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Redress Schemes for Lettings Agency Work and Property Management Work (Approval and Designation of Schemes) (England) Order 2013

Volume 749: debated on Tuesday 26 November 2013

Motion to Approve

Moved by

That the Grand Committee do report to the House that it has considered the Redress Schemes for Lettings Agency Work and Property Management Work (Approval and Designation of Schemes) (England) Order 2013.

Relevant document: 12th Report from the Joint Committee on Statutory Instruments.

My Lords, I declare that I am an owner-occupier of a leasehold property. Before I get into the substance of introducing these regulations, I once again pay tribute to the noble Baronesses who have worked so hard on this matter and who are joining the Committee this afternoon.

The Enterprise and Regulatory Reform Act 2013 gave the Secretary of State the power to require all residential letting and property management agents in England to be members of a government-approved or government-administered redress scheme. This means that tenants and landlords dealing with agents in the private rented sector, and leaseholders and freeholders dealing with agents in the residential leasehold sector, will be able to complain to an independent person about the service they have received if they are not satisfied.

More and more people are choosing to live in the private rented sector. The number is up from 2.4 million households in 2005 to 3.8 million in 2011 and is still growing. We estimate that there are approximately 2.5 million leasehold properties in England. It is vital that people living or owning property in these sectors have the ability to complain if they receive poor service from their agent. This is supported by good professional agents. The requirement for all letting and managing agents in England to belong to an approved redress scheme will weed out the cowboys who give agents a bad name. Just as importantly, the scheme will drive up standards while imposing the least regulatory burden. This order is the first step towards implementing this requirement.

The order, which was laid before the House on 25 October 2013, makes provision for: applications for approval of schemes; the conditions that a scheme must meet before they may be approved or designated as a government-administered redress scheme; and the process for withdrawing approval or designation where a scheme no longer complies with those conditions. A government-administered scheme must meet the same conditions as those for approved schemes, with the exception of independence, as in a government scheme it is a given that the scheme is independent from those who could be investigated by it. These redress schemes will complement and not replace the existing protection awarded to tenants and leaseholders; for example, the consumer protection legislation and the duties of local authorities.

When this order comes into force, the Secretary of State will invite schemes to come forward for approval. When the Secretary of State is satisfied that all agents can join a scheme of the required quality, a second order will be made that will require agents to belong to such a scheme. Article 4 sets out the conditions that schemes must meet to be approved. The provisions of the scheme must include, for example, what types of complaints may be made, what the ombudsman’s duties and powers are in relation to investigating complaints and what redress a member of the scheme may be required to make to a complainant. Types of redress must include apologies, explanations, compensation and making good. Article 4 also requires schemes to have procedures in place to ensure that members of the scheme deliver the redress that has been awarded to claimants. This may include expulsion from the scheme if a member agent does not comply.

We know that consumers in the private rented sector are especially concerned about the fees charged by agents, particularly when they are mentioned only after tenants have signed a contract or invested emotionally in a specific property. Where this occurs, the schemes may investigate a complaint about this and may require the agent to pay compensation.

When the duty to belong to a scheme is introduced, agents who do not belong to a scheme could be prevented from operating. To help enforcement of the duty, Article 4 also requires schemes to have arrangements in place to provide information to other redress schemes and to the regulatory bodies. This will enable agents who do not belong to a redress scheme to be identified and, in the longer term, will help drive up standards.

We recognise the importance of the redress schemes being seen to be independent and of their operation being transparent. Article 4 requires scheme administrators to publish an annual report on the operation of the scheme. Article 7 requires administrators of approved schemes to provide the Secretary of State with information about the operation of the scheme, enabling performance to be monitored. In exceptional circumstances, where a redress scheme no longer meets the conditions of approval, Article 8 of the order enables the Secretary of State to withdraw that approval. This will help ensure that the level of service and standards expected of the redress schemes are maintained.

