rose to move, That the draft order laid before the House on 13 September be approved [35th Report from the Joint Committee].

The noble Lord said: My Lords, I welcome this opportunity to commend to your Lordships the measures the Government have introduced to ensure that consumers of home reversion plans and Ijara home financing arrangements will be protected by FSA regulation. These changes are to be achieved through the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2006. They take effect from April next year.

For completeness, I should also mention two negative procedure orders also before Parliament: the Proceeds of Crime Act 2002 (Business in the Regulated Sector) Order 2006 and the Terrorism Act 2000 (Business in the Regulated Sector) Order 2006, both of which make consequential changes. They align the money laundering treatment of arranging or advising on the products that the main order deals with, and they reduce burdens on firms.

These changes follow the Regulation of Financial Services (Land Transactions) Act 2005, which was widely supported by industry and consumer groups. That measure was also widely welcomed by your Lordships. It received Royal Assent last year. Noble Lords will be pleased to hear that there is equally widespread support for the secondary legislation on which the Government consulted earlier this year. The actuarial profession, Safe Home Income Plans—the self regulatory body—the Association of British Insurers and the Financial Services Consumer Panel were united in support.

Respondents to the home reversion proposals were generally strongly supportive of regulation and endorsed the approaches the Government had taken. They raised a number of points of detail, and the Government’s published response to the consultation analyses those. Nine respondents commented on the home purchase plan proposals. Generally, respondents supported the detailed proposals for defining and regulating these products. I want to put on record that the Government are extremely grateful to all those who took part in the consultation.

I shall set out briefly what we mean by these different products. Equity release schemes allow some elderly homeowners to release the value of their property in return for all, or a share, of their interest in the home. With home reversion plans, the consumer sells all or part of their home but retains the right to live there. These are not yet regulated by the FSA.

The second main issue is to extend regulation to what we describe in the order as home purchase plans. Sharia-compliant home financing arrangements have been developed to meet the same purpose as a conventional mortgage product while complying with Islamic principles. There are two main types. First, in Murabaha structures, an institution buys and re-sells the home to the consumer, accepting payment of the price over a lengthy period. These are already regulated by the FSA. Secondly, Ijara products relate to where the institution combines a sale with renting the un-owned share of the property to the consumer. These are not yet regulated by the FSA. Our aim is to remove the current regulatory imbalance between Murabaha and Ijara products. All consumers who choose to use these non-interest bearing products will benefit from FSA protection. This is basically a question of fairness and of a level regulatory playing field.

Consumers of home reversion plans are not completely without protection at the moment. The market is subject to voluntary protection through the industry group Safe Home Income Plans (SHIP). SHIP members agree to comply with a code of practice and undertake to provide a fair, simple and complete presentation of any plan that they offer. They also offer a guarantee that consumers will never owe a lender more than the value of their home—a “no negative equity” guarantee. These protections stop short of the protections offered by statutory regulation and the FSA’s regime. Such a regime would extend to consumers the FSA protections and would ensure a level regulatory playing field in the equity release market, removing any artificial regulatory distortions.

We are also committed to tackling regulatory barriers that may hinder the development of a Sharia-compliant financial product. Purchasing your own home is potentially the largest financial transaction people may make during their lifetime and all consumers deserve suitable protection. Regulation has an important role in protecting consumers of these products, building market confidence and facilitating innovation.

I have also been asked by the Merits Committee briefly to address in my remarks the Government’s approach to Islamic finance. London is already leading the West in Islamic finance. It has more banks supplying services in accordance with Islamic principles than any other western financial centre, and British professional services firms are leading the way in the development of Islamic business services.

It is the Government’s ambition to ensure that, through London’s international markets, Britain strengthens its position as the world’s leading centre for international finance. The Government will continue to work with the Financial Services Authority to modernise the regulatory and tax framework to ensure that it keeps pace with opportunities in matters of traditional UK strengths, along with new and innovative areas such as Islamic finance. For example, there is a nascent market for Sharia-compliant home financing products. The changes that we are making in this order are to avoid market distortion, ensuring a level regulatory playing field within the market and that all consumers who choose to use these non-interest-bearing products will benefit from FSA protections. However, I am sure that it will be understood that wider issues of Islamic finance go beyond the scope of this order.

The FSA has had responsibility for regulating first charge residential mortgages since October 2004 and, following consultations in 2003 and 2004, we decided to bring home reversion plans and Ijara home financing arrangements within the scope of FSA regulation. Because these types of transactions are based on sale and purchase arrangements in land, and are not loans secured on land which are specified in the Financial Services and Markets Act 2000, primary legislation was required. The Regulation of Financial Services (Land Transactions) Act 2005 amended the Financial Services and Markets Act 2000 to add an appropriate reference to these transactions. This order is needed to complete this process by defining in detail the new activities to be regulated.

