§ Motion made, and Question proposed, That the sitting be now adjourned.—[Jim Fitzpatrick.]9.30 am
§ Mrs. Angela Browning (Tiverton and Honiton)
It is a pleasure to serve under your chairmanship again, Mr. McWilliam. At a previous sitting, I recall our having some interesting literary exchanges, but I will spare you those today. I do not think that the work of D. H. Lawrence is appropriate to today's debate. Our discussions will be important, although they probably cover only a small group of elderly people who were missold home income plans in the 1980s. At the end of my remarks, I shall refer to the current situation.
I have been a Member of Parliament for 11 years and I took up such cases in 1991 before I was elected. The fact that I still have some of them on the books, so to speak, is of great concern. The problem has caused anxiety to other hon. Members, in particular my right hon. Friend the Member for West Dorset (Mr. Letwin), and my hon. Friends the hon. Members for Poole (Mr. Syms) and for East Devon (Mr. Swire). They would have liked to be present today, but they are in Committee this morning. What I am about to outline affects their constituents, too.
Back in the 1980s, many people who had retired on small pensions were attracted by sales people who sold them home income plans whereby they could not only increase their income but usually receive a cash sum to spend on something that they found attractive, such as a trip abroad to visit their children or a new car. Such transactions were not explained to them, however, and were clearly cases not just of mis-selling but of fraud. People were sold equity-linked, high-risk products on which they were told that they would receive a return that would not only provide them with an additional income but would pay off the interest on a mortgage if they remortgaged their property.
When I raised the matter in 1999, I received great assistance from the insurance ombudsman, who took up many individual cases in my constituency and restored several constituents to the position that they were in before they unfortunately took out the home income plans. However, five constituents have been unable to access such restoration and the interest on their properties is still mounting. The building societies that set up the mortgage have made helpful arrangements whereby they have promised not to foreclose so that people have the right of tenure in their property until they die, but many elderly people wish to sell for one reason or another—often to go into residential care. As the interest is compounding, when they die, the property is likely to be owned outright by the building society.
I draw attention to the cases in my constituency involving people who were sold policies by Sonia Thompson who worked for DBS Financial Management Ltd. The case has been before the court, 182WH but I have clear evidence that I will share with hon. Members of that particular lady falsifying mortgage applications. Even when the building society concerned was informed about the falsified documents, it still agreed to go ahead and co-operate with Miss Thompson in arranging the home income plans. That is why the building societies that still hold the deeds for the properties should do the decent thing.
§ Mr. John McWilliam (in the Chair)
Will the hon. Lady assure us that the case to which she is referring is not lying before the courts and that it has been decided?
§ Mrs. Browning
The case is not lying before the court, Mr McWilliam. It went before the court, but unfortunately it was thrown out because the witnesses were elderly and unable to do justice to it. I shall quote from a letter that I received from the Britannia building society, which is one of the building societies involved in such matters in my constituency. When I raised the matter on the Floor of the House in 1999, Britannia agreed to visit my constituent. The letter stated:we are more than happy to try to deal sympathetically with members who have problems relating to the DBS settlement and I am hopeful that we will be able to do something positive to help.I am sorry to say that, despite that assurance, nothing has happened with Britannia building society. The people who were involved have moved on to other departments or have left the organisation. I raised the matter because I believed that Sonia Thompson, acting on behalf of DBS, acted illegally in the way in which she carried out her work. One of the policy holders and mortgagees, a Mr. Budgen from Devon, who gave me permission to put his details before the House today, wrote to Britannia building society and explained his experience. He said:The Mortgage application form was completed by us and signed as true. Since then a figure of over £22,000 has been added by Miss Thompson, a representative of D.B.S. Financial Management Ltd. as being our income…Immediately we received this copy…we spoke to your manager at Barnstaple",but they still processed the mortgage.
Unfortunately the lady was allowed off the hook by the courts, but there is an onus of responsibility on the building societies that were involved in processing the mortgages. That is an extreme case due to the way in which Miss Thompson conducted her business, but there are examples of such activity throughout the country. A couple of my constituents have other building society mortgages and there are certain requirements for building societies to check the validity of what is offered in a mortgage and the person's ability to repay that mortgage.
People may be surprised to hear me say that such requirements are not bound up in sufficient regulation, and that there is therefore a free-for-all in the area of financial services. We must bear it in mind that the purchase of a home is the biggest financial investment that any individual or family makes. Given that the problem affects people who have already paid off a mortgage and are now in retirement, it compounds the vulnerability of the people taking out the schemes. Therefore, there is a real imperative for the schemes to be brought within the remit of financial services and dealt with by the ombudsmen who handle complaints and restoration. Some schemes have been subject to such guidelines, but not all.
183WH The difficulty is that the people so affected are now elderly and frail. They are dying without having had the benefit that others have had of their cases being brought to justice. That is why I am bringing such cases before the House. Time is running out for that vulnerable, fragile group of elderly people. It is time for some action to be taken so that at least their final years can be spent without the anguish and anxiety of compounding interest and living in what was their family home but in many cases no longer belongs to them.
Looking at what needs to be done, I am looking for a minimum of a freeze on the interest that is rolling up. I cannot believe that that would cost the building societies an arm and a leg, because there are so few of those people. Talking of arms and legs, if one considers the amount of money that has passed from the mortgagees to the building societies, one can see that the building societies have made a fair old return from those people already. It would not hurt the building societies to do the decent thing now. They should freeze the interest, look at terms of restoration as others have done in identical cases and determine how those people initially came by the policies.
We should consider how the building societies came to be involved in allowing the policies to be sold to that particular group of clients under rules quite different to those that would have applied to younger people of working age. I am aware that some building societies have tried to help, for example, by saying that those people have security of tenure for the period of their lives, and I welcome that. I feel, however, that more needs to be done.
We should be looking to bring equity release mortgages within the regulatory framework and we should consider the situation of elderly people who are remortgaging their homes. I do not say that that is always a bad thing. I know that people are interested in such policies, particularly those who do not have families to which they wish to leave the family home, or who find that they are on a very low income in retirement. None the less, such people do not seem to have the protection afforded to others and the Government have an opportunity to do something about that.