It is also important that there is competition between the schemes to ensure that costs are competitive and that there is sufficient capacity for all letting and managing agents in the private rented and residential leasehold sector to join. However, we also recognise that having a large number of schemes may cause confusion and that consumers will need to have clear information on which schemes are authorised and which ones they should go to. Article 6 enables the Secretary of State, when making a decision about whether to approve a scheme or designate a scheme as a government-administered scheme, to take into account the number of other schemes that are likely to be approved or designated as government-administered schemes.

I commend this order to the House. I beg to move.

My Lords, I find this an interesting order. I read the Explanatory Memorandum, but nothing really explains anything very clearly. I ask the Minister to confirm that this is just a sort of preliminary paper and that we will have to await the next step before we know what on earth it is about, because so much here is unclear. My personal interest is declared in the register of interests. I have leasehold property, which I let.

Nowhere does the order bring out the importance of transparency and how much we want to see that. Paragraph 7.14 of the Explanatory Memorandum states that the order,

“requires individuals responsible for running approved schemes … to provide such information on the operation of the scheme as the Secretary of State may reasonably require”.

However, I am not concerned about what the Secretary of State wants to know; I am more concerned about all the millions of people in leasehold properties who want to know what this is all about. Unless we have complete transparency, a lot of redress will be demanded by people, as they will all find it unsatisfactory that they never get straight answers to anything. I am speaking wildly and widely: this generalisation may catch people who are 100% reliable as managing agents, but there are far too many who are not. That is why we want this scheme to work and to work well.

Paragraph 7.12 says that there will be,

“publication of an annual report”.

I am not clear about who will make that annual report, and I should like to know what that is about. Is it is a report by the ombudsman or by each person who deals with the schemes? It is clear that there could be more than one scheme. Multiple schemes could be approved by the Government. It is not clear what exactly you have to do in order to be approved because, again, everything is shrouded in those wonderful words that now enable the Secretary of State to do pretty well anything. Therefore, until we see the next stage, we will not know what it is really talking about.

If there are, say, four approved schemes, will we have four annual reports, or will the Government or the ombudsman produce one report? I am mystified by the reporting process. Reporting is interesting and satisfactory up to a certain point, but what people really want is action. They want to know where they stand, and it is only fair and right that they should. There are currently a lot of cowboy practices, whereby some invisible person collects insurance from all the leaseholders, who find that they are paying a grossly inflated amount because someone is raking off money in the background. There are many points such as that which we need to look into.

It might be that we will need to have some clear definition of which parts of a building will be the responsibility of a communal system and in which parts the owners of individual flats will be responsible for work themselves. Regarding knowing what the responsibilities are, it is no answer to say “Well, it will all be in the terms of the lease”, because a lot of those leases are pretty woolly. No one is quite sure what happens with them.

That takes me to the point that any of your Lordships who read your Sunday paper must have seen: the story of this man named Jackson, who has just lost his flat. He went to the leasehold valuation tribunal but was foolish because he should have paid the £300 which was the original dispute, as far as I can see, and then gone to the tribunal. He ended up going to the tribunal when the maximum that he would have to pay was £500. Your Lordships will all have heard before, and I know that it is on record in Hansard, that I participated in Committee when the Bill was passed in 1996 that set a maximum of £500 that would be payable by any applicant. Now the whole tribunal system has changed, and however bad and expensive it has been, that is nothing to what it will be in future.

A lot of articles now are asking whether anyone will be able to afford to go to the leasehold valuation tribunal any more, even to go into the first stage. It was always acknowledged that if it went on appeal up to the second tier of the Lands Tribunal, that was where people who had big money would be at an advantage. No one ever foresaw the point where even if you were only liable for that £500 maximum, the other party could bring against you QCs and enormously expensive people who would charge the earth and then you, as a leaseholder, would find that it was billed back to you. The bill was not being taken on by the head lessee or the freeholder but came back on the person who had the cause for complaint. Will the redress schemes set out here cover that sort of issue, or will the situation be simply as it was for people such as that man?

