Prudential Regulation Authority: Equity Release Sector

Lord Davies of Oldham Excerpts

Wednesday 5th September 2018 Lords Chamber

[Lord Bates]

What it reflects better is an issue of pricing, which is a fair debate. The no negative equity guarantee, which is very important to lots of consumers, because they do not want to leave their families with the potential liability, is a key part of the offer. The pricing of that, depending on which measure you take, says either that we assume there will be house price growth over the next 15 to 25 years, or that there will be no growth at all, or that interest rates will accrue at 5% to 6% or at 1% to 2%. The variance that the noble Baroness has identified lies in whether you apply the effective value test at a different point between those two extremes to come up with a different number. The purpose of the consultation paper is to get clarity so that all interests are protected.

[Lord Davies of Oldham (Lab)]

My Lords, the rate of increase in the market has been exceptional over the past five years, and there are clear indications that this will carry on at a rate not dissimilar for the immediate future, so I do not know the extent to which the regulators are being effective in this respect. It is obvious that home owners will be eager to borrow in circumstances where incomes can scarcely keep up with inflation, but we have to guard against things going badly wrong. What if house prices shudder to a halt or even fall? There are reasons to think that such issues could arise in the economy and we would be back to Equitable Life, which caused such tremendous damage to people 20 years ago.

[Lord Bates]

That is of course why within the industry itself—and indeed with the regulator—the normal level at which borrowing is taken from the home is between 30% and 40%, to allow for that cushion. We have to recognise also that this has two benefits: to individuals as, for most people, their home is their largest asset and being able to release some capital to enhance their quality of life in later life is good; and to the annuity holders on the other side of the balance sheet from the equity release, who have been suffering badly as a result of gilt yields being around 1.5%. The ability of life insurance companies to match these two needs and to offer a better deal to both is something to welcome. The noble Lord is absolutely spot on when he says that we need to watch it; we need to watch it very carefully and what I have outlined is what the regulator is doing already and the rules that it has applied, and also the consultation that is open at this moment to see whether more needs to be done.