I received a letter from the National Consumer Council that said,We welcome the prospect of Financial Services Authority regulatory protection for consumers of lifetime mortgages from 2004. We are concerned, however, by the exclusion of home reversion schemes from the FSA's regulatory remit.I hope that the Minister will be able to say today that she will look again at this issue. There is time to consider whether to bring such policies within the scope of the regulations. Many organisations that deal with the elderly and with such products, including Britannic Retirement Solutions Ltd, Help the Aged, Which? and the Consumers Association, are anxious to see changes in this area. I hope that the Minister will be receptive to this request today. That would not, however, necessarily help the vulnerable group about which I speak and I want to flag it up that that group is in need of urgent action.
Such cases were brought to my attention before I was elected in 1991 and, 11 years on, I cannot think of any other open casework on which I am still trying to get a 184WH resolution. We have had meetings in the House over the years with Back Benchers of all parties, lawyers and buildings societies and Ministers have talked to us to try to find a way through. I cannot believe that the will is not there to resolve the problem for this small group of people and that we cannot find a way forward today in order to do something for them.
In 1991 I wrote to the Council of Mortgage Lenders, which was at that time quite resistant to any increase in the regulation that affected it. I hope by now that it has had second thoughts, because we are 11 years down the track. Most of us recognise that there is always a need for the individual to assess risk and take some responsibility for that. However, the way in which the policies were sold, and in many cases sold fraudulently to pensioners, means that one could not realistically have expected people to realise what the full consequences would be.
There must be a greater input into the detail and the consultations that people are given, because they are jeopardising the very roof over their head. One feels that, particularly when speaking to people such as my constituent, whom I will call Mrs. X because she does not want to be named. She explained in a tearful conversation with me how she was suddenly in the frame of being able to visiting her close relatives in Australia, perhaps more than once, although she had not seen them for a long time. That was the result of a sales pitch that was put to her suggesting that not only would she have more income in retirement, but that something that she thought well beyond her reach—visiting her close relatives—was suddenly a realisable dream. One can understand that such people are severely vulnerable when small print is put before them by those who have no good intent and simply want to collect commission on a policy. On behalf of that group, I ask the Minister to bring to bear whatever influence she can on the building societies that still hold the mortgages to do the decent thing—restore people to their previous position and freeze the interest.
I ask the Minister to examine the cases because this is not the end of the story. Such practices and policies may well be put before a future generation of pensioners. It is incumbent on us to ensure that when we regulate, we regulate to protect the genuinely vulnerable. We need not overregulation but a measure so that the roofs over people's heads are not put in jeopardy as they retire.
§ Mr. Paul Tyler (North Cornwall)
I am delighted to contribute briefly, and I congratulate the hon. Member for Tiverton and Honiton (Mrs. Browning) on the way in which she comprehensively introduced this extraordinarily sad saga. As she mentioned, there is a long history of all-party concern about this matter on behalf of our constituents. Several of my constituents were also sold dud schemes in the late 1980s, which was a classic case of mis-selling. I shall return to that point in a moment.
I shall outline more history to add to what the hon. Lady said. She will recall that the schemes were explicitly endorsed by the then Government when they were first introduced in the late 1980s. Margaret Thatcher, the then Prime Minister, went on record to support the schemes as an easy and effective way for 185WH those in the circumstances that the hon. Lady described to release equity, to take advantage of the increasing value of their property and to get additional income for old age. The then Government were involved at that early stage.
Like the hon. Lady, I was visited in the early 1990s by constituents who realised just what they had been sold. Most were not only very elderly but in ill health. One of the reasons why many had taken up the schemes was that they needed additional income or released capital to improve their property in order to cope with the difficulties of old age and infirmity.
When I was elected in 1992, I formed a little informal group. I am delighted to see the hon. Member for Birmingham, Selly Oak (Lynne Jones) here because she, I and Mr. William Powell, the then Conservative Member for Rugby—[Interruption.] For Corby—I am sorry, my memory has collapsed. The three of us tried to get some sense out of the various regulators and Treasury Ministers. Throughout the Parliament of 1992 to 1997, we fought a lonely battle on behalf of a lonely group of vulnerable and elderly people.
One of the great questions that hangs over the sad problem, as the hon. Member for Tiverton and Honiton effectively demonstrated, is why nobody was prepared to accept responsibility during those five years. The Council of Mortgage Lenders, the insurance industry, the insurance ombudsman, the Securities and Investment Board, which we visited, and Treasury Ministers were not prepared to say, "Yes, we recognise there is a problem here and we are going to take it up."
§ Mrs. Browning
I must put it on record that the then Insurance Ombudsman Bureau resolved several of my problem cases and restored people to the position that they had been in before they took out the policy. From my experience, if everyone had been treated by the insurance ombudsman in that way, there would be no need for me to speak in today's debate. I hope that the hon. Gentleman will endorse my opinion.
§ Lynne Jones (Birmingham, Selly Oak)
To clarify the hon. Gentleman's point, my recollection is that there was a different regulator for products sold with insurance policies as opposed to financial services products, which were regulated by FIMBRA. Responsibility was then taken over by the Securities and Investment Board. One problem with which we all tried to grapple was the plethora of regulatory bodies. At the point at which FIMBRA had produced a report and was starting to use its teeth, it was taken over, and the report was hushed up and not acted upon.
§ Mr. Tyler
I am grateful to the hon. Lady for succinctly making the point that I was just about to make. I do not blame anyone, but, unfortunately, the time scale of changes in the regulatory systems did not help. The hon. Lady made that point vividly.
186WH I pay tribute to some individuals who, at their own expense and with considerable personal commitment, have tried to support those affected, especially Mr. Phillip Cheal and Mr. Tony Craven of the two support groups, who have done a fantastic job. Perhaps their most important act was to alert Members of Parliament to the fact that the individual cases brought to Ministers and the regulatory authorities were examples of a large number of cases—the tip of the proverbial iceberg. They also managed to get the commitment and interest of the Consumer Association.
I am delighted that, even at this late stage in a long and sad story, the Consumers Association has taken such an active role. I intend to use the excellent brief that it has provided for this debate to exemplify exactly what has gone wrong with the investment schemes. I shall also quote details of individual examples obtained by the association, obviously with the consent of those concerned.
The major problem is that the way in which the schemes were introduced was almost invariably linked to expectation about the rise in value of the stock market and the inevitable and continuing rise in the value of property. Hon. Members may say that anybody in their right senses would know that anything that rises that fast is likely to fall. Unfortunately, that is not always the case with forecasts. Indeed, to a large extent, when one examines the small print, the mis-selling that undoubtedly took place was dependent on a continuing and considerable rise. Therefore, those who invested in schemes in the property boom of the late 1980s suddenly found themselves at a considerable disadvantage.