This is exactly what happened to him. It started off as a minor dispute and he thought that he would be paying just £500. Eventually, after it had moved on, his legal bill was £76,000. I presume that everyone else in the block of flats had a share of that bill, too. He waited for the work to happen. A new company took over; again, that is rather typical of what happens. Indeed, I have had what I describe as wonderful whitewash letters saying, “We have been bad in the past but we are angels now. Everything is going to be all right and no one will have any cause for worry at all”.

Interestingly, at the meeting we had at the department, the person who is now running it was there. She claims to have had a whitewash and was very much in favour of the redress scheme. Perhaps the companies are reformed but we must wait and see. The problem is where it may end up. This man received bills to meet all these charges for three years, but no work was done in that time. That is very unsatisfactory and I feel very sympathetic towards him. For anyone to think that they are going into a minor thing, designed for ordinary people, only to find instead that they lose their home over it is a tragic situation.

I therefore have great hopes for this redress scheme, but we have an enormous number of problems to look at. When I look at the document in front of us, for example, there is nothing set out yet in Article 3(1). It states only:

“An application to the Secretary of State for approval of a redress scheme must … (a) be made in such a manner as the Secretary of State may determine; and (b) be accompanied by such information as the Secretary of State may require”.

There is nothing there to tell you what you would actually get out of it at all. This may be a formality but it is very important. Whatever we do on the matter, this is just the first step, and we have such a long way to go to make life fair for people in these properties.

These are all technicalities, and everything has taken a long time. Was it not in the summer that we passed this amendment? Now we are pretty well at the end of the year and this is the first bit we have—this draft statutory instrument, which does not even look as if it goes very far.

I am concerned about arbitration. I spoke here when the issue of changing the whole tribunal system came up before. That is a retrograde step. The tribunals were intended to be handled so that any ordinary person could go to them. The way the system has changed now has taken us right back to the battles we fought in 1996 against all these prohibitive charges. It will be very worrying for many people who now will not dare to complain about things. Unless the redress scheme is good, well thought through, carefully planned and honestly implemented with transparency, I worry about what the future will hold.

Of course, I am a great believer—as I am sure everyone knows—in commonhold, the system we have in Australia. There, no one is dependent on an intermediate landlord and you all share the rights to your own property. Here, the law demands that if you want to change to that system, you need 100% of the leaseholders of the block of flats to agree. Everyone knows that all you need is one crooked landlord willing to pay someone to be the 1% that will not pass something and that will never happen. The Government should—and I believe will in future—look at changing that law so that it could be either a simple majority or a possible one. There are people living overseas, not resident in the place and not even knowing what is going on or caring—sometimes they have so much money it does not matter to them. Unless we can really change this and make it fair, it will remain a great injustice that people living in a place will find that they do not have the rights and control to which they should be entitled. I have said more than enough and am sorry to burden the Committee with even more on this issue.

My Lords, I took an interest in this matter a little while ago when we considered it. I have a couple of questions as a result of this order coming forward. I agree with my noble friend Lady Gardner that it seems terribly short on detail as to implementation. I am not much reassured by the fact that I am not sure whether what I have here is an Explanatory Note or just guidance on how the scheme will be carried out. I am not very reassured by the idea that there will have to be a board for each of these schemes. It is not at all clear of whom such a board would be made up. The board is there to appoint the scheme administrator, but there is nothing else about what the board is meant to do. The only thing it says is that if you are under a complaint investigation you can sit on this board although you cannot particularly make up the majority of it.

My noble friend Lady Gardner, who has been absolutely remorseless in getting all this right, pointed out that it is the detail of the implementation that will matter. There is nothing very much about the scheme administrator except that he can be appointed for three years. The next thing that will happen is that we will talk about the ombudsman. There is nothing in between to suggest that the scheme administrator and the ombudsman will be different, or whether the ombudsman will fit into how the scheme will run. After all, the ombudsman probably will be one of the most important aspects of it.

Another quite trivial thing comes up later on. There is an awful confusion between “consumers” and “clients”. It would be helpful if we could decide which word will be used. I will give the example:

“Taking special care when dealing with consumers who might be disadvantaged”.

