Mortgage advisers offering equity release plans to older homeowners are failing to offer good quality advice, the chief City watchdog said today.

In its second review of the equity release market since taking over mortgage regulation in October 2004, the Financial Service Authority found that standards are "unacceptable" at many firms of financial advisers and has threatened to take action against those that have not come up to scratch.

The mystery shopping exercise found that the main culprits were advisers for whom equity release forms only a small part of their business. Many did not ask enough questions or issue the correct documents before recommending the loans to borrowers.

Although specialist equity release advisers faired better in the FSA's investigation, the findings will come as a blow to the equity release market at a time when it is trying to improve its reputation. SHIP, the self-regulatory body for the equity release industry, recently announced new measures that it hopes will improve the level of advice given to borrowers. From August 2007, SHIP will only list advisers who have a specialist lifetime mortgage qualification. Jon King, chief executive of SHIP, says: "By insisting that advisers are qualified, we believe that we will stop 'dabbling' in equity release and be left with only those who are serious about the market and their customers."

But consumers are still wary. Which? the consumers' association, thinks the schemes are "expensive" and "risky".

Equity release loans enable older homeowners to access extra cash by borrowing against the value of their home. There are two kinds of scheme: lifetime loans and home reversion schemes. Lifetime mortgages enable borrowers to take out a loan secured against their property up to a maximum of 50 per cent of the property's value. You continue to own the property until you die or move into residential care, when the loan, plus rolled-up interest, is repaid. There are now guarantees that the repayment figure will never exceed the market value of the property. Home reversion schemes involve selling part or all of your home to a company in return for a lump sum or regular income. You are then a tenant until you die or go into care, at which point the company sells the house and collects the proceeds.
At the moment, the FSA only regulates lifetime mortgages, but the watchdog may use the findings from this investigation as it prepares to begin regulation of home reversion schemes, due to come into force next summer.

For a list of SHIP members, visit www.ship-ltd.org