FCA keen to boost equity release as part of wider mortgage market review

Speaking at an event in London, FCA strategy and competition director Christopher Woolard said that greater use of so-called 'equity release' arrangements could benefit "an older population that is increasingly asset-rich, but cash-poor". However, such arrangements were still a "dirty word" for many people despite action to "help clean up the market" by both regulators and industry", he said.

The FCA's review would consider whether regulation "[needs] to adjust to foster more of a market in areas like equity release, whilst still protecting consumers", he said.

Equity release products allow those aged over 55 to access some or all of the value of their home as cash, either in the form of a 'lifetime mortgage' repayable from the value of the estate after death or by selling all or part of their home to a 'home reversion' provider in exchange for the right to continue living in it until death. These products are relatively popular in the US, but the market for them is "significantly smaller in scale" in the UK and EU, according to Woolard.

The FCA director said that there was a "debate" to be had about the role of equity release products, as part of a wider drive to improve competition between mortgage providers. The FCA committed itself to a mortgage market study, beginning early in 2016, as part of its most recent business plan, he said.

"We believe there is a debate to be had about what products and markets could exist and whether more entrants and innovation here might benefit consumers with greater choice and improved products," Woolard said.

"Certainly, you cannot avoid the need to engage on what is a fundamental question: what impact will the aging population have on the UK's mortgage markets as we move forward? That's why we want to use today as a first step in a conversation with industry and consumer bodies about what options could exist in the future. And that is a conversation we want to continue over the autumn," he said.

The number of people aged over 85 is predicted to increase by 244% over the next 35 years, while the UK itself has "one of the fastest aging populations in Europe, which itself is relatively old compared to other continents", Woolard said. People are now living longer after retirement on an average pension pot of £30,000, while at the same time owning property assets "of around seven times that number or more", he said.

"The ability to access some of that asset, as a restricted lump sum or a gradual income, could make a significant difference to people's lives," he said.

The FCA's business plan for 2015/16 contained a commitment to review the mortgage market, in particular the impact of the changes introduced in April 2014 by the Mortgage Market Review (MMR). The MMR introduced stricter affordability tests which take into account a wider range of lifestyle factors, and require lenders to consider how future interest rate rises will impact on the customer's ability to meet their repayments.

On its introduction, the MMR was predicted to affect mortgage approval rates by anything up to 20%, Woolard said. Instead, approval rates have only fallen by 2%, from 43% before the introduction of the new rules to 41% at present, he said.

"We do, however, have to remain sensitive to the impact of these reforms over the long run," he said. "And we certainly need to keep focussed on outcomes and whether the market is working well. Even if we believe our rules are proportionate, we need to remain alert to how firms are interpreting them and the effect on consumers."

Noting that "80% of the mortgage market sits in the hands of six main players", Woolard said that competition could "play a key role in ensuring the mortgage market works well".

"If competition is functioning effectively, it should lead to lower prices, better consumer service and more innovation in the form of products that better address consumer needs," he said.