One of the members of the joint review group set up by the Institute of Actuaries is Charles Golding of Golding Smith & Partners. It states here that the firm has ‘been providing advice to clients in the equity release market since 2003’. Who better to be on a board of independent experts advising the Institute on the selection of specialist Equity Release advisors?
He doesn’t seem to like the PRA Consultation Papers though. He says in his commentary on CP 48/16 here
The difficulty we have with the second part of principle (ii) is that it relies on a comparison of two assets where there is no ready market, the motives of the investors are different and inefficiencies may arise, giving rise to apparent arbitrage opportunities. An ERM investor is largely disinterested in what an investor would pay for a home reversion.
So let’s look at the second part of that principle, CP 48/16 p.17.
… a market participant would prefer future possession of the property on exit to an ERM, given that the property will be of greater value than the ERM if the guarantee is not exercised, or the same value if it is.
What’s wrong with that? It follows from the laws of logic, on the assumption that a rational and self-interested investor would prefer more to less. If the NNEG is going to be exercised in t years, the investor has possession deferred for t years, which is exactly what a reversion is. Why on earth would the investor be ‘largely disinterested’ in a reversion, given that is what they are getting anyway? If on the contrary the NNEG is not going to be exercised in t years, the ERM investor gets only the less valuable loan, so would clearly prefer deferred possession. So in both circumstances the investor will prefer deferred possession to an ERM, as the Man says.
And what are these ‘apparent arbitrage opportunities’? If they are actual, then the market will eliminate them. If they are apparent, they don’t exist, so they are only in our head.
Now Golding is welcome to publish these ideas himself, or perhaps his clients might like to pay him for more ideas on the same line, i.e. that do not appear in the corpus of scientific research journals that are subject to rigorous peer-review, or which are contradicted by approaches that are used and taught all over the world . The problem is the way that the Institute, a professional body established by Royal Charter in the public interest, is allowing such views to gain credibility simply by endorsing them through a committee that almost entirely represents commercial interests.
It is a source of shame to an organisation that has until recently had a distinguished history dating back 170 years.