As the hon. Member for Tiverton and Honiton said, some of the more responsible lenders have done their best to mitigate the problem, and I pay tribute to them for that. However, many people, including some of my constituents, are considerably out of pocket. I must emphasise that those who were caught in the situation have almost invariably lost their legal right to redress. It has gone; they are out of time. Several thousand retired people have mounting debts and cannot pay them off by using interest payments or by remortgaging.
If the person in debt dies, the debt must be met through the sale of the home, which may well be repossessed and sold at a reduced price, and the family is then placed in an even more difficult situation. The most desperate part of that desperate situation is the length of time—more than 10 years, in most cases—for which uncertainty hangs over so many people. I know of people in my constituency whose lives have been ruined by the uncertainty, the constant threat to their future and their homes, and the worry about how their families will look after them if they become too ill and disabled to stay in their homes.
I shall give three examples that the Consumers Association told me about, having of course obtained the consent of those concerned. First, I give the example of Marion Grimshaw, from my county, Cornwall. The lender was the Chelsea building society. She borrowed £17,000 in 1990, ironically just before such schemes were removed from the market. She had the use of all £17,000 and has not been able to repay anything so far. The amount still owing is £60,773. Imagine such a debt hanging over an elderly woman living on her own.
187WH Then there is the case of the scheme sold to Mabel de Morgan's mother, who is from Anglesey, in 1989, when she was 88 years old. The lender was the Staffordshire building society. The mother borrowed £15,000; she had use of £5,000 and invested the other £10,000. She has already repaid £27,900, and yet £18,800—a considerable sum—is still owing.
Mr. and Mrs. George Carrod were lent money by the West Bromwich building society. The hon. Member for Birmingham, Selly Oak will recall the various exchanges that we have had with that building society. Mr. and Mrs. Carrod borrowed £49,500 in 1989 and had use of £8,600. Some £5,000 was kept back from the loan, and £200 a month was taken from investments for 18 months. The amount so far repaid is £57,580 in compensation and investment value, and the amount still owing is £20,715. Those are huge sums of money.
Hon. Members will agree that such schemes are an extraordinary scandal that has affected some particularly vulnerable people. The hon. Member for Tiverton and Honiton is absolutely right to say that those lenders who have insisted on getting their pound of flesh should accept a freeze on any further interest. However, that is not enough. There should be compensation for the mis-selling of those schemes, just as there has been for the mis-selling of other financial products. Government responsibility has been acknowledged for the way in which the episode was so disastrously exploited because of the endorsement by the then Government.
My constituents and I are fed up to the teeth with the game of pass the parcel that has gone on for far too long. It has to stop at some time. As I have said, legal remedies are now effectively blocked to those affected; the cases are out of time. The Government have a responsibility, particularly to those who are not very articulate and who are not only elderly but ill and frail. Such people have been kept in an impossible situation for far too long. We are talking about classic cases of mis-selling, and the Government must act.
§ Lynne Jones (Birmingham, Selly Oak)
I, too, pay tribute to Phillip Cheal and Tony Craven of the home income plan scam support group, and to Vera Hawkins, who is sadly no longer with us. Perhaps her dogged work to support elderly people caught up in the home income plan scam led her to her premature death, which has come to many elderly people because of the worry resulting from such plans and from the growing debts that they have led to.
Unfortunately, I was not sufficiently well organised to bring my file on home income plans from my constituency office, so I will have to speak from memory. As far as I am aware, I no longer have any elderly constituents who continue to be dogged by increasing debts. Most reputable building societies have frozen those debts—although not before they had accumulated to unacceptable levels. Some, but by no means all, the growth in debt has been paid off by compensation. There is not a lot that the Government can do, but I ask the Minister to look in detail at the policies of different building societies and lenders and 188WH perhaps name and shame those that are not following the practice of those that have done the best for their elderly customers.
The scandal with which I was most involved was that of the West Bromwich building society. Elderly people were encouraged to embark on financial investments by an organisation called Fisher Prew-Smith. People were signed up to schemes without being given any explanation of what was involved, and they were told to sign legal papers with a solicitor whom they had never met who was apparently acting on their behalf. That enabled the building societies subsequently to wash their hands of any responsibility—even though the suppressed FIMBRA report makes it clear that building societies such as the West Bromwich knew what they were getting into and embarked on loans to elderly people with the specific objective of increasing lending.
It took many debates and many meetings to expose what was happening. Belatedly, the West Bromwich building society accepted some responsibility when it agreed to freeze some loans. Many people have had appalling experiences. Elderly people, including at least one constituent of mine, have gone to their graves prematurely through worry over the debts with which they were burdened as a result of home income plans.
Today, elderly people own a great deal of equity in property. Elderly people come to my surgery who cannot afford to pay for essential maintenance work on their homes. Those people are on low incomes, and very little help is available to them to get work done. One way to help such people—or people who struggle on low incomes but have high capital assets—would be equity release schemes. However, adverse publicity and the worry associated with equity release and home income plans mean that many elderly people are reluctant to embark on such schemes. I am pleased that the Government have raised the issue in the Green Paper and are considering options to create a level playing field for the regulation of equity release and home reversion plans to protect consumers and make the market work better. I hope that the Minister will say a little more about that.
I am thankful that our regulatory system is now less of a maze than it was in 1996–97, when my constituents and I had to attempt to grapple with a complex system in which different regulatory bodies were allowed to play off against each other, each claiming that things were not their responsibility. I congratulate the Government on having made some sense of the maze, and I look forward to hearing what they will do to help elderly people who are still struggling with mounting debt and to ensure that the elderly will be able to make the most of their capital assets.
§ 10.5 am
§ Dr. Vincent Cable (Twickenham)
I thank the hon. Member for Tiverton and Honiton (Mrs. Browning) for introducing the debate. She recounted her constituents' experiences effectively, but I wish to add a different dimension to the discussion.
This is a current problem: last week I noticed a headline in the letter column of my local borough newspaper that said, "Caught in SAM Trap"—SAM stands for shared appreciation mortgages. Over the past few years hundreds of local people have bought into those schemes, 189WH and they will be caught up in the problems that the hon. Member for Birmingham, Selly Oak (Lynne Jones) is so troubled about. She and my hon. Friend the Member for North Cornwall (Mr. Tyler) have brought a useful historical perspective to the debate.
