SMART LAWYER DEFINITION EXPOSES ELDERLY TO MIS-SELLING RISKS

3.27.32pm BST (GMT +0100) Tue 24th Jun 2003

Equity Release Schemes Exempt From Regulation

The £250m home reversion market, which targets the elderly selling their homes to pay things such as plugging holes in their pensions, is today being exempt from regulation by the Financial Services Authority.

Although MP's will today discuss enabling legislation to allow the Financial Services Authority to regulate certain mortgage and insurance advice, products and sales, 'equity release reversions schemes' have been left out of the new legislation. A "smart lawyer definition" exempts these schemes because they do not qualify as mortgages within the meaning of the law. Vince Cable MP, Liberal Democrat Shadow DTI Secretary, said:

"It is the elderly and vulnerable that are most at risk with these schemes and it is simply unforgivable, although sadly characteristic, for Government to drag its feet on this issue.

"It surely is within the wit of the Treasury and its draftsmen to come up with regulations which cover this area."

"It is not acceptable that the sale of quasi-mortgage products that benefit from a "smart lawyer definition" are not regulated, when similar products just across the divide are.

"Regulation should prevent mis-selling, so on the back of pensions and the split capital crisis, it is essential that the loophole is closed rapidly."

ENDS

Notes for Editors:

On Tuesday 24 June 2003, the Commons' Standing Committee on Delegated Legislation will debate:

Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2003. Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.1) Order 2003.

Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2003. Financial Services and Markets Act 2000 (Exemption) (Amendment) Order 2003.

These Statutory Instruments will allow for the regulation, under the auspices of the Financial Services Authority, of the arranging, advising and selling of certain mortgage and general insurance products.

The Government has decided to exclude Equity Release Reversion Schemes. There is currently consultation on the issue. The text of the Treasury press release dated 5 June 2003 included the following:

"The home reversion market is estimated to currently be worth over £250 million a year and is growing rapidly. The target market tends to be elderly, and sometimes vulnerable, people who have paid off their mortgage. Informal discussions with stakeholders have provided no evidence of consumer detriment at present. However given the rapid expansion of the market and concerns over the potential for consumer detriment there will be an open consultation examining the cost and benefits of regulation."

Equity release products allow homeowners to release value from their investment in their residential properties. There are 2 key routes by which this can be achieved:

'Lifetime mortgage products' - releasing equity by way of taking out a mortgage, repayable on death; and

'Reversion products' - sale of all/part of the equity, in return for right to occupy property until death.

The sale of mortgages is currently covered by the Code of Mortgage Lending, and enforced by the Mortgage Lending Compliance Board. In addition, these statutory instruments will bring mortgages within the remit of the Financial Services Authority ("FSA"), the regulator for financial services matters under the terms of the Financial Services and Markets Act. The sales of reversion products are not similarly captured.