Stomach-churning U-turn by the ERC

So when I read that the Equity Release Council is “open-minded” about products that do not meet these standards, my stomach churned.

Time can be a great healer when it comes to obscuring memories of financial disasters.

Time can be a great healer when it comes to obscuring memories of financial disasters

So let us have a short history lesson and remember why such guarantees were put in place in the first place.

It followed a series of scandals, some of which saw pensioners being sold loans attached to investment products which were supposed to repay the interest.

The most infamous of these were the West Bromwich Building Society home income plans.

In 1998 West Bromwich lost a High Court battle brought by 190 customers and was ordered to pay compensation averaging £13,000 to £14,000 per client.

We can only imagine how many people might be caught in a similar scandal in today’s much larger market.

Equity release is a worthwhile product. But it is also very complex and being sold to, potentially, very vulnerable people.

Few understand the consequences of interest rolling up on to a loan, even with detailed explanations.

That is precisely why rules are tight – including the need for independent advice and a no-negative-equity guarantee.

Even with these rules, complaints about mis-sold equity release schemes are rising as the numbers sold increases.

Meaningful research into the equity release market is rare.

In 2007, a report, Pricing and Risk Capital in the Equity Release Market was presented to the Institute of Actuaries by Hosty, Groves, Murray and Shah.

This suggested that the cost of the no-negative-equity guarantee should add about 12 basis points to the cost of borrowing – rather less than the current gap between normal mortgages and equity release loans.

So perhaps lenders need to look more at their profit margins and less at removing vital guarantees.

In June, Douglas Andrews and Jaideep Oberoi presented the report Product Innovation: Home Equity Release for Long-Term Care Needs.

This proposed that lenders could receive a return based on the house price index plus an additional percentage rather than charging a fixed rate.

It suggested a public-private-partnership be established to bear the risk of a no-negative-equity guarantee.

Equity release is ripe for innovation. Mortgage costs need to come down as do exit penalties. Flexibility needs to increase, and there is a clear need for products allowing borrowers to repay the interest and to swap lenders if they wish.

But innovation should not mean throwing out guarantees which ensure that borrowers can remain in their homes and that lenders cannot raid other parts of their estate.

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Wake-up call for firms

Baroness Ros Altmann’s findings that pension firms are leading customers towards their own helplines and sales people in wake-up packs is depressingly unsurprising.

The idea of treating customers fairly seems to be anathema to many firms. Treating ourselves to customers’ savings would be a better slogan.

I received a letter recently from an investor who had contacted their firm about withdrawing their pension but ‘they just kept sending letters about buying an annuity’.

There had been a mistake, with the same packs being sent out more than once. But on seeing the literature it was easy to see how he believed he was being railroaded towards an annuity.

It has been argued that pension firms are likely to give more prominence to their helplines above those of third parties. But the profit motive has no place here.

Pension firms have had decades to make money out of these investments – and most have made a jolly good job of that aspect of their work.

The Government and regulator have made it clear that at retirement the interests of the consumer are paramount.

Firms should take on board Baroness Altmann’s findings without the Government having to intervene yet again.

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High Fidelity

Fidelity’s proposed entry to the exchange traded funds market is welcome indeed. On my first meeting with Fidelity many years ago I had the feeling it was a company trying to behave in the right way. That feeling has not changed.

Fidelity has come a long way from the company which, in the 1990s, was disparaging of trackers and insisted that managed funds were the only way forward.

Since then, it has often been at the forefront of increasing choice and has, in some cases, helped to drive down charges.

Competition from Fidelity in the ETF market can surely only be a good thing for investors.

Tony Hazell writes for the Daily Mail’s Money Mail section

Email: t.hazell@gmail.com