What are the Rules and Regulations Around Equity Release You Must Know in 2024?
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- Equity release is a financial option for seniors to unlock capital from their property, subject to eligibility criteria like age and property value.
- There are no strict spending rules for equity release funds, but they must be used responsibly and not for illegal or risky ventures.
- The Equity Release Council sets industry standards, ensuring consumer protection with principles like no negative equity guarantees.
- Equity release advisors and providers must adhere to strict rules and regulations, ensuring transparency, fairness, and consumer protection.
- Solicitors involved in equity release must follow specific rules, providing crucial independent legal advice to homeowners.
Navigating the world of equity release rules and regulations can be a daunting task for UK homeowners seeking to tap into the wealth tied up in their homes, and you may find yourself asking, "Are equity release schemes safe?".
With a remarkable £6,2 billion in total lending in 2022, a 29% increase from 20211, it's evident that this financial solution is gaining traction amongst those looking to boost retirement income, fund home renovations, or even assist family members financially.
In This Article, You Will Discover:
In this article, the Every Investor team will guide you through the complexities of equity release in the UK and the essential regulations that govern the industry.
With this information, you’ll be able to make well-informed decisions about this financial tool by understanding the equity release rules and regulations.
What Are the Basic Equity Release Eligibility Rules?
The basic equity release eligibility rules are that you must own a home in the UK valued at a minimum of £70,000 and you must be 55 or older.
In addition to these eligibility criteria, there are other factors that may affect your ability to release equity from your property, such as the condition of your property and where exactly it’s located.
To qualify for an equity release plan, you’ll usually need to meet the following basic eligibility criteria:
- Age: The minimum age requirement’s 55, though certain providers may have a higher minimum age limit of 60 or 65.
- Property ownership: Owning the property, which should be your primary residence, is a must. Also, you may need to have no current mortgage debt or a mortgage sum low enough to be paid off with the equity release money.
- Property value: Depending on the provider, your property must be worth at least a certain amount, usually approximately £70,000 or more.
- Location of the property: The property must be in the UK and adhere to the location requirements set out by the provider. Many providers exclude certain locations, like the Isle of Wight and the Scottish Isles, from equity release eligibility.
- Construction type: Your home should be of standard construction, though some providers may take into account non-standard properties on an individual basis.
- Property condition: Your property will have to be in reasonable condition. Your provider may demand that you utilise a portion of your equity release funds to make necessary repairs or upgrades.
Please note that individual providers may have additional eligibility requirements or criteria that are specific to their equity release products.
It's important to consult a qualified equity release broker or advisor to discuss your individual circumstances and determine appropriate equity release options.
Are There Rules When It Comes to Spending Equity Release Funds in the UK?
In the UK, there are generally no strict rules when it comes to spending equity release funds.
While equity release funds can generally be used for a wide range of purposes, there are certain restrictions or situations where using the funds may not be allowed or advisable.
Some instances where equity release funds may not be used include:
- Illegal activities: It’s against the law to use equity release funds for illegal activities like money laundering, drug trafficking, or any other kind of crime.
- Speculative or high-risk investments: It’s not advisable to use equity release funds for speculative or high-risk investments, as this could lead to significant financial losses and jeopardise the homeowner's financial security.
- Short-term lending or loans to others: Using equity release funds to provide short-term loans or lend money to others can be risky and may lead to financial difficulties or disputes.
- Business ventures with no clear plan or strategy: Using the funds to invest in or start a business without a clear plan or strategy may not be advisable, as it may result in financial losses or impact the homeowner's ability to repay the equity release loan.
- Releasing equity to repay an existing equity release plan: Homeowners should not use equity release funds to repay an existing equity release loan without proper financial advice, as this could lead to further financial complications and may not address the underlying issues.
- Gambling: Using equity release funds for gambling or other high-risk activities can result in financial losses and may not be an appropriate use of the funds.
Equity release money can, however, be used for various purposes, depending on the homeowner's needs and preferences.
Some common uses of equity release funds include:
- Home improvements or adaptations: Many homeowners use the funds to make necessary repairs, renovations, or adaptations to their homes, such as installing a new kitchen, bathroom, or making the property more accessible as they age.
- Debt repayment: Equity release can be used to repay existing debts, such as mortgages, loans, or credit card balances, helping homeowners to reduce their monthly outgoings and improve their financial situation.
