Considered in Grand Committee
This order extends the scope of the Financial Services Authority regulation to include the sale and rent-back market. Regulation will bring important protection for consumers in this market, preventing exploitation of vulnerable homeowners and providing a means of redress for those who experience problems. Full regulation of this market will commence in June 2010, but this order introduced real protections for homeowners now by introducing an interim regulatory regime on 1 July this year.
The sale and rent-back market, sometimes referred to as the sale and lease-back market, offers homeowners the option of selling their properties at discounted rates in exchange for tenancy agreements. Sale and rent-back agreements effectively combine two transactions: first, individual homeowners sell their property at a discount and, secondly, they are offered an agreement to remain in the home as a tenant.
A range of stakeholders, including consumer groups and mortgage industry representatives, have raised concerns about the sale and rent-back market. The main concerns are, first, that these arrangements are often taken up by vulnerable homeowners facing repossession; secondly, that these homeowners may be entering sale and rent-back agreements mistakenly believing that these agreements offer secure tenure in the medium to long term; and, thirdly, that with increasing numbers of homeowners experiencing financial difficulty as a result of the global financial downturn, the scale of the problem is likely to increase.
I will come to the specifics of the order shortly, but it may be useful, given the context that those entering into sale and rent-back agreements are often homeowners facing repossession, if I first take a moment to set out the framework of support that the Government have put in place for homeowners during these difficult times. Statutory regulation of mortgages and credit provides homeowners with important protection and appropriate means of redress. In 2004 the Government extended the scope of FSA regulation to cover first-charge residential mortgages. The FSA’s regime requires lenders to treat their customers fairly and to treat repossession as a last resort. Regulation of other credit business is covered by consumer credit legislation administered by the Office of Fair Trading. The regime has been strengthened by the recent implementation of the Consumer Credit Act 2006.
Regulation of mortgages and credit is supported by the new mortgage pre-action protocol introduced in November last year. This set out clear guidance on what action the courts expect lenders to take before bringing a claim to the courts to help ensure that lenders have tried to discuss and agree alternative courses of action with the borrower.
The Government launched the homeowner mortgage support scheme on 21 April. This new scheme, together with changes to support for mortgage interest and the Government’s mortgage rescue scheme announced in the 2009 Budget, will help homeowners who experience a temporary income shock or lose employment, or are otherwise vulnerable, to remain in their homes. The Government have also taken action to help ensure that every household struggling with debts has access to free and impartial debt advice.
Against this backdrop of support for homeowners, the Government are proposing specific protections for those who may be considering a sale and rent-back agreement, which is the basis of this order. The action follows consideration of the sale and rent-back market by the Office of Fair Trading. In response to stakeholder concerns, in the Budget 2008 the Government asked the OFT to investigate the market and consider appropriate options to strengthen consumer protection. On 14 May last year the OFT announced that it would conduct a formal market study, working to a tight timetable in the light of concerns about this market.
The OFT published its report on 15 October. Its market study found that the potential for severe consumer detriment in connection with sale and rent-back agreements is unlikely to be addressed through the existing framework of consumer protection, other Government initiatives to help homeowners in difficulty under way at the time of reporting, or by industry self-regulation of the sale and rent-back market. The report recommended that the sale and rent-back market should be regulated by the FSA. At the 2008 Pre-Budget Report, the Government confirmed their intention to consult on this, including extending the scope of FSA regulation.
We published the consultation on 6 February. It sought views on three options: maintaining the existing framework, self regulation and FSA regulation. The consultation also invited views on the proposal for the FSA to put in place its regulatory regime via a two-stage approach. This would involve an interim regulatory regime which would take effect as soon as the statutory changes came into force and a full regulatory regime at a later date, following a full consultation and cost-benefit analysis by the FSA. Alongside the consultation, the FSA published a consultation on an interim regulatory regime so that it would be ready to introduce consumer protection swiftly, if asked. Both consultations closed on 1 May, and the Government published a summary of responses to their consultation on the second of this month. Alongside this, the Government laid before Parliament the order that we are looking at today.
