Keeping up appearances

Few financial products have greater potential to tug at Australians’ emotions than reverse mortgages, according to Kieren Dell, executive director of the Senior Australian Equity Release Association of Lenders (Sequal).

“We’re talking about a product that includes property, senior citizens and inheritance in the mix,” Dell explains.

“These are all highly emotive issues for Australians. Beneficiaries, for example, need to know they’re not going to get an unencumbered property. There may well be a debt on it.”

Code of conduct

The emotive potential is a key reason why Sequal’s 10-point code of conduct “strongly encourages” borrowers to discuss the transaction with family members and seek advice from a qualified financial planner, Dell says.

In fact, the launch of Sequal itself in January this year is a result of the emotive potential of the product.

As an attempt at self-regulation, Sequal is modelled on the Safe Home Income Plans (SHIP). SHIP was formed to clean up the sector in the UK after adverse consumer experiences in the 1980s and early 1990s.

As house prices crashed and interest rates soared, people holding reverse mortgages found they owed more than their homes were worth. In a few cases, older people were evicted from their homes, with all the accompanying bad publicity for the products.

Five of an estimated 11 providers in the Australian market are currently members of Sequal, Dell says. Membership includes most of the major providers, with the notable exception of the Commonwealth Bank of Australia.

The remaining providers are a diverse group of specialist lenders, including both credit unions and major financial institutions.

“It’s not automatic to be a member of Sequal just because you offer a reverse mortgage,” says Dell, who predicts there will be “about 20 providers by this time next year”.

He adds: “Members have all agreed to abide by our code of conduct, and have all been certified to make sure they do so. Membership is a tick of approval saying they meet all of the requirements.”

As a measure of Sequal’s success, Dell says, financial planners and brokers are beginning to accept membership as a base level of comfort. “They’re saying they’ll only use Sequel members’ products.”

Another measure of success are the many requests the association receives from the distribution side to join Sequal. “This can’t happen, of course, because Sequal is an association of lenders, and we intend to keep it this way. However, we are currently working on endorsing planner education programs, as a way of satisfying demand.”

No negative equity

Product design and the advice/sales process are two key areas that the Sequel code of conduct covers. The no negative equity guarantee is the cornerstone of the code from the point of view of product design, says Dell.

“It’s an absolute must for Sequal membership because it’s at the heart of client confidence. It ensures they will never, in any circumstance, owe more than the value of the property.”

A lot of the code’s 10 points relate not so much to the product but to the advise/sales process, he says.

“How the advice is given is just as important as the product design process in terms of a code of conduct.

“For example, it’s an absolute requirement that every one who signs up for a reverse mortgage with a Sequal member must get independent legal advice. They are signing a mortgage contract, after all. They need to understand what their obligations are under that loan.”

There is also a strong recommendation that clients talk to Centrelink, “because you don’t want them to lose their pension through the process of taking out a reverse mortgage”.

Dell says he spoke to the Australian Securities and Investments Commission (ASIC) in the course of Sequal’s formation and it’s his understanding that ASIC sees self-regulation as a positive move, next to having no regulation. “But, of course, they also will want to keep an eye on the market.”

Adviser compliance

Sequal requires a very similar product and fee disclosure to that presented to clients under Financial Services Reform (FSR), he says, even though reverse mortgages are not financial services products, and therefore do not technically fall under the FSR regime.

The reason is a reverse mortgage is a loan, and as a loan it comes under the regulation of the uniform credit code, a set of state-based regulations, uniform across the nation.

“Even so, and this is where it starts to get a little bit murky, planners using reverse mortgages in a retirement income perspective will certainly have to comply with all the requirements of their licences. A planner giving advice will operate under not just FSRA [Financial Services Reform Act] but the Trade Practices Act, and a whole lot of other regulation,” he says.

In the final analysis, Dell says, planners and brokers still have to go through an accreditation process with the providers.

It’s the providers who are trying to control the standards, such as insisting on the provision for clients to get legal advice, because ultimately it is with them that the product risk lies.

In Dell’s opinion most providers are meeting Sequal’s code of conduct, whether they’re members of the organisation or not. But there are also products that are popping up that are not necessarily reverse mortgages, he says.

“There was one scheme, for example, where an organisation would buy the house upfront. The person would pay them a peppercorn rental each year in return for an income stream over 30 years. Now that product is flawed, in the sense that there is too much risk for the retiree that the organisation will go under and cannot keep making the payments,” Dell says.