Prudential Regulation Authority: Equity Release Sector

Lord Sharkey Excerpts

Wednesday 5th September 2018 Lords Chamber

Asked by

[Lord Sharkey]

To ask Her Majesty's Government what assessment they have made of the report by the Adam Smith Institute, Asleep at the Wheel: The Prudential Regulation Authority and the Equity Release Sector, published on 7 August.

[The Minister of State, Department for International Development (Lord Bates)]

My Lords, the Government take the issues raised in this report very seriously. Equity release offers an effective way for home owners to enhance their standard of living in later life, but must not threaten their financial stability or place consumers at risk. The Prudential Regulation Authority is alert to the issue. It is acting to set a clear and more precise prudential expectation for insurance companies’ risk management of equity release mortgages.

[Lord Sharkey (LD)]

The equity release mortgage market has trebled over the last five years and continues to grow strongly. Many of these mortgages have no negative equity guarantees—in other words, the loan value is capped at the price of the house when sold. The Adam Smith report says that insurance companies selling these mortgages have so misjudged the risk that another and bigger Equitable Life scandal is in prospect. Will the Minister say what action is being taken to prevent that?

[Lord Bates]

The responsibility for that lies directly with the PRA, the responsible regulator. It is in regular contact with the industry on setting new guidelines. That was already done in 2016. Just before the report, to which the noble Lord referred, was published, a new consultation was published by the PRA on this issue—the effective value test, which was used to calculate an appropriate amount that must be held in capital on the balance sheet to reflect the risks being entered into. That consultation is open until 30 September. There are some proposals, which, if they find support, will be implemented by the end of the year.