In addition, the FSA has published its own cost-benefit analysis and draft rules and guidance. It proposes a range of rules tailored to deal with the specific risks inherent in the home reversion and Ijara home purchase markets. We anticipate that, subject to this measure completing its passage through Parliament, the FSA will make the final announcement of its rules next week.

This order amends the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. It specifies as regulated activities entering into, administering, arranging and advising on regulated home reversion plans and regulated home purchase plans. This means that the FSA will be able to require firms undertaking these activities by way of business to be authorised unless they benefit from an exemption.

The order also clarifies an existing provision relating to high net worth “business angel” companies and amends the overseas person exception to replace the reference to a “non-resident individual” with a reference to a person who is not resident, in order to catch corporate trustees who are resident overseas. The order extends the existing exclusions from regulation for activities such as giving general advice in newspapers to bring them into line with the treatment of other mortgage-related activities.

The order defines home reversion plans and home purchase plans in detail and the activities to be regulated in relation to these products. These differ from the equivalent regulated activities for mortgages in two important respects. First, intermediaries for home reversion providers—“the lender”—and for reversion sellers will be regulated. Secondly, the acquisition of an existing home reversion by a new provider, including from a provider who is not the original provider, will be regulated. These differences were consulted on and received support.

Part 3 of the order makes consequential amendments to the Consumer Credit Act and other primary legislation. Part 4 also makes consequential amendments to secondary legislation, so that the newly regulated activities are dealt with elsewhere in the body of financial services and other secondary legislation. Part 5 establishes a transitional regime to provide a degree of continuity for firms which have submitted an application to the FSA for permission or variation of permission or an application for approval which has not been dealt with by 6 April next year, and which meet the other conditions. Finally, the schedule to the order sets out further details of the regime that will apply to persons who are subject to the transitional provisions.

In conclusion, I believe that this measure rightly commands wide support and I commend it to your Lordships. I beg to move.

Moved, That the draft order laid before the House on 13 September be approved [35th Report from the Joint Committee].—(Lord McKenzie of Luton.)

My Lords, I thank the Minister for introducing the order, and I put his mind at rest immediately by saying that we support it. We supported the Regulation of Financial Services (Land Transactions) Act when it was debated in your Lordships' House just a little over a year ago, and we now support its detailed implementation.

When I looked back at the issues that we brought forward when we debated the Bill, as it then was, in October 2005, I found that we raised concerns about the cost of regulation. I am delighted to find that the final estimate of the cost of regulation has proved lower than it was when we debated the Bill. I do not know whether that is a first, but lower final regulatory costs are certainly welcome.

At that time, we also raised concerns about timing. The Government started bringing home reversions within the FSA's regulatory ambit back in November 2003, nearly three years ago. I then asked when the new regulatory arrangements, and therefore complete protection for consumers, would be brought into effect. The Minister told me at the time that implementation would be in the first quarter of 2007. He concluded his remarks at Second Reading by saying that the Government,

“now wish to press ahead and implement it as quickly as we can”.—[Official Report, 17/10/05; col. 565.]

That sounded quite hopeful, but I now see that the implementation date has slipped back to the second quarter of 2007. It would be very easy to say that it is just a matter of two months, but we started this three years ago. The plain fact is that, although a voluntary scheme is in place, at present consumers have imperfect protection, and there has been a general consensus that that issue should be put right. I have never quite felt that there has been a sense of urgency in getting these arrangements in place, and perhaps the Minister can comment on that.

I also raised with the Minister last year the plight of those who had entered into home income or shared appreciation mortgages marketed in the late 1980s. At that stage, some, but certainly not all, lenders had entered into voluntary arrangements, which mitigated some of the worst cases of hardship. But not all lenders participated in that and I urged the Minister to use the Government’s de facto powers to achieve an equitable outcome. The Minister said that the Government would continue to do what they could. Can he update the House on that? Are all lenders now engaged in a process which has removed the problems often encountered by very elderly people, who have been enticed into these arrangements, as a result of the unregulated nature of home income and shared appreciation mortgages? If not, will the Minister say what else the Government will do about this?

My Lords, it is literally a year and a week since we debated the primary legislation from which this order flows. The Minister’s description of its purpose brought back memories of that happy time.

The noble Baroness has just made a point about timing. I have some sympathy with her, not least because there is evidence that some providers have been waiting for these regulations to come into effect before deciding to offer products to the market. These are useful products for a lot of people, so urgency would and should have been of the essence. However, we are grateful that the regulations are now before us and that they are coming into force reasonably quickly.

