A new report released today from the Adam Smith Institute suggested that the UK’s equity release sector is “greatly” under-valuing their no negative equity guarantees, with the regulator missing opportunities to manage the risks.

The Asleep at the Wheel: The Prudential Regulation Authority and the Equity Release Sector report highlighted that the equity release sector is in “big trouble”, with the Prudential Regulation Authority (PRA) having been aware of the issues for “years”. The report claimed that the regulator has knowingly allowed firms to use valuation methods that are “unfit for the task”.

Report author Kevin Dowd was relentless, describing the equity release “fiasco” as another case of “incompetent management, undervalued long-term guarantees and regulators who are not up to their jobs”.

“Nearly two decades and one Global Financial Crisis later it seems like history is repeating itself,” Dowd added.

The UK’s equity release market has trebled in size between 2012 and 2017, and it is forecast to grow by a further 40% by 2020. PRA stress tests in 2017 indicated that a 30% house price fall could result in losses between £2bn and £3bn, with the exposures skewed towards firms with larger house price or ERM exposure.

The report argued that the PRA is confused about the capital requirements it imposes upon the industry, and supported this argument with an answer given by deputy bank governor Sam Woods at a parliamentary committee in 2017. At the committee, Woods suggested that the requirement was £126bn, while his colleague David Belsham stated it was just £80bn moments later.

Durham University professor of finance and economics and report author Kevin Dowd said: “We never seem to learn. Equitable Life hit the rocks two decades ago because it under-valued its long-term guarantees. Now the Equity Release sector is in deep trouble for the same reason. In both cases, the firms involved got into difficulties because they were using voodoo valuation methods that had no scientific validation. Same causes, same results.”

Dowd concluded that the “most astonishing” thing about this “fiasco” is that the PRA was aware of the poor valuation practices but permitted them anyway, and said it would be “interesting to know why”.

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