It might be clients who are disadvantaged. Anywhere else, all the way down, the text is about responding to “clients” in an appropriate time. Everything else is about clients. In the interests of clarity, let us decide who it is we are talking about.

There needs to be much more explanation of how many schemes are likely to be approved and how many would be too many. You might get 25, all of them absolutely perfect, but might actually need to have not more than about four or five because that is how they are made up. There must be much more clarity about who the ombudsman is and how the access to the ombudsman will work through this scheme.

Other than that, even though there are some holes and flaws and things that need to be taken further, this has moved at astonishing speed, by governmental standards, and I am grateful for that because it is long-overdue legislation.

My Lords, we owe a lot to the two noble Baronesses who have already spoken, because without them we probably would not be here.

We welcome this order and look forward to rapid progress in future, we hope. It will give landlords, tenants and leaseholders an ombudsman to whom they can take their complaints about a letting or managing agent. However, we have a number of queries, and I will raise seven of them.

First, I still do not understand why the Government are reinventing the wheel. There are already two established, OFT-approved schemes that deal with letting and managing agents. Indeed, 60% of letting agents and all the managing agents that belong to ARMA are already members of one of those schemes. However, this order requires that the existing schemes must be reapproved, on slightly different criteria from those upon which they are already approved, and allows a plethora of others to apply, which will be confusing and not in the interests of consumers. I have never believed that there should be more than one ombudsman per industry. I lost that argument with my Government, but there should not be more than two per industry. Perhaps I can argue that. The idea of there being four, eight or 15 per industry will only add to the confusion and costs—and of course, it is not the consumer but the provider who will choose which to go to.

This goes against the feedback the Government had on this, and the Cabinet Office’s guidelines on Ombudsmen. Paragraph 9 of Ombudsman SchemesGuidance for Departments, which was published in 2010, states:

“It is important to maintain a proper balance between the development of new Ombudsman schemes … and extending the remit of existing schemes where that is … possible. In choosing the best option, Departments will therefore need to … avoid multiple redress schemes within individual industry sectors, which may confuse consumers … by utilising existing Ombudsman schemes (even existing voluntary ones), or by introducing single new schemes”.

The latter is not the case here. There is the Cabinet Office saying, basically, that we should use existing schemes or extend them. The guidance goes on:

“Before creating a new Ombudsman scheme, you”—

this is addressed to departments—

“should consider the role and remit of existing schemes and decide whether a new scheme is necessary. It may … be more appropriate, and more cost effective, to extend the remit of an existing scheme”.

Why this part of the Government does not listen to that part of the Government, I do not know. Does the Minister expect more than the two existing schemes to be approved?

We know from the paperwork that a second order is envisaged that will make it mandatory for agents to be a member of a redress scheme once the department is satisfied that a sufficient—its word—number of approved schemes are operating. Will the Minister tell us what number is sufficient?

My second question is about the independence of the oversight body, or the board, in the words of the noble Baroness, Lady Hanham. The draft conditions of approval, which are not in front of us today but are related to this, suggest that the oversight board should have a member,

“from an organisation representing consumers”.

I wholeheartedly agree with the sentiment behind that, but the whole idea of a corporate board is that the individuals on it do not represent the organisations from which they come in but are part of a corporate entity. I hope that the department will consider a slightly different wording—perhaps, “with experience of representing consumers”—to ensure that the corporate identity of the oversight board is not put at risk.

My third question is about enforcement. That is the oddest part of the instrument. The Minister clarified that slightly just now. She will recall that the Government rejected my original amendment, which would have extended the Consumers, Estate Agents and Redress Act 2007 to letting and managing agents. That included an enforcement mechanism; the OFT could come in if orders for redress were not followed. As the Minister said in her introduction, schemes will have to make provision for enforcement of any requirement to provide redress, which may include expulsion from the scheme.