Following consultation, the Government consider that extending the scope of FSA regulation to include sale and rent-back agreements is the most appropriate way of ensuring consumer protections in the sale and rent-back market. We consider that a two-stage approach to introducing regulation, including the use of an interim regime, represents an appropriate and proportionate way of balancing quick action to protect consumers with the rights of firms already conducting business in the market.
The order we are debating introduces regulation of sale and rent-back agreements by this two-stage process. Interim regulation will commence on 1 July this year. At the end of the summer, the FSA will consult on rules for its full regime, which will come into force in June next year. Under the interim regime, firms will need to meet FSA threshold conditions, including the requirement to have adequate resources and to be run by fit and proper people. Firms will also have to comply with the principles for businesses and meet a number of systems and controls and conduct of business rules. That is the second stage of the process. The first stage is for almost immediate implementation, provided that the Committee considers the order to be acceptable. I beg to move.
I thank the Minister for introducing the order, to which we will not object. The Government asked the OFT to look at the sale and rent-back market and have based their solution on the advice from the OFT. They have consulted, so they cannot be faulted on those grounds. However, I have to say that I have a tinge of regret that we are unleashing the full might of the FSA’s regulatory powers on a relatively new market, which is of indeterminate size but is certainly highly fragmented, and about which—as the OFT study revealed—we know relatively little. My concern is that the costs, which are estimated at £8,000 on a one-off basis and £20,000 per year thereafter, may well deter providers of sale and rent-back products.
The Treasury impact assessment is based on 1,000 providers and 5,000 transactions a year—that is, on average, five transactions per provider. If you have to recoup in year one both the set-up and the ongoing costs, you have to recoup more than £5,000 per transaction on average. We have to bear in mind that these transactions concern relatively small amounts and certainly involve homes lower down the valuation scale.
I do not doubt that there have been circumstances in which owners of property have entered into unwise transactions, possibly induced by purchasers to sign up to terms which were unduly favourable to the purchaser and unfair to the owner of the property. However, it is clear from the OFT report that sale and rent-back products can in fact be a suitable response for some people, especially those who are already over-borrowed but who place a high value on remaining in their own home. These are not people who would benefit from the mortgage protection schemes and the like to which the Minister referred. Their problems are too deep-seated to be dealt with by those sorts of protections.
The impact assessment has an impossibly wide range of costs and benefits of the regulatory solution in the order—between net costs of £953 million and benefits of £1,327 million. The Treasury is to be commended for its honesty in revealing the wide range of potential outcomes, but this underlines—for me, at least—the difficulties that we have in justifying a regulatory solution. I instinctively fight shy of a regulatory solution if another solution can be found. I accept, though, that on the basis of the work that is done by the Treasury, no satisfactory self-regulatory system seemed to be available. There is evidence that some consumers have been harmed by sale and rent-back products, but precious little evidence, anecdotal or otherwise, to weigh in the balance on the other side.
My final set of questions to the Minister concerns the future of regulation. We constantly add regulated activities to the FSA, but I do not think that we ever take them away. Will he say whether the Treasury and/or the FSA believes it appropriate to look at the regulated activities that are accreting in the FSA to see whether they continue to be justified over time?
More specifically, does either the Treasury or the FSA believe that it should review the power that has been added in the light of the difficult evidential base behind it and the understanding of what the consequences of regulation might be? Does the Treasury believe that a review would be appropriate after a number of years to see what the impact of this power has been on the availability of finance of different kinds to homeowners? There is a danger that well-intentioned regulation—this is clearly that—could actually kill the market for sale and rent-back entirely, and I am by no means convinced that that is the right outcome for all consumers.
We on these Benches not only do not object to this measure; we positively welcome it. We believe that there is increasing evidence that the sale and rent-back market is becoming a serious scandal. I accept the noble Baroness’s point that the evidence is not very clear—it is a fairly new market—but there is a great deal of evidence that unscrupulous operators are preying on very vulnerable people. In this case, the Government have taken the right decision, and the FSA now needs to step in and regulate this.