I agree with what the hon. Member for Birmingham, Selly Oak has just said. If people's wealth is locked up in their homes, it makes sense to try to help them to liberate some of it rather than its being just paper value—and if that can be done in a safe way, we should encourage it. It is not only Mrs. Thatcher who agrees with that; it is basic common sense. The problem has been that many of the products that do that have been, and still are, unsafe.
I also wish to touch on a broader issue that the three hon. Members who have already spoken did not mention. It relates to the wider picture of heavy mortgage lending and the potential instability that that will create for the housing market.
There are two types of products. The straightforward mortgage lending type of equity release is unproblematic and uncontroversial; the mortgage is repaid on death and the products are regulated. The controversy revolves around reversion products, whereby the mortgage lenders acquire a share of the equity. The figures for the past 18 months suggest that we are dealing with a very big market: about one third of all equity release is in the form of reversion products. That amounts to £300 million over 18 months, which is very big business.
The history of reversion products is chequered, for the reasons that the three previous speakers have mentioned. Reversion products that achieve equity release were started in the 1970s, and even at that stage there were some unhappy experiences, particularly with products that had variable interest rates locked in. People were in effect giving up the equity in their home, but acquiring liabilities with very high interest rates when the economic cycle was in a phase of high rates.
The industry claims that some of those products were banned in 1990, and I would like the Minister to confirm that that is the case. Since then, the industry has been governed largely by self-regulation under the safe home income plans—or SHIP—scheme. I have just looked through the code of practice that governs safe home equity release plans, and it is fine—it has been approved by Age Concern, I think. Many of the elements in it are progressive; for example, there is a commitment to give an absolute guarantee that there will never be negative equity under these plans.
If the code of conduct were honoured and universally applied, the problems that we are debating would not be serious. However, a good deal of equity release reversion lending is operating outside the voluntary code. One of the most striking cases is that of the shared appreciation schemes that the Bank of Scotland and Barclays bank operate. Many of the people who are victims of the type of reversion scheme that I have mentioned are those who have bought into those banks' schemes.
I shall illustrate what the shared appreciation schemes do with reference to the experience of one of my constituents, a Mr. Brooking, who came to see me about the matter. His home in Twickenham was valued at £190,000 four years ago, but Twickenham, like many 190WH other suburban areas, has witnessed an extraordinary boom in house prices. Mr. Brooking's property has now more than doubled in value to £400,000. On the back of his £190,000 home, Mr. Brooking took out a £30,000 mortgage. However, in addition, half the appreciation in value of his home—more than £100,000—also belongs to the Bank of Scotland. It has earned a return of about 250 per cent. over four years, assuming that the market stays up and that Mr. Brooking, who is an elderly gentleman, moves house or dies.
What is striking about that case is that my constituent is not naive; he is a highly sophisticated, well informed, clear-thinking man who read all the small print. However, the small print in no way prepared him for what happens in a world of rapidly rising house prices. The assumption that the Bank of Scotland used, and presented to all its clients, was that house price appreciation would continue at about 4 to 5 per cent. a year. All its modelling and examples were based on that assumption. Mr. Brooking was given no warning; he had no reason to expect such an extraordinary outcome. He has since referred the case to the ombudsman, who has been totally obtuse and completely failed to understand the issues. She had a very unsatisfactory correspondence with the ombudsman.
Thousands of people have got involved in the shared appreciation scheme and feel a serious sense of grievance as a consequence. Apart from the fact that schemes such as SAM operate outside the code of practice, the hon. Member for Birmingham, Selly Oak also underlined a broader point. Mortgage lending has been regulated since 2000, but reversion products are unregulated. The Government have given a commitment in the Green Paper to look into that, and perhaps the Minister will give us a few more indications today about where Government thinking is heading.
My final point relates to the broader issue of mortgage lending and what it does to the housing market. Equity release is part of a much bigger phenomenon—an enormous amount of money goes into the housing market, and that contributes to the enormous appreciation of prices that we have seen. The Government broadly take the view that we should not worry too much about that, although borrowing-to-income ratios are at record levels. The fact that interest rates are low historically means that there is no particular reason why people should have enormous difficulties in repaying those mortgages—provided that interest rates remain low.
The problem with that optimistic scenario is that should incomes fall and unemployment rise—bearing in mind the fact that there is no longer any fall-back ability to make mortgage payments through the social security system—prices could fall rapidly. That hypothesis is not mine alone. The Governor-designate of the Bank of England has already warned of the potential for a serious shock to the economy if house prices fall substantially.
Other members of the Monetary Policy Committee have said openly that they cannot do anything about the problem. They cannot deal with this bubble and the potential crash because to cut interest rates would add to inflation. Low interest rates might be good from the manufacturing sector's point of view, but they would aggravate the housing boom. On the other hand, to raise interest rates to deal with the housing boom would be 191WH bad for the rest of the economy. The Monetary Policy Committee is trapped, because it cannot do anything through its conventional mechanisms.
Are the Government thinking at all about whether there is any way in which the asset bubble in the housing market, to which equity release has contributed substantially, can and should be managed? There are ideas out there. Some fairly conventional people have said that we should reconsider special deposits, which quarantine some of the cash in mortgage lending institutions, including that in equity release schemes. The money can then be released if the housing market crashes. However, that is an old mechanism, which may not work in our much more sophisticated times. Do the Government have any thoughts about the way in which the overall market should be managed, or should it simply be allowed to take its course?
To conclude, there are two sets of problems. First, there are the products themselves. How will the different treatment of reversion and other mortgage products be dealt with? Secondly, there is the overall housing and mortgage market, and I hope that the Minister will put the issues in that wider context. Are the Government content with the way in which the market is evolving, or have they undertaken provisional thinking on how it might be managed in future?
§ Mr. Stephen O'Brien (Eddisbury)
I am grateful to my hon. Friend the Member for Tiverton and Honiton (Mrs. Browning) for securing this timely and important debate on equity release. The subject has gained considerable attention from the press and the general public, and it is appropriate that it should be the subject of full parliamentary consideration.
In discussing equity release mortgages, it is crucial to consider equity release in general. Such provision has become increasingly important as more elderly people use the resource of their home to provide additional income in retirement. During the debate, I want to determine whether the Government are prepared to demonstrate that they understand the importance to the elderly of such income by making a commitment to introduce swiftly appropriate regulation of the market.