We need to be clear what happens if a letting or managing agent is expelled. Will they simply move over to one of the other redress schemes, and will that scheme then have to accept them? If not, can I be clear that they would have to cease trading? Obviously, we want to get rid of people who, having been found to provide redress, do not. I am in favour of that, but we need the Minister to clarify that that would happen. This morning, in the Commons Delegated Legislation Committee, the suggestion was made that a redress scheme could expel a member and that it would therefore cease trading. We need to be absolutely sure that there is the legal power to do that. Perhaps the noble Baroness can confirm that.

Related to that, the Government will obviously need to have an appropriate sanction for agents who refuse to sign up to a redress scheme, and it must be strong enough to be a deterrent. It probably has to mean that they cannot continue to trade. Otherwise, it would always be in their interests not to join an ombudsman scheme. Perhaps we could have clarification on that.

Fourthly, there is the really important issue of client money protection, which is a major cause of consumer detriment. There is a recent case, different from the one that has been mentioned, of a letting agent that went bust in Hastings and lost all its clients’ deposits. It cost landlords and tenants an enormous amount of money. At the moment, there is nothing to ensure that that does not happen again.

Client money protection is the only way to ensure that deposits, forward rents, payments for repairs, and so on, are kept safe. The Government’s words on this are a bit unclear. I think that it should be a condition of belonging to a redress scheme that there is client money protection, but the draft conditions that were published earlier this month state that in making a judgment, the ombudsman scheme would have to take account of whether the letting or management agents were:

“Treating clients’ money in an appropriate manner”.

That is nonsense. What is an “appropriate manner” unless it means what we mean by client money protection—in a separate bank account with separate bank signatories, and, perhaps, insurance? Does “appropriate” mean proper client money protection?

My fifth question is: what are the Government’s plans for ensuring that the other 40% of letting agents—I am less sure of the other figures—are signed up to a redress system, and what will be the penalty if they do not join? We hope that it will be that they have to cease to trade. But who will be responsible for that compliance? Who will go around identifying letting or managing agents who are not members of a scheme? I hope that consumers will not be expected to do it, and that plans are in place to deal with that.

The Government seem to want ombudsmen to run a sort of two-tier scheme. They are very keen for agents to join, but they say they should be able to do so without signing up to a code of practice. So they envisage a two-tier scheme where agents can choose whether or not to adhere to a code of conduct or practice, which seems absurd. The very least we can do is to say that any scheme must make it clear that when an ombudsman comes to a judgment it will be not—in the woolly phrase of the moment—on generally accepted principles of best practice, but according to a code. I assume the Government share our concern to raise standards, but if we are not going to enforce a code by taking ombudsmen’s judgments in line with it, we cannot do that. I do not see how the requirements for transparency proposed by the noble Baroness, Lady Gardner, are going to be enforced if there is no code that requires transparency and against which the ombudsman can take decisions.

My sixth question is: what are the Government going to do to inform consumers about their rights to redress? There were comments about making information from the scheme available to other schemes, and to anyone who regulates letting agency work, despite the Government’s refusal to set up a regulator for letting agencies, as I had wanted—but never mind. However, there does not seem to be a requirement for the list to be made available to the public, although surely it is the public who need to know which redress scheme their agent belongs to.

My last question is: when will this come into force? We heard rumours that it might not be before October, despite being expected it by April this year, but we were reassured at an early morning hearing in the Commons by the Minister there, who suggested that the target was still April. For the sake of this Committee, can the Minister confirm that that is the date that she and her colleagues are working towards?

My Lords, I am grateful to all the noble Baronesses who have spoken in the debate this afternoon.

Many issues have been raised, and, while I will do my best to respond to most of them, I will say straightaway that there may be some which I will have to follow up in writing. That should not delay us. As noble Lords know, we are at the start of a three-stage process, and I would expect to be able to answer some of the points raised today when we get to the next set of regulations. What we have in front of us is an order which sets out the criteria and process for approving schemes. The next stage is for schemes to come forward, and the third and final stage is to lay an order which would bring into force the legal requirement for agents to belong to a scheme. So, if I follow up anything in writing, it will be because we are in an ongoing process.