- Supplementing retirement income: Some homeowners use equity release to supplement their pension or other retirement income, providing additional financial security and a better quality of life during retirement.
- Financial support for family: Equity release can be used to provide financial support to family members, such as helping children or grandchildren with education costs, house deposits, or other expenses.
- Travel or leisure: Many homeowners use the funds to enjoy their retirement, travel, pursue hobbies, or simply maintain a comfortable lifestyle.
- Long-term care: Some people use equity release funds to cover the costs of long-term care, either at home or in a care facility, ensuring they receive the necessary support and assistance as they age.
Although equity release funds can be used for various purposes based on the homeowner's needs and preferences, it’s crucial to carefully consider the long-term implications and risks associated with the chosen purpose.
Equity release reduces the value of the borrower’s estate, which can impact the inheritance they leave behind for their loved ones.
Additionally, homeowners should be aware of any potential effects on their tax situation or eligibility for means-tested state benefits.
Consulting a qualified financial adviser can help you use the funds responsibly and in accordance with your financial goals and objectives.
The Equity Release Council’s Standards
The Equity Release Council’s standards demonstrate the industry's maturation over the years, with rules and regulations in place to protect consumers and promote responsible, ethical equity release practices
The Equity Release Council (ERC)2 started life as Safe Home Income Plans (SHIP) in 1991 to clean up the sector’s reputation.
SHIP was rebranded in 2012 and is now called the Equity Release Council.
Equity Release Council standards include guarantees that:
- Lifetime mortgages must have fixed or capped variable interest rates (but be aware that interest rates may still be higher than traditional mortgages, and the total interest cost could increase significantly over time).
- Homeowners have the right to remain living on their property until the plan ends upon their death or when they move into long-term care.
- You’ll have the opportunity to transfer your plan to a new property if you move, provided it meets the lender’s criteria.
- Plans must include a No Negative Equity Guarantee to ensure any debt that exceeds the final sale price of the home will be written off.
- You have the right to pay back a portion of your loan annually, without incurring a penalty, and/or to make monthly penalty-free interest payments to stop the interest from compounding.
4 Overarching Principles for Regulated Equity Release Providers
The four overarching principles of regulated equity release providers, as set out by the Equity Release Council, aim to guarantee fair treatment of consumers and access to a variety of equity release products tailored to their specific needs.
These principles are:
- Transparency: Regulated equity release providers must provide clear and concise information about the products they offer, including fees and charges.
- Flexibility: Providers must offer a range of products that are flexible and can be tailored to meet the individual needs of consumers.
- Security: Consumers must be assured that their interests are protected and that their property won’t be at risk as a result of equity release.
- Guarantees: Providers must offer guarantees that ensure consumers can remain in their home for as long as they choose, and that the total amount owed will never exceed the sale value of the property.
4 Required Customer Outcomes for Equity Release
The four required customer outcomes for equity release include that members of the Equity Release Council must offer advice and services that’s honest, impartial, transparent, and clear.
Here’s a closer examination of these outcomes:
- Consumers will have access to appropriate products that meet their needs.
- Consumers fully grasp the features, costs, and risks associated with equity release.
- Consumers will have access to independent legal and financial advice before making a decision.
- Consumers’ property will be protected and will never be at risk as a result of equity release. (While your property will generally not be repossessed if you adhere to the terms and conditions of the equity release agreement, it’s essential to understand the specific terms and potential consequences in case of non-compliance.)
Equity Release Council Member Requirements
The Equity Release Council member requirements include a set of minimum conditions that must be met by all members.
These requirements include adhering to the council’s rules and standards, being authorised and regulated by the Financial Conduct Authority (FCA)3, offering a range of equity release products that meet the council’s standards, and providing independent legal advice to customers.
Members also have to submit to certain procedures to maintain their ERC membership.
Annual Certificate of Compliance
Lenders must submit an annual certificate of compliance on the anniversary of their membership initiation.
You can ask your lender to view its annual certificate of compliance.
Member subscriptions are renewed annually and are only granted to equity release companies, advisors, solicitors, etc. that meet the relevant requirements.
Fees & Charges
Equity Release member fees and charges will differ depending on whether you’re a provider, financial advisor, solicitor, or associate member.
Financial advice firms are charged an annual fee per advisor on a sliding scale, based on the number of advisors in the firm.
Larger firms pay a lower per capita fee than smaller firms.
These fees range between £195 and £300 per advisor, and there’s an additional £70 application fee for each person listed on the application.