As Her Majesty's official Opposition spokesman on the issue, I approach it in what I hope the Minister recognises is a constructive manner. I seek the Government's support in particular on issues on which Members of Parliament can have a real and current effect. Many of the issues raised by my hon. Friend relate very much to the past, and I shall address some of them, but it is important, given our responsibilities in the House, that we learn from what happened in the past so that we can prevent similar problems arising in the future.
There is great confusion about what equity release is, what risks underpin it, and when it is appropriate to purchase. Equity release can simply mean down-sizing the family home, or extending an existing mortgage. I shall focus on a specific financial service product, which uses the home of an elderly person to generate income or a cash lump sum. Such schemes can take the form of a loan or a reversion: a loan is a mortgage, while a reversion is the sale of all or part of the house.
192WH It is inevitable that more people will turn to equity release. According to the Council of Mortgage Lenders, the average price of a house in 2001 was £115,700. By comparison, the average retirement fund in 2001 was only £24,000, according to the Association of British Insurers. That means that many so-called cash-poor pensioners are sitting on increasingly valuable assets.
For many people, equity release may be the only way in which to top up their retirement income, whether that is to fund a lifestyle need, care fees for a loved one, or policies for one's own future domiciliary care. That will be inevitable given falling annuity rates and stock markets, which are due, as much as anything, to the Chancellor's tax grab of £25 billion and £5 billion per annum on the pension schemes of those who have been doing the right thing by putting money aside during their earning lifetime to provide for their retirement. When that is coupled with low interest rates and increasing longevity, it is certain that more people will turn to their property to provide much-needed additional income in retirement.
That seems especially likely when one takes account of today's terrifying and growing retirement savings gap, which is at least £27 billion. The failure to take advantage of equity release where appropriate could increase that gap to as much as £40 billion. That is why the current, relatively small, equity release market in the United Kingdom, estimated by Datamonitor to be worth about £750 million, and by the Council of Mortgage Lenders to be worth about £1 billion, is deemed to have the potential to support sales growth of up to £4 billion or £5 billion a year for the next decade to achieve a market of £50 billion or, some would say, even £100 billion.
Two major factors have hindered the growth of that potentially critical market. The first relates to reputation. The home income plan saga of past years continues to have a serious and damaging effect, as my hon. Friend cogently described. That point that was reinforced by the examples cited by the hon. Members for North Cornwall (Mr. Tyler) and for Birmingham, Selly Oak (Lynne Jones). That can only undermine confidence generally in a potentially important market. I urge the Minister and the building societies involved to act urgently to freeze interest on those loans. I recognise that that is ultimately a decision for the building societies, but however much we in opposition prefer it were not so, the party in government unquestionably carries influence, so we urge the Minister to put her full weight behind that cause.
The second factor that hindered growth is confusion about the regulation of equity release products. In its consultation paper CP 146, the Financial Services Authority announced that it was prepared to regulate mortgage-based equity release—the regulation is due in 2004—but reversionary equity release would fall outside its remit. Therefore, the distinction described earlier, between mortgage-based and reversionary equity release, currently carries significant consequences. That would mean that cash reversions would be wholly unregulated in what we know will be an increasingly important market, but one with some identifiable risks of consumer detriment, especially for vulnerable older people.
193WH Not surprisingly, that has caused considerable concern among several organisations, ranging from Britannic Retirement Solutions in the private sector, Help the Aged and Age Concern in the charitable sector, the Consumers Association and the National Consumer Council in the consumer sector, to trade bodies, such as the Association of Independent Financial Advisers. Given the attempts at populism that inform the Government's actions in their every waking hour, the Minister should be aware—if she is not, she can certainly take it from me, as a fellow north-west Member of Parliament—that this subject currently forms a major story line in "Coronation Street". Surely the Government will now do something!
Concerns were raised that the proposed action would both fail to provide the ageing consumer with an important safeguard, and maintain confusion in the market, thereby stifling its anticipated growth and ability to provide additional income for people in retirement. The Treasury's argument for partial regulation of the equity release market appears to have been as follows. The FSA is empowered under the Financial Services and Markets Act 2000 to regulate mortgages, but it is unable to regulate reversionary equity release as that is deemed to be a contract. In effect, caveat emptor applies under the legal doctrine of privity of contract, and reversionary equity release is not regarded as a financial services product. Consequently, equity release is not currently included in the regulated authorities order, hence the nonsense of partial regulation.
We were led to believe that the only way to bring reversionary equity release schemes under the proposed FSA equity-release regulatory umbrella was to enact primary legislation to change the Financial Services and Markets Act to include them. Imagine my surprise, therefore, when paragraph 72 of the Government's pensions Green Paper, entitled "Simplicity, security and choice: working and saving for retirement", published on 17 December 2002, announced:The Government needs to ensure that the market for equity release is effectively regulated and that individuals fully understand the implications and risks of the deal. One issue of potential concern is that while equity release mortgages will be regulated by the FSA from 2004, home reversion plans are outside the scope of regulation. The Government will be looking at options to create a level playing field for the regulation of equity release and home reversion plans to protect consumers and make the market work better.I am relieved that the Government have recognised the anomaly and have decided to deal with it by creating, in that important phrase "a level playing field" for the regulation of equity release and home reversion plans, also known as reversionary the equity release, to protect consumers and to make the market work better. The Government have the opportunity today to tell us how and when they will do precisely that. Will the Government enact primary legislation to amend the Financial Services and Markets Act 2000 to enable the FSA to regulate equity release mortgages and home reversion plans? If so, are they prepared to tell us when and whether it will be in this year's Finance Bill?
194WH The Minister should have some very clear information and I look forward to a clear answer. Bearing in mind the importance of this market to the cash-strapped pensioner, I hope that the Government agree that the issue needs swift and prompt attention; it cannot be left to drift. Consumer protection and the confusion surrounding it, which has been highlighted yet again in this debate, show that it is unacceptable to let the matter drift.
Alternatively, do the Government now wish to change their mind on whether reversionary equity release falls within the definition of a financial services product—that is, to say that reversionary equity release is more than a mere contract? A case can be made for that less painful approach to ensure consistent regulation, not least because most consumers and intermediaries recognise reversionary equity release as a differentiated financial product targeted at a differentiated class of people, primarily the vulnerable elderly, for what is likely to be a once-in-a-lifetime transaction using their main and almost always only dwelling house.