It is also pleasing to note that the likely cost of introducing and managing the order is less rather than more than was envisaged. The figures that were bandied about were very high, so I am particularly pleased. Without going into the minutiae of the new computer programmes or whatever would be required, it seemed to me that this would be a big barrier to entry for many providers. I think that during the previous debate we were talking of costs of more than £400,000 for a regulated firm.

I should welcome the Minister's view on the press speculation that these products might serve as a form of inheritance tax avoidance. Under these provisions, a person could sell a half or two-thirds of a whole house and at that point distribute the income to his heirs and successors but, at the point of death, he would not have ownership of the assets. Subject to the seven-year rule, this might be a rather crafty way of avoiding inheritance tax. It seems to me that the innovation used by—I shall not say “the accountancy profession” in present company—the markets for providing people with ways of avoiding inheritance tax knows no bounds. I wondered whether this issue had crossed the Treasury's path, whether the Treasury thought that it was likely to be significant and, if so, whether it had given any thought to the potential leakage of revenue that might flow from it.

Subject to that question, we remain as supportive of this measure as we were a year and a week ago.

My Lords, I thank both opposition Benches for their continued support for these provisions and the thrust of the order. I shall try to deal with their points.

The noble Baroness, Lady Noakes, and the noble Lord, Lord Newby, talked about how the cost of regulation had gone down. This came about through the FSA's own calculations, which gave us better insight into what was involved, as it had become more focused on the detail of what its regulation might entail. Whether or not that is a first, I do not know, but it is certainly to be welcomed as good news.

Timing was also mentioned by both the noble Baroness and the noble Lord. I accept that 6 April is just into the second quarter, although not by very much. As to why it has taken as long as it has, the Government will regulate only where there is a clear need. We are often accused of over-regulating but, on this occasion, it seems to me that we are accused of not regulating speedily enough. It is important to establish the costs and benefits of regulation before proceeding with it. These are complex products and it is important to get the regulation right. That is why two consultations were completed in advance of the Regulation of Financial Services (Land Transactions) Act 2005, and we consulted earlier this year on the technical detail of the secondary legislation. We published the results of that consultation in mid-September. In addition, the FSA has consulted on its rules, but I hope that we will now have a shared interest in ensuring that this measure is implemented as quickly as possible.

The noble Baroness, Lady Noakes, asked about home income plans, which we touched upon when we debated the primary legislation. That matter comes outside the ambit of the order but I shall update the noble Baroness as best I can. There is very little that the Government can now do; it is for lenders to resolve the situation with the people who took out these products. Most lenders have offered a package of measures to home income plan investors to deal with the residual debt, and the Government hope that all lenders will continue to take as generous and sympathetic an approach as possible to that debt. The Government do not believe that it would be appropriate or desirable to go beyond the protections offered by the 1986 Act and the further steps taken to achieve retrospective redress for consumers in this instance.

The Government have every sympathy with consumers who find themselves in difficulty having taken out a shared appreciation mortgage, but no evidence of misselling has been found by the Financial Ombudsman Service to date, so it is difficult to see what grounds there are for compensation. Consumers can access the Financial Ombudsman Service if they feel they have been badly advised or that the mortgage has been missold. Although I reiterate the Government’s sympathy, if there has been no misselling it is difficult to see what else might be done.

The noble Lord, Lord Newby, asked an intriguing question about inheritance tax. Of course, the Government are very keen to ensure that loopholes in inheritance tax are closed at the earliest opportunity. I know there are those who would wish to abolish inheritance tax, but perhaps that is a debate for another occasion. The Government have assisted some of these products which were in danger of being caught by the pre-owned assets legislation. Regulations came into force on6 April 2005 which introduced an exemption for equity release arrangements from the pre-owned assets charge. The commitment was made by the Paymaster General in autumn 2004 that arm’s-length equity release transactions would be exempt from the pre-owned assets charge, even if the owner sells only part of their home. That was a facilitating measure and not a restrictive one. The fundamental point is that we need to keep a close eye on all transactions of this nature if they are being abused as an inheritance tax or other tax avoidance device.

I thank noble Lords for their support for the order. If the order is approved tonight, the FSA will be able shortly to open its doors for applications from firms carrying out regulated activities. This will give firms the necessary time to prepare for the start of regulation next year. Subject to the order completing its passage through Parliament this evening, the FSA will take a further important step when it publishes its detailed rules and guidance next week. As set out in this legislation, regulation will take effect from 6 April 2007.

In general, our approach throughout has been to establish a new regulatory regime, broadly equivalent to the existing mortgage regime. It is only right that consumers of home reversion plans and Ijara home financing arrangements benefit from consumer protections afforded by FSA regulation, and I think that that view is widely held. This will strengthen confidence in the market, and consumer confidence is an essential base for diverse and competitive markets. That is an outcome which I think your Lordships will be keen to support, therefore I commend the order to the House.

On Question, Motion agreed to.