Equity Release Council application fees for solicitors are based on case-load.
Fees range between £450 for up to 499 cases and £10,000 for 20,000 cases and more.
There’s also a £70 application fee for each individual associated with the application.
Associate Members & Providers
Associate members’ and providers’ fees are assessed on a case-by-case basis.
This is because of the variety of product types.
What Rules & Regulations Are Equity Release Advisors Subject to?
Equity release advisors are subject to various rules and regulations to ensure consumer protection and maintain high professional standards.
These rules are enforced by regulatory bodies such as the Financial Conduct Authority (FCA) and industry organisations like the Equity Release Council (ERC).
Some key rules that equity release advisors must abide by include:
- FCA regulation: Advisors must be authorised and regulated by the Financial Conduct Authority (FCA) to provide equity release advice, ensuring they adhere to the FCA's rules and guidelines for conducting business.
- Appropriate qualifications: Advisors must hold relevant qualifications, such as the Certificate in Regulated Equity Release (CeRER) or an equivalent qualification, demonstrating their competence in providing equity release advice.
- Ongoing professional development: Advisors must engage in continuous professional development to maintain and update their knowledge and competence in the equity release sector.
- Treating customers fairly: Advisors must treat clients fairly and provide advice that is suitable, clear, and tailored to the client's individual needs, circumstances, and objectives.
- Comprehensive advice: Advisors should consider all relevant factors, including the client's financial situation, needs, objectives, and risk tolerance, before providing equity release advice.
- Consideration of alternatives: Advisors must discuss alternative financial solutions with clients, such as downsizing, taking out a conventional mortgage, or other options before recommending an equity release plan.
- Clear communication: Advisors must clearly explain the potential risks, benefits, and implications of taking out an equity release plan, including the impact on the client's tax situation, state benefits, and inheritance.
- Personalised illustrations: Advisors must provide clients with personalised Key Facts Illustrations (KFIs) for each recommended equity release product, detailing the costs, features, and risks associated with the plan.
- Independent legal advice: Advisors must ensure that clients receive independent legal advice from a solicitor of their choice before entering into an equity release contract.
- Record-keeping: Advisors must maintain accurate and detailed records of their advice and communications with clients, ensuring compliance with regulatory requirements and enabling effective resolution of any disputes or complaints.
By abiding by these rules and regulations, equity release advisors can ensure a high standard of professionalism, transparency, and consumer protection within the industry.
What Rules & Regulations Are Equity Release Providers Subject to?
Equity release providers are subject to various rules and regulations for the sake of consumer protection.
These rules are enforced by the FCA and the ERC.
Some of the rules equity release providers have to adhere to in the UK:
- FCA regulation: Providers must be authorised and regulated by the Financial Conduct Authority (FCA) to offer equity release products, ensuring they adhere to the FCA's rules and guidelines for conducting business.
- ERC membership: Many reputable equity release providers choose to become members of the Equity Release Council (ERC), which requires them to follow the ERC's standards and principles for consumer protection and transparency.
- Product standards: Providers must ensure that their equity release products meet specific standards, such as providing a no-negative-equity guarantee, and ensuring clients will never owe more than their property's value.
- Clear communication: Providers must present their equity release products clearly and transparently, ensuring customers understand the terms, conditions, and implications of entering into an equity release agreement.
- Treating customers fairly: Providers must treat customers fairly throughout the entire equity release process, from the initial enquiry to the ongoing management of the plan.
- Responsible lending: Providers must assess the affordability and suitability of equity release products for each customer, considering their financial situation, needs, and objectives.
- Independent legal advice: Providers must ensure that customers receive independent legal advice from a solicitor of their choice before entering into an equity release contract.
- Cooling-off period: Providers must offer a cooling-off period, typically 14 days, during which customers can change their minds and cancel the equity release plan without incurring any penalties.
- Complaints handling: Providers must have a robust complaints handling procedure in place, allowing customers to raise concerns or disputes and ensuring these are dealt with fairly and efficiently.
By following these rules and regulations, equity release providers help to maintain a high standard of professionalism, transparency, and consumer protection within the UK’s equity release industry.
What Rules Do Equity Release Solicitors Have to Follow?
Equity release solicitors have to follow certain rules in order to be allowed to operate within the industry.
Equity release solicitors play a crucial role in the equity release process in the UK, providing independent legal advice to homeowners and ensuring that their interests are protected.
