Overview

The aim of this consultation document is to provide an opportunity for people and organisations to give their views and advice on establishing standards for "Home Equity Conversion" (HEC) schemes, to the Office for Senior Citizens.

The specific objectives of the paper are twofold. The first is to gather further information about the operation of these schemes in New Zealand. Secondly, this paper aims to raise and discuss possible options for regulation in the HEC market.

What are "Home Equity Conversion" schemes?

"Home Equity Conversion" schemes are marketed as a way to make available to older people some of the equity in their homes. They are generally loans or advances made against the capital value of people's homes and drawn down in the form of one or more lump sums or periodic payments or annuities. The capital advances, together with accumulated interest on these advances, usually do not have to be repaid until the owner sells the property or dies. Repayment is generally secured by a mortgage over the home.

The growing interest in HEC schemes reflects the fact that owning a freehold home is the preferred way of saving for most New Zealanders. In the New Zealand environment, there is a greater focus on investment in real estate than in private annuities and pension schemes. New Zealanders, on average, have only 22% of their net wealth in liquid assets such as shares, bonds or bank deposits. In the United States the comparable figure is 65%.

The Minister for Senior Citizens wants to protect the interests and provide peace of mind for borrowers by ensuring that HEC schemes meet certain standards.

To draw up the standards the Office for Senior Citizens seeks the views of:

• older people
• HEC providers
• people and organisations interested in retirement financial planning
• people interested in inheritance matters affected by HEC schemes
• people interested in social policy and related issues.

Why have standards in HEC schemes?

For most older people, the equity they have in their home is the major part of their wealth. Consequently, older people are increasingly turning to HEC schemes to use some of that wealth to supplement their income.

There is a variety of HEC schemes available in New Zealand, and while they operate on similar principles, there are variations in terms and conditions. For example, some schemes involve the sale of the home to a third party with the resident having a guaranteed right of continued occupancy, while others lend against the value of the home.

HEC loans have been available in overseas countries for longer than in New Zealand. Governmental responses to HEC schemes range from:

• national legislation in the United States and the United Kingdom
• the federal government insuring schemes in the United States
• provincial law-making in Canada
• market self-regulation in Australia.

Appendix One contains background information on international approaches to regulating HEC schemes.

The Minister for Senior Citizens, supported by the Office for Senior Citizens, has undertaken to establish a code of minimum standards, although the shape and form of such a code has yet to be established.

This consultation is taking place against a backdrop of measures in New Zealand, such as the Task Force on Regulation of Financial Intermediaries, designed to improve the protections available to users of financial products. To enable this consultation to address the issues for HEC schemes in their entirety, protective measures in existence are also included with appropriate references.

The consultation process

The Office for Senior Citizens will pursue an open and transparent process with the objective of arriving at sensible solutions for both borrowers and lenders of HEC schemes. The Office for Senior Citizens will report to the Minister for Senior Citizens, Hon Ruth Dyson, on the outcomes of the consultation process, along with recommendations on how to address setting and enforcing minimum standards for HEC schemes.

Part 1 of this consultation document contains background information on HEC schemes in New Zealand.

Part 2 contains a series of issues and subsequent questions on which the Office for Senior Citizens would like advice.

The questions are contained in the submission booklet for you to answer and return.

Submissions do not need to use, or follow the format of, the submission booklet. The Office for Senior Citizens is interested in any other aspects of HEC schemes that should be considered, so please include additional comments you may have.

Submissions can be sent to: The Office for Senior Citizens, PO Box 1556, Wellington 6140.

Submissions should be received by 31 March 2007.

Submissions will be analysed and a report on proposals for the Code of Practice is expected to be submitted to the Minister for Senior Citizens by mid 2007.