Robert Sinclair: Equity release isn’t like Equitable Life

Ryan Bembridge

August 8, 2018

Robert Sinclair AMI

Robert Sinclair (pictured) of the Association of Mortgage Intermediaries has dismissed the parallel drawn between the equity release mortgage sector and the Equitable Life scandal in yesterday’s Adam Smith Institute report.

The report, written by Kevin Dowd, professor of finance and economics at Durham University, said there was an equity release scandal brewing like the one that afflicted Equitable Life but “on a larger scale”. It suggested that a number of lifetime mortgage lenders could be exposed due to the no negative equity guarantees in place.

Equitable Life closed its doors to new business in 2000 after failing to put enough money aside for promised pension payouts, causing hundreds of thousands of policyholders to lose their money.

However Sinclair, chief executive of the Association of Mortgage Intermediaries, said: “Five years before it went under our investment committee told our customers to get out of Equitable Life.

“But I look at the equity release market and I see nothing that causes me to have major concerns.

“Equitable Life was based on two different scenarios: they were invested badly and there were guaranteed annuities which they couldn’t afford to repay. Also they were ripping off the customers!”

For Sinclair whether providers are doing their jobs correctly depends on how they are valuing the property now – which should be the same as any other part of the mortgage market – whether the interest rate being applied is appropriate, and the level of longevity risk, i.e. how long the loan will run for.

He added: “Individual transactions may have longevity risk but as a portfolio transactions begin to even out if you are a large provider.

“The risk is the gap between the current valuation and the longevity risk which is a judgement on how much house prices rise.

“Do I think there’s a huge issue here? Clearly if house prices fell by 30-40% there is a short-term issue for everyone.”

The Equity Release Council released a statement responding to the Adam Smith Institute report but it failed to address whether the accusations made against the industry have any validity.

A council spokesman said: “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 [no negative equity guarantee], 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. 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….

“…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.”

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