care, paying off existing debt, supporting family members and meeting lifestyle costs.


Both UK financial regulators and Members of Parliament have made public statements in support of equity release and its benefits to consumers and society.[2] [3] [4]


The high standards of products and advice available today are among the reasons why record numbers of homeowners aged 55+ use some of the wealth in their homes to help pay for later life[5], and why equity release currently receives fewer complaints than any other type of home finance product[6].


Planning for the future


Customers of Equity Release Council members enjoy three levels of protection when they take out an equity release plan: structured and regulated financial advice; independent face-to-face legal advice; and clear product safeguards.


These safeguards include a No Negative Equity Guarantee (NNEG) when customers take out a lifetime mortgage product from our members. This means that when their property is sold and agents’ and solicitors’ fees have been paid, even if the amount left is not enough to repay the outstanding loan to the lender, neither the customer nor their estate will be liable to pay any more.


The NNEG and other Council standards – such as the guarantee of a fixed or capped interest rate for the entire length of the plan – provide certainty for customers that they are protected against the impact of future changes to interest rates and property prices.


Rigorous requirements


Media reports of a publication from the Adam Smith Institute this week have raised questions about the growing equity release market and whether lenders are taking enough precautions to fulfil the NNEG, for example, if people live longer than expected or if economic circumstances change and house prices fall.


Managing risk is fundamental to what the equity release and insurance industries do. Equity release lenders are regulated firms that operate within strict UK and EU rules, with the resources to withstand one-in-200-year events. For example, the UK insurance sector is subject to the Solvency II regime, which is regarded by many as having the most rigorous and sophisticated regulatory requirements in the world.


While the detail of pricing decisions are commercially sensitive, common factors in offering a No Negative Equity Guarantee include three fundamental lines of security:


  • a prudent view of house price trends with allowances for future uncertainty
  • stress tests for very adverse scenarios
  • significant extra risk capital to ensure that, in an extreme adverse event in the residential property market, lenders remain able to meet future obligations to policyholders.


We understand the general approach to NNEG pricing reflects current accepted rules. The ratings agency Fitch stated in June 2018 that UK equity release mortgages are “not generally treated as risky assets… thanks to conservative loan-to-value ratios (LTVs) and limited exposure to short-term falls in property values.” [7]   The Prudential Regulation Authority (PRA) recently suggested that equity release mortgages are “a suitable investment for annuity writers as part of a diverse portfolio” and that the market is “relatively small in the big scheme of things” at “around 1% of total insurance assets”. [8]

Since the NNEG became a feature of equity release plans in 1991, every customer who has been entitled to this protection from our members has had this commitment fulfilled.  

The Council, its members and other industry representatives are currently working with the PRA as part of a consultation process on equity release regulations and will continue to engage constructively in this matter.


Who should I speak to for more information?


If you are interested in finding out more and already have an equity release plan, please contact your lender with any further questions.


If you are interested in finding out more and do not have an existing equity release plan, you can find an Equity Release Council member from our online member directory.


For media enquiries, please contact [email protected]


[1] The number of people aged 55+ in the UK has grown by 31% in the last 20 years (Office for National Statistics, June 2018)

[2] Equity release mortgages “play an important role and will play an increasingly important role” (Sam Woods, Chief Executive of the PRA, Treasury Select Committee hearing on the work of the PRA, 11 July 2018)

[3] “In light of pension shortfalls, housing equity will continue to play a key role in later life and retirement planning… [lifetime mortgages] remain a useful tool and meet a number of consumer needs” (FCA Ageing Population occasional paper, September 2017)

[4] House of Commons debate on the Financial Guidance and Claims Bill, April 2018

[5] Over 37,000 new customers agreed an equity release plan in 2017, with almost 67,000 new and existing customers making withdrawals of housing wealth in total last year (Equity Release Council, January 2018)

[6] The FCA received 1,179 complaints about equity release products in H2 2017 or 6 complaints for every 1,000 customers – making up just 1% of all complaints about home finance products, In comparison, it received 2,993 complaints about second and subsequent charge products (34 per 1,000 customers); 15,405 complaints about other unregulated home finance products (6 per 1,000 customers), and 95,547 complaints about other regulated home finance products, including mortgages (10 per 1,000 customers)

[7] UK equity release mortgages generally “not risky” (Fitch, June 2018)

[8] Sam Woods, Chief Executive of the PRA, Treasury Select Committee hearing on the work of the PRA, 11 July 2018