If the Government are to take that route, why were they not prepared to do so last year or earlier? The matter was raised, as I am sure the Minister is aware, during the passage of last year's Finance Bill. Failure to deal with the issue earlier has undoubtedly affected consumer confidence and the growth of an important market. However, the Government cannot and must not provide a system of regulation for reversionary equity release that is not policed in the same way and by the same body that polices mortgage-based equity release. By this I mean that if the FSA is to regulate mortgage-based equity release, and it is intended that it should do so from 2004, it must be the body that regulates reversionary equity release.
If the Government were to provide another body to carry out that task it would immediately cause additional complexity and perpetuate the consumer confusion that the regulation was intended to deal with. The hon. Member for Birmingham, Selly Oak pointed out that recent experience and increasing knowledge of how market regulations operate suggest that it would be better to bring the regulatory approach under one umbrella. I notice that the Liberal Democrat spokesman, the hon. Member for Twickenham (Dr. Cable), rightly did not attribute blame, but said that we must learn from experience.
The Green Paper refers explicitly to creating "a level playing field" for the regulation of these products, and that can only mean consistent regulation; therefore the FSA should be the regulatory body for reversionary equity release products. I hope that the Government can now reassure my colleague the hon. Member for Tiverton and Honiton, her constituents and me. Although it would be small comfort to people involved in the continuing saga, it would be at least some comfort to them to know that the pain that they have suffered will not be visited on future generations.
§ Mrs. Browning
I hope that the Minister can help us with the older cases as well. Since initiating today's debate, I have heard from Norwich Union and Nationwide that both support changes to introduce regulation in this area. Nationwide sent me a letter, which I received only this morning, sayingconsumers that are most likely to use these products are often elderly and vulnerable. Without much-needed clear regulation, there is a danger that current practice could lead to future accusations of mis-selling.Across the piece, even before its introduction, there seems to be great support from the industry for more regulation. That is not something that one often sees.
§ Mr. O'Brien
I thank my hon. Friend for having made that important point, because it is critical that that area of the market is appropriately regulated, not least so that it operates on a level playing field. There is also a need to enhance consumer confidence in the light of the concern provoked by home income plans. The market will certainly be a major one, even allowing for the inevitable cycles that can be predicted for property values. The capital assets locked up in people's homes are massive compared with the amount of money that is being put aside for pensions—the disparity is far greater than was formerly the case. I endorse my hon. Friend's comments. She recognises the extraordinary amount of third-party and business support from all quarters, not only for market regulation, but for that to be coupled with proper recognition of and redress for those who have suffered. I hope that the message that she takes from the debate to her constituents who have suffered so grievously will be that something is going to happen. We look forward to hearing the Minister's response to all the issues that have been raised.
It is important to recognise that, while the Green Paper's wording is somewhat woolly, it is common knowledge that the FSA is working on the assumption that the Government's intention is that the product sector should come within the FSA's remit, after what will be described as tricky boundary issues have been ironed out and the details have been discussed. I imagine that the FSA's high street firms division will deal with it. That will tie in with the long-term care issues that are already under review by the FSA. It is therefore a wholly appropriate expectation for the FSA, and one that I would encourage, as it is consistent with its stated concern about the rapid growth market in products directed at asset-rich, cash-poor, often elderly, vulnerable people. By today's standards, it is odd that reversionary equity release is not already covered and that mortgage equity release is not expected to be covered until 2004.
The Government must be in no doubt that the vulnerable elderly consumer expects and deserves a high level of protection when purchasing such products. For him or her, regulation means the guarantee of effective monitoring of and punitive systems for product providers and advisers who are in breach of regulation. Consumers also demand the confidence given by a reliable compensation scheme and an effective ombudsman. The roles and powers of such regulation should be enshrined in legislation. I hope that the Minister will agree that voluntary regulation cannot work and should not be expected to do so, given the potential size of the market and the variations within products.
196WH My concerns have been echoed by the private sector and, as my hon. Friend the Member for Tiverton and Honiton pointed out, by many consumer groups and charitable associations. It might seem counter-intuitive that it is a Conservative who is calling for more regulation, when it is normally our role to try—often vainly—to stop the Government from indulging their whim for excessive and stifling regulation. However, we have a responsibility to do so in this instance, because the Government have not introduced the safeguards that both the private sector and consumers have called for, in the light of experience and of the recent exponential growth of the market, to meet their needs and release for their lifetime use the equity value that is pent up in property, rather than, as often happens, leave that value to pass to others after their death.
Concerns about the regulation of equity release have been expressed in both Houses of Parliament. Baroness Greengross is today asking an oral question in the other place to find out how the Government plan to regulate and promote the development of equity release schemes. No doubt, the Minister's colleague in the other place will read with great care what she says here, in order to guarantee consistency. We would ask that that consistent message be expressed in the terms for which we have all called.
The Conservative party is pleased to note that the Government have at last recognised the importance of the market—the elderly—and of the need for effective regulation, but it is up to them to let us know what they intend to do and when. There can be no fudge. A paragraph in a Green Paper, which is what they have provided on so many occasions, is no substitute for action. To do otherwise would be no more than disingenuous spin about their intent in a critical market. I hope that the Minister's answer will, for once, absolve the Government of that charge.
§ The Financial Secretary to the Treasury (Ruth Kelly)
How pleased I am serve under your chairmanship, Mr. McWilliam.
I am grateful to the hon. Member for Tiverton and Honiton (Mrs. Browning) for securing this debate. I pay tribute to her, the hon. Member for North Cornwall (Mr. Tyler) and my hon. Friend the Member for Birmingham, Selly Oak (Lynne Jones) for their campaigning. They have brought to the attention of the House and people outside the importance of these matters and the injustice that has been done to certain people by the mis-selling of certain financial products.
I am aware of the distress that has been caused by the mis-selling of these plans not only because of the representations made by hon. Members but through correspondence. However, in response to the hon. Member for Eddisbury (Mr. O'Brien), I must say that the Government recognise the role that assets in their broadest sense—non-pension assets and, in particular, housing and equity release—can play in the provision of retirement income. As the hon. Member for Twickenham (Dr. Cable) said, it is common sense that people ought to be able to secure an income from their assets in retirement if that is what they want to do. If that is done in an informed way, and if it can be done safely, such practice will grow, and rightly so, but we must ensure that those products are provided in as safe a way as possible.
