Equity release rule delays - a triumph for lenders and consumers alike

The Prudential Regulation Authority has announced that it will suspend the implementation of new rules governing solvency requirements for equity release lenders who offer no-negative equity guarantees (NNEGs) until the 31st of December 2019 - a year later than previously scheduled.

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Claire Barker | Managing director, Equilaw
13th November 2018
Claire Barker Equilaw
"It would seem incredibly precipitous to condemn an entire (and entirely successful) industry on the basis of some massive ‘what ifs?’"

The regulator (which oversees approximately 1,500 banks, building societies, insurers, credit unions and investment companies on behalf of the Bank of England) said that it had taken the decision as a result of ‘feedback’ from the lending industry and to ‘clarify the position for insurers planning their year-end 2018 processes’ - a cause for considerable relief among the many lenders who had warned that the changes would be detrimental to profits.

The new rules have been designed to counter growing fears within the Bank of England as to capital holding requirements and the ability of equity release providers to cover NNEGs in the event of house prices cooling or actively declining. They will change the way in which lenders assess the future value of properties and ensure that more capital is held to cover lending liabilities. Yet, reaction to the proposals has proven intensely controversial within the ER sector, with the Equity Release Council condemning the PRA’s preliminary consultation paper for its ‘excessive prudence’ and for ‘assuming a 25 to 30% fall in property prices (with) no recovery’.

However, a subsequent report by the Adam Smith Institute and the BBC has asserted that the industry’s reliance upon ‘voodoo valuation methods that (have) no scientific validation’ to calculate NNEGs, together with the possibility of longer living customers and a decline in house prices could ultimately cost lenders billions of pounds in losses and has criticised the PRA for making ‘half-hearted’ attempts to resolve this. So, what gives? Figures published by the ERC for Q3 2018 have revealed that the value of equity release lending rose to its highest ever level for an individual quarter between July and September (to £1.02 billion), with many within the industry now confident that lending totals could reach and breach the £4 billion barrier in 2018.

In short, equity release is going from strength to strength. Moreover, with house prices continuing to grow (albeit at the slowest annual rate for almost 5 years) and overall forecasts pegged at around 3% for the next decade (according to PwC), it would seem incredibly precipitous to condemn an entire (and entirely successful) industry on the basis of some massive ‘what ifs?’. A degree of caution is always to be applauded, of course, yet it would be churlish to regard this implementation delay as anything other than a triumph for both lenders and consumers alike and as an opportunity for regulators and the industry at large to get their houses in order (no pun intended).

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