They must adhere to various rules and guidelines set forth by professional regulatory bodies, such as the Solicitors Regulation Authority (SRA) and the Council for Licensed Conveyancers (CLC), as well as follow the Equity Release Council's (ERC) standards if they are a member.
Here are some of the rules equity release solicitors have to follow:
- SRA or CLC regulation: Solicitors must be regulated by the Solicitors Regulation Authority (SRA) or the Council for Licensed Conveyancers (CLC), ensuring they adhere to their respective codes of conduct, professional standards, and guidelines.
- Professional competence: Solicitors must possess the necessary knowledge, skills, and expertise in equity release to provide clients with accurate and relevant legal advice.
- Independent advice: Solicitors must provide independent legal advice to their clients, ensuring that they act in their clients' best interests and not be influenced by any external factors, such as the equity release provider or financial adviser.
- Confidentiality: Solicitors must maintain client confidentiality, protecting any personal or sensitive information shared by their clients during the equity release process.
- Clear communication: Solicitors must communicate clearly with their clients, ensuring they understand the legal implications, risks, and responsibilities associated with entering into an equity release agreement.
- Due diligence: Solicitors must conduct thorough due diligence, checking the terms and conditions of the equity release contract, and ensuring that it complies with all relevant laws and regulations.
- Client care: Solicitors must treat their clients with respect, fairness, and professionalism, ensuring they receive the necessary support and guidance throughout the equity release process.
- Transparency: Solicitors must be transparent about their fees and charges, providing clients with a clear breakdown of costs and ensuring they understand what they are paying for.
- Conflict of interest: Solicitors must identify and manage any conflicts of interest that may arise during the equity release process, putting their clients' interests first.
- Record-keeping: Solicitors must maintain accurate and detailed records of their work, communications, and advice related to the equity release process, ensuring compliance with regulatory requirements and enabling effective resolution of any disputes or complaints.
It’s important that equity release solicitors adhere to these rules and guidelines, as doing so will help ensure a high standard of professionalism, transparency, and consumer protection within the industry.
Solicitors must also adhere to the ERC's rules and code of conduct.
This code of conduct states that:
- There must be at least 1 in-person meeting between the solicitor and the customer—this does not include telephonic or electronic meetings.
- The solicitor appointed by the customer is responsible for providing legal advice and ensuring the customer understands the equity release process and wishes to proceed.
- The solicitor must check that anyone acting on behalf of the customer has been validly appointed with power of attorney.
- The solicitor must satisfy themself that a customer believed to be mentally incapacitated is indeed so, by means of a medical certificate or other documentation.
- Where the provider agrees and permits this, the solicitor must provide this advice to the incapacitated customer’s attorney.
- The customer must be separately represented and the solicitor mustn’t be acting for the provider, advisor, occupier, or other third party.
- All legal advisors must fully comply with their regulator’s requirements.
Are There Guidelines to Property Valuations for the Equity Release Industry?
Yes, there are guidelines to property valuations for the equity release industry that valuers and providers must follow to ensure accurate and fair valuations.
Some of the accepted norms for property valuation when it comes to equity release:
- RICS standards: Valuations for equity release should be carried out by a qualified surveyor who is a member of the Royal Institution of Chartered Surveyors (RICS). RICS sets professional standards and guidelines for its members, ensuring high-quality valuations that adhere to the RICS Valuation – Global Standards (the 'Red Book').
- Independence: The valuer must be independent of both the homeowner and the equity release provider to avoid any potential conflicts of interest, ensuring a fair and unbiased valuation.
- Market value: The valuation should be based on the property's current market value, taking into account factors such as size, location, condition, age, and any improvements or modifications that have been made to the property.
- Comparables: The valuer should use comparable properties in the local area to support their valuation, considering recent sales and market trends to determine an appropriate value for the subject property.
- Physical inspection: Accurate valuations require a property inspection. During the inspection, the valuer assesses the property's condition, features, and any factors that could affect its value, such as structural issues, dampness, or planning restrictions.
- Valuation report: The valuer must produce a written report detailing their findings, methodology, and the property's estimated market value. This report is used by the equity release provider to calculate the maximum amount that can be released from the property.
- Revaluation: In some cases, homeowners may request a revaluation if they believe the initial valuation is inaccurate or if significant changes have occurred to the property since the initial valuation. The provider may require an updated valuation report from a RICS-qualified surveyor to reassess the property's value.
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