197WH Equity release schemes are financial products that allow home owners to release the value of their property over and above any amount owed on a mortgage. Those schemes involve providers giving home owners a lump sum or income, or both, based on the value of the home. The providers receive their return when the home is sold. There are two basic types of scheme. One is mortgage-based; the other is the reversion plan. In the mortgage-based scheme, the householder retains ownership of the property; but in reversion plans, the reversion provider becomes the owner of whatever proportion of the property is sold.
There are several variants of the mortgage-based scheme. The mortgage annuity scheme, usually called the home income plan, allows the home owner to take out a fixed-interest mortgage, which is used to buy an annuity for a fixed income for life. The rolled-up interest mortgage allows the interest on the mortgage to be rolled up and added to the amount owed, which is repaid on death or when the property is sold. The shared appreciation mortgage expresses the cost of the loan as a percentage of any growth in the property value, payable on death or the sale of the property. Finally, some interest-only loans are available. I am aware of the concern expressed about many of those categories.
Under the home reversion plan, home owners sell their house at a discounted rate in return for a lump sum and/or income, and they continue to live in the house rent-free or for a peppercorn rent for life. The amount paid to the house owner is based on a number of factors, including the value of the property, the proportion of the property being sold, the life expectancy of the home owner, long-term interest rates and expected house-price inflation.
As with other regulated mortgage contracts, mortgage-based equity release schemes will be covered by the Financial Services Authority's regulatory regime that is due to come into force in October 2004. The FSA considers that such mortgages, which it calls lifetime mortgages, are high risk, and it has accordingly devised a regulatory regime for them. The proposals are set out in consultation paper 146—the FSA's approach to regulating mortgage sales—which was published in August 2002.
§ Mr. Tyler
As the Minister has already made apparent, the schemes are extremely complicated. She has also made it clear that some are high risk. Does she accept that such schemes were sold, particularly in the late 1980s, to a large number of people who could not get independent advice and were not expert in such matters, and that the schemes were demonstrably high risk to the seller, not to the buyer? Does she accept that the worst feature of that mis-selling was the fact that salespersons were able to say that the then Government had endorsed—guaranteed, even—such schemes?
§ Ruth Kelly
I am not going to comment on individual cases with which building societies or others may now be dealing. I shall come on to the different types of scheme and the problems with each, but to continue on appreciation mortgages. I understand the interests of the hon. Member for Twickenham in such matters.
Concerns have been raised about the returns that lenders receive if borrowers sell their property, having received a shared appreciation mortgage. The return a 198WH lender receives from a shared appreciation mortgage is dependent on the increase in property value. In most cases, no interest is payable. The borrower repays the amount borrowed, plus three times the agreed percentage of any increase in value. For many shared appreciation mortgages, the maximum percentage is 25 per cent., so at most the borrower will be charged three times the increase in value. With the value of some properties rising substantially, however, lenders could receive a large return—indeed, some have done so. The hon. Member for Twickenham drew attention to the example of one of his constituents. Few people could have foreseen the extent to which house prices would grow. However, if house prices had fallen or risen more slowly, borrowers would have received a lower interest or even an interest-free loan. The risks should be properly understood and explained, and people should exercise an informed choice.
I am pleased to say that, when the FSA's mortgage regulation comes into force, the proposed advice and disclosure regime will enable borrowers to become fully aware of the implications of all equity release loans before they take a decision on the right one for them. I believe that the new regime will cover the anxieties that the hon. Member for Twickenham expressed. In the meantime, if hon. Members' constituents believe that they have been badly advised, or that their mortgage was mis-sold, and, assuming that all internal complaints procedures have been completed, they may be able to seek redress from the financial ombudsman service.
Home reversion plans are not currently covered by the FSA regime. That is because they are considered to be pure sale and purchase agreements, and not financial services products, as the hon. Member for Eddisbury pointed out. Just because home reversion plans are not financial services products does not mean that there is no scope for abuse. Vulnerable consumers may still be at risk of mis-selling and a lack of redress if things go wrong. There is also the possibility of distortion of the equity release marketplace in favour of the unregulated plans if there is not a level playing field and regulation between reversion-based plans and mortgage-based plans.
I am delighted that my hon. Friend the Member for Birmingham, Selly Oak mentioned the pensions Green Paper, and acknowledged the paragraph in it in which the future of home reversion plans is considered. I also note the commitment of the hon. Member for Eddisbury. He too thinks that it is a good idea to consider the matter closely, and wants a commitment from the Government to regulate.
The Government recognise the concerns that have been expressed and are concerned—for the reasons that I have described—about creating a level playing field for the regulation of both equity release and home reversion plans, aiming to protect consumers better and to make the market work better. We have already begun to meet interested parties to find out how a system of regulation might work. We are still gathering evidence of possible and likely consumer detriment in order to decide the appropriate degree of regulation. We do not want to overregulate—I am sure that the Opposition would have us bang to rights if we pursued that route. We want to get things right and we want consumers to be properly protected. Were we to go ahead on the basis of consultation, the process would be to publish a 199WH consultation paper—probably later this year—and then to decide after taking legal advice whether regulation could be implemented using secondary legislation or whether primary legislation should be pursued.
§ Mr. Stephen O'Brien
If it was felt that such regulation was appropriate to achieving the Green Paper's stated aim of creating a level playing field, will its introduction coincide with the introduction of regulation of mortgage equity release, which the FSA is due to introduce in 2004?
§ Ruth Kelly
We will keep such dates in mind when we carry out our consultation and consider the possible legislative routes. As I have suggested, we are not holding back. We have begun to meet interested parties and are in discussion with them. We are determined to find out what we can do in this area.
§ Ruth Kelly
We will consider all the options that are put to us, while bearing in mind the fact that creating as close to level a playing field as possible for different types of regulation will be desirable. After consultation, we will determine the best way of regulating. One possibility is that the FSA will carry out the function; and the FSA will have views on the best ways of conducting any such regulation.
It is not the case that consumers have no protection at present, or that they will have no protection in future. As has been pointed out, the main reversion scheme providers are members of SHIP—safe home income plans—which is supported by leading providers of equity release plans. Members of SHIP agree to comply with a code of practice and undertake to provide fair, simple and complete presentation of any plan that they offer. I understand that the charity Age Concern has welcomed that code of practice; it may well improve the code, as the hon. Member for Twickenham has suggested. A SHIP plan guarantees that consumers will not lose their home whatever happens to the stock market or interest rates. In addition, and importantly, consumers' solicitors act on consumers' behalf—they are independent of the providers—when advising on the sale.