How will the safeguards and the protections for people work in practice? Compensation after the event is never as good as preventing a transaction that is not right and preventing a rip-off. Clearly, solicitors have to act on a transaction of this kind. Will the Minister—or, rather, the FSA through him—say whether solicitors have a duty of care to their client to warn them that the transaction into which they are going to enter could be illegal, if the order is passed, or certainly not in their best interest? Will the FSA take steps to ensure that solicitors are put on notice so that it is even a question of professional misconduct if they do not properly advise the client? This is a practical point, particularly as—as the noble Baroness said—we are probably talking about fairly low-value houses in many cases. We want to prevent the abuse, the scandal, from happening at the point of sale rather than having an involved compensation procedure afterwards.
In general, however, we think that regulation is necessary in this case.
I am grateful to both noble Lords for their support for the measure. I noted the noble Baroness’s reservations, and I recognise the figures. After all, they are government estimates of the costs. She is absolutely right that this is a question of balance between the cost to those who might provide these opportunities and the particular problem that has been recognised. That came through strongly in consultation, but it was also a reflection of the fact that anxieties have been expressed about this business from a number of quarters, particularly consumers’ associations, which highlighted difficulties in this area.
The noble Baroness is absolutely right that we have difficulties with estimating the nature of the business, because it is a recent development with quite quick growth. We cannot produce definitive positions on the size of the business nor directly how the business will react to the costs involved. The consultation gave clear indications as to what was involved. I certainly accept the point made by the noble Baroness about the FSA and regulated activities. I know that the FSA regularly reviews its regime; it is obliged to. The noble Baroness will appreciate that the FSA has been under considerable pressure of public scrutiny in recent months, not to say the past few years. Of course we expect the FSA to keep its regulation under review and to make sure that its actions are appropriate and proportionate. I can give assurances on that front, and that full consultation occurred before the orders were drafted.
There is the additional dimension of care. The issue is serious enough for us to want to act promptly—that is why we have the interim position—but we are all too well aware of the fact that the costs involved and the situation is such that before the full regulatory regime comes into place, a month should elapse for people to adjust to that market. The noble Baroness used a phrase that I would ordinarily have sought to use: it is a question of striking a balance between protecting the vulnerable consumer, of whom we have notice of sufficient numbers, and ensuring that provision is made to help homeowners—provided that consumers are fully aware of their rights. I entirely accept what the noble Lord, Lord Oakeshott, said: it is important that the best advice is available. We are talking about low-income families. I am in no doubt about the obligation on the solicitor; I have more doubts perhaps about the relationship between the solicitor and people who are probably carrying out the first or second transaction of their lives of such import. When one is dealing with a new concept, with the best consumer advice in the world, one is all too well aware that an awful lot of people remain in comparative ignorance of their rights.
I emphasise that none of us thinks that this strategy ought to obtain in very large numbers of cases. We can see the growth of the industry. With safeguards, it may be that it provides support and help to some, but we all know that sale and leaseback will not be appropriate in some cases. We know already of cases where complaints have been registered—and the complaints have been about the most fundamental thing: “We did not appreciate that we had lost the capacity to safeguard our home”. I cannot think of a more fundamental right than that. If the Consumers’ Association is telling us that cases are emerging where people are in that situation, it shows how seriously we must address safeguards for the consumer.
All the points that both noble Lords made about the legislation are important. It is important that the potential costs involved do not choke off supplies of what may be a service to the consumer. Awareness of rights and the ability to conduct transactions with professional advice need the greatest consideration. The FSA should not, because this may be a relatively small market at present, neglect its obligations to control this market; it must take those responsibilities seriously. As we all recognise, the FSA is carrying some most significant burdens and some others which affect a much smaller percentage of the population. I entirely accept that it must act in the most professional way with regard to its regulatory regime. It certainly needs to review those powers if its effectiveness is adversely affected by the amount of work that it has taken on. We all know the strengthening of the professionalism of the FSA that has gone on in recent months. We will need to ensure that that is properly supervised. I commend the order.
Committee adjourned at 5.21 pm.