By Jennifer Clarke BBC Radio 4's Inside Money

The Financial Services Authority has acknowledged that when it starts regulating only part of the equity release market next year, the limited scope of its regulation could prove confusing for consumers.

Susan de Mont, Head of Mortgage Policy at the FSA told BBC Radio 4's Inside Money programme she accepted that "at the moment it is a bit muddled for consumers", but pledged that the FSA "will make that better and clearer".

Your loan could double in 10 years, and that is a big risk for people to take on Susan de Mont, FSA

In October 2004 the FSA will begin regulating mortgages for the first time.

This means it will set the rules governing the sale of equity release mortgage products, which it calls "lifetime mortgages".

The regulator has said it considers these products "high risk" because of the way they work.

Snowball effect

FSA regulation of part of the market begins in 2004

Also called "roll up" mortgages, the borrower repays neither the capital nor the interest on the loan. Instead the interest is added to the loan, "rolling up" like a snowball.

The debt keeps growing and is not repaid until the house is sold - usually after the borrower either dies or goes into long term care.

Interest rates on these products are higher than normal, typically around 7%.

Susan de Mont warned: "The amount of the debt can rise very quickly," adding that "your loan could double in 10 years, and that is a big risk for people to take on."

The FSA is concerned that the full impact of this snowball effect is not made clear enough to consumers.

When its new rules take effect next year, companies which sell lifetime mortgages will have to provide a table spelling out exactly how the debt will grow in the future.

However, the regulator will not be responsible for regulating the other half of the equity release market, called home reversion.

Under such schemes, the consumer sells part of his house to a company in return for a lump sum, and /or a regular income, and the right to live in the house rent-free for the rest of his life.

Consultation paper

Susan de Mont admitted the situation is "muddled"

Susan de Mont told Inside Money that the Treasury sets the scope of what the FSA can regulate, and because home reversion schemes are not technically mortgages, they are "outside what the government has asked us to do".

The Treasury announced back in June that it would issue a consultation paper on whether or not the FSA should be given extra power to regulate home reversions.

If it does decide to grant those powers, new legislation would be necessary. This takes time.

Consumer group concerns

The FSA also has a statutory duty to consult with industry and consumer groups before implementing any new regulation.

Because of this, Susan de Mont concluded that even if the Treasury did decide it wanted the regulator to be responsible for home reversion schemes as well as lifetime mortgages, it would not be possible to put this in place by October 2004.

"That would have to follow at a later time," she said.

The Consumers Association is very worried about the prospect of such a "significant gap" in regulation.

Rebecca Fearnley has just compiled a report into the equity release market for Which magazine.

She told Inside Money that failure to regulate home reversion schemes would leave a "loophole" which "unscrupulous providers" could exploit, leading to "a danger of mis-selling".

The Treasury admitted there was a "potential issue" for consumers, adding this was one of the reasons it would be publishing a consultation document. This is expected in September 2003.