For the future, the FSA proposes that those firms that sell both mortgage-based equity release schemes and reversion plans will be required to take account of both types of product when giving advice. The proposed training and competence requirements will also include knowledge of both lifetime mortgages and reversion schemes, whatever the Government's decision. That is because the FSA is able to make rules in respect of the unregulated activities of regulated firms.
I turn now to home income plans. There were indeed serious problems at the end of the 1980s with schemes based on investment bonds. Those schemes used the proceeds of a mortgage raised on a property to invest in 200WH a bond designed to provide sufficient returns to repay interest on the mortgage and, in addition, to provide an income. Unfortunately, the investment bonds failed to provide the returns required and investors found themselves with rising levels of debt to their lenders. The problem is well recognised by us and a range of measures have been implemented to help.
The sale of investment bonds was regulated at the time under the Financial Services Act 1986. Effectively, the then regulators banned home income plan schemes involving such bonds in the early 1990s. Using complaints procedures that were established under the Financial Services Act, home income plan investors were able to claim against their advisers, who were required to return the capital invested. About £70 million has been paid in compensation to 4,500 home income plan investors either directly by advisers or, if they had gone out of business, by the investors compensation scheme, which was the predecessor of the financial services compensation scheme.
§ Mrs. Browning
On that point, may I quote from a letter that I received from a former Economic Secretary to the Treasury—a dear colleague—that was put out on 20 November 1992? On home income plans and the investors compensation scheme, it states:In cases where the financial adviser was not the only party responsible for investors' losses, the ICS will not delay making an offer of compensation but will attempt subsequently to recover an appropriate element of the costs of compensation. I understand that one building society has, whilst not accepting legal liability, agreed to make a contribution to the costs of compensating clients.That is a written precedent showing that there was culpability on behalf of not only the independent financial advisers, which is clear, but building societies. We want the Minister to show those who are still caught by the policies and increasing debts that the Treasury will put its weight behind getting building societies to do something to restore people to their original position and, as a first point, to introduce a freeze on the interest that is rolling up.
§ Ruth Kelly
I shall come to the hon. Lady's point in a moment.
I recognise that the Financial Services Act was able only to deal with funds that had been put into an investment bond. There were other cases in which people used sums raised for other purposes that are not covered under the Act and, consequently, many were left with residual debt to their lenders even after the compensation that was allowed. Although the lenders themselves should respond to residual debt, we take a serious interest in victims.
Fortunately, most lenders have offered a package of measures to home income plan investors in respect of such residual debt. The terms of packages typically include cash payments, reductions in interest rates charged for mortgages, capping mortgage interest rates and allowing people to stay in their homes for the rest of their lives. Additionally, the then investors compensation scheme agreed additional financial benefits for former home income plan investors with several lenders.
201WH There is still scope for negotiation with lenders on those issues and I know that the Financial Services Authority has taken an interest.
§ Mr. Tyler
The Minister has said that the Government are taking a serious interest in people who are still caught by the schemes to which the hon. Member for Tiverton and Honiton referred. What exactly does that mean? We accept that comparatively few people have not benefited from compensation in the terms to which the Minister referred. What are the Government going to do? It is 11 years since the severity of the problem was first recognised, and there are damaged, distressed and vulnerable people out there.
§ Ruth Kelly
The fact is that there is very little that the Government can do except bring moral pressure to bear. The lenders must resolve the situation with the people who took out the plans.
§ Lynne Jones
I agree that the issue comes down to moral pressure, but it would be helpful if investigations were carried out to determine which lenders have the best records. That could be benchmarked, so that pressure could be put on other lenders to be that helpful to borrowers.
§ Ruth Kelly
I thank my hon. Friend for that. Clearly, lenders have different records on that matter. The Government and the FSA are aware of the issue, and following this debate, I shall take a closer interest in it. The investors compensation scheme has been able to negotiate settlement terms with the West Bromwich, the Cheltenham and Gloucester, and the Stroud and Swindon building societies, but other lenders have not been so co-operative.
It is interesting to consider the case of one building society that went beyond the package of terms resulting from the ICS. In a court case, it was decided that responsibility lay not just with the independent financial adviser but with the building society, and that as the two were engaged in a joint enterprise or had a common design in marketing such products, they had a joint responsibility for compensation. That creates a precedent.
§ Mrs. Browning
I am very pleased to hear the Minister acknowledge that, because in all the outstanding cases that have come to my attention, homes were mortgaged with one branch of the Britannia building society some 60 miles away from where the people involved lived. It 202WH was not the nearest branch, which one would think would be the obvious place to go. One has to conclude that there was a liaison between that one branch, for which Britannia's head office has responsibility, and those doing the selling.
§ Ruth Kelly
I acknowledge that I am not familiar with the particular branch that the hon. Lady mentions. I am more familiar with the general issues surrounding such plans.
There has been some success in persuading lenders to aid their victims and those who have been caused distress by the plans. That will continue, but we are determined to ensure, over time, that such distress will not be caused unnecessarily in future. That is why we are considering how such plans might be regulated in future. Of course, home income plans and mortgage-based plans will be brought under regulation. We hope that lenders will take account of the views that have been expressed today and in the past and will take as generous and as sympathetic an approach as possible to any residual debt.
These are involved, technical and emotive subjects that range over different types of financial products governed by different regimes and sold at different times. In the background, there is the emotive issue of home ownership and the horror that many people, particularly the elderly, feel at the thought of losing so much of what they have worked so hard to gain. We are right to be concerned about that, and I welcome this opportunity to set out the Government's position. I hope that I have said enough to assure hon. Members that the victims of mis-selling have appropriate mechanisms for redress, and that the FSA takes the matter seriously and provides adequate levels of investor protection, although of course we recognise that some cases are still outstanding.
Through the great pensions Green Paper, the Government are taking the steps necessary to enable people to save with confidence, and use not just the simpler financial products but equity release—if they are properly informed and fully aware of the risks involved—as a potential additional source of retirement income. I agree with the hon. Member for Eddisbury that we are talking about a growing market, and one in which consumers should have confidence if they are to make proper investment decisions. We are putting in place a framework that is right for the future.
§ Sitting suspended till Eleven o'clock.