James Daley: There is no such thing as 'safe as houses' in the current market

The equity release sector must clean up its act

A little over four years ago, at the very height of the technology boom, a few crazy pundits pointed out that companies were over-valued and that the market was in for a nasty fall. The optimists, who were giddy after 20 years of rising stocks, dismissed the bears, continuing to fill their boots with technology companies (and, in the case of fund managers and financial advisers, their clients' boots too). The doom-mongers were eventually vindicated, and the rest is history - a painful era which many investors are still trying to forget.

A little over four years ago, at the very height of the technology boom, a few crazy pundits pointed out that companies were over-valued and that the market was in for a nasty fall. The optimists, who were giddy after 20 years of rising stocks, dismissed the bears, continuing to fill their boots with technology companies (and, in the case of fund managers and financial advisers, their clients' boots too). The doom-mongers were eventually vindicated, and the rest is history - a painful era which many investors are still trying to forget.

But as horrible as this episode and the subsequent bear market proved to be, valuable lessons were learnt by professional and private investors alike. For instance, if a market is starting to display bubble-type characteristics, then it is best to exercise at least a degree of caution.

Surely no company will ever again be as foolish, and as opportunistic, as the likes of Jupiter Asset Management, which launched its Global Technology Fund at the very peak of the market in March 2000.

Enter Newcastle Building Society, which this week announced the launch of a new residential property bond, just weeks after both the Treasury, the Bank of England and numerous other pundits warned for the umpteenth time that house prices are approaching, if not at, their peak. With a 100 per cent capital guarantee, and promising 100 per cent of any growth in the Halifax house price index over the next five years (or 200 per cent over the next decade), Newcastle boasts that its new bond is as "safe as houses".

Astonishing. When it comes to the financial services industry, it would seem old habits still die very hard.

As Newcastle well knows, while capital guarantees sound very cosy, they do not mean that you can't lose money. If the UK housing market does not finish at least 15 per cent higher after five years, then your investment will not even have kept pace with inflation. And if you believe the doom-mongers this time, a fall in house prices is far more likely than double-digit growth.

Don't get me wrong, I'm not about to become the latest pundit to predict a crash in the property market. Nevertheless, there is little doubt that after five years of record growth, prices are now being reined in by rising interest rates. Furthermore, for Newcastle to assert - as it does in its press release - that its bond is a good substitute for buy-to-let, is seriously misguided. For a start, its bond pays no income, only a capital lump sum at maturity.

Given that you can guarantee a return of almost 30 per cent in a five-year instant access savings account, why would you tie your money up for five years with Newcastle, only to risk making nothing at all?

To add insult to injury, the bond also pays a higher than average 5 per cent commission to financial advisers. Although this doesn't come out of the clients' investment, such a high rate will surely encourage some to sell the bond for all the wrong reasons.

With consumer confidence in UK financial services having recently reached all-time lows, the industry has been under fire from all sides to brush up its act. It is disappointing that just one year after the worst bear market for several decades, there are still so many examples of the practices which got the industry a bad name in the first place.

* IT will be a year next week since the Treasury Select Committee first got stuck into the UK store cards market for its extortionate rates, lack of transparency, and complete absence of scruples when handing out credit. With typical interest rates of around 30 per cent, John McFall, the committee's chairman, rightly lambasted the industry for "fleecing" consumers.

Since then, the Office of Fair Trading has labelled the market uncompetitive, while the Competition Commission is now in the process of carrying out its own investigation. So what progress has been made to move towards a more consumer-friendly market in the meantime? Er, well not very much actually. Of the 27 store cards catalogued by the financial website Moneyfacts, only Liberty has decreased its APR significantly since last summer - from 25.7 to 18.9 per cent.

As the industry should know, the sentences are always that much worse for those that refuse to co-operate. It is only a matter of months now before the sector will thankfully be made to answer for its complacency.

The equity release sector must clean up its act

Taking out an equity release plan - which allows you to extract money from the value of your house - is one of the biggest and most complex financial transactions that most people will make in their retirement. (Although after watching one of the fluffy adverts on daytime television, you'd be forgiven for thinking that it's a breeze)

Yet the quality of advice and care taken by advisers remains poor. As this week's investigation into the sector on page 7 reveals, an increasing number of elderly are being sold unsuitable products, or advised to withdraw more money from their home than they need. This often leaves them unable to provide the inheritance they had hoped, or to cover long-term care costs when they arise.

It's not just the advisers who are at fault either. High costs and inflexible products are as much to blame for the poor ride which so many customers get. While many clients will only want to withdraw a relatively small amount from their property, most providers will warn that they cannot guarantee they will allow further withdrawals at a later date. This puts pressure on clients to take out more than they need initially.

As the sector moves within the Financial Services Authority's remit later this year, there is a real opportunity to clean up the equity release market and ensure that customers are given quality advice. A good start would be the introduction of a new exam which all advisers must take before advising on the sector. In the meantime, buyer beware.