The noble Baroness, Lady Hayter, questioned whether we were reinventing the wheel, and why we were proceeding as we are when two schemes already exist. I remind her that we know that those schemes exist, but we hope that they will come forward to seek approval and to register. We certainly hope that happens.

As to whether there is a risk of too many schemes coming into force—a point raised by my noble friends Lady Gardner and Lady Hanham—as I said in moving the regulations, Article 6 makes it clear that the Secretary of State should have regard to the number of schemes that are, or are likely to become, approved schemes or government-administered redress schemes when deciding whether it is in the best interests of complainants and members to approve a scheme. This would require the Secretary of State to look at any scheme brought forward—other than the two I have just mentioned—but the power is there for the Secretary of State to conclude that there are adequate schemes already in place and that there might be a detrimental effect if more schemes were approved. We have considered and taken account of this issue in producing this order.

The noble Baroness, Lady Hayter, asked about enforcement and what happens if an agent is expelled or refuses to join. Enforcement will be detailed in a second set of regulations. On the issue of the conditions for membership of the schemes, as is made clear in the order, these will include whether someone can join a scheme after being expelled from another scheme. We would examine this issue where a scheme is brought forward to the Secretary of State for approval.

As to the issues of safe agents and money protection, I share the noble Baroness’s concerns about ensuring that client money is protected. Certainly we would encourage the use of client money protection arrangements and so-called safe agents. As she knows, we did not seek to introduce this as part of the order but certainly we would be supportive of schemes that referred to this in their terms.

My noble friend Lady Hanham raised additional points. She highlighted that there was confusion and inconsistency between the words “consumers” and “clients” in the language used in the order. It is fair point. I shall consider it and see what it is possible for us to do in that area. It is a legitimate point to raise.

My noble friend Lady Gardner covered a wide range of issues. I am sorry that she feels that too much is unclear in the order. As I have already said, we are at the first stage of a process towards introducing these redress schemes. As to the direct question of the noble Baroness, Lady Hayter, there is no desire on our part to delay the introduction of the order. We are working to the timetable that my honourable friend mentioned in the other place this morning, namely the spring.

My noble friend Lady Gardner asked about annual reports. Each of the approved schemes will have to publish its own annual report. So if there are, say, four schemes, that will mean four individual annual reports.

My noble friend also raised some questions about the rights of leaseholders when they take a case to a leasehold valuation tribunal, when fees are incurred and when, even if the complainant has had their complaint upheld, they see those fees being recycled into their service charges. I gather that this point was raised during the debate this morning in the other place, and that my honourable friend there agreed to meet the Member who raised that concern. I will discuss it further with him and come back to my noble friend, and perhaps she and I can have a meeting once I have been able to catch up with my ministerial colleague on that matter.

My noble friends Lady Gardner and Lady Hanham raised some questions about how the ombudsman would relate to the schemes and the detailed conditions currently available on the Government’s website. Those detailed draft conditions will be finalised when the order comes into force. Only schemes that can satisfactorily prove that they meet these conditions will be approved. It is for the schemes to decide whether there should be an ombudsman. All schemes will provide an independent way of investigating complaints, which is a condition that we will apply when a scheme comes forward for approval.

My noble friend also raised a point about the conversion from leasehold to commonhold. We will debate that matter on another day because I do not believe that it is directly relevant to the regulations in front of us. However, my noble friend makes the point well and I know that she feels very strongly about it.

In conclusion, the procedures and requirements set out in this order are key to delivering the first stage in the implementation of the requirement for letting and managing agents to belong to a Government-approved redress scheme. The order will enable the Secretary of State to approve redress schemes against a clear set of criteria that will ensure that all approved schemes will provide an independent and transparent service, and that consumer complaints will be dealt with fairly and consistently. On that basis, I beg to move.

Motion agreed.

Sitting suspended for a Division in the House.