Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2014

Monday 15th December 2014 Grand Committee

Motion to Consider

17:24

Moved by

[Lord Newby]

That the Grand Committee do consider the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2014.

Relevant document: 14th Report from the Joint Committee on Statutory Instruments

[Lord Newby (LD)]

My Lords, noble Lords may find it helpful if I start by outlining the background to this regulation. The term “sale and rent back” refers to a type of transaction whereby homeowners agree to sell their property, usually at a discounted price, in exchange for tenancy rights. This product reached the peak of its popularity in 2008, when the Office of Fair Trading estimated that 50,000 of these transactions had taken place until that point. Its attraction was mainly to homeowners struggling to meet mortgage repayments but who wished to stay in their family home. However, a number of questions were raised over whether customers taking out these agreements were receiving fair treatment.

In 2008 the OFT investigated business practices in this market and published a report that confirmed the presence of significant consumer disadvantage, in two respects. The first was through the financial loss to the customer when the property was sold. The OFT found evidence to suggest that most sale and rent-back providers bought the properties at a significant discount, paying between 70% and 90% of the market value of the property. The second was a lack of security of tenure. Sale and rent-back agreements make a virtue of the homeowner’s ability to continue to live in their home. However, the OFT report showed that in many cases people were being relatively quickly evicted from their home, while they had been led to believe they would be able to stay there over the medium to long term.

The OFT identified a number of market failures that led to these poor outcomes. These included the asymmetry of information between vulnerable individuals with low levels of financial capability and professional salespeople offering these agreements. That was a particular problem in this market because transactions tended to be undertaken by people in difficult and stressful circumstances, who may not have been in a position to weigh up all their options carefully and objectively. However, another factor was that relatively few homeowners took out such agreements. That meant that these firms were not subject to reputational risks in the same way as many other types of firm, limiting the ability of an effective feedback mechanism to operate where customers were consistently receiving poor outcomes. In addition, the OFT found that these market failures were often compounded by the deliberately misleading high-pressure sales tactics used by many providers.

As a result of the OFT report, the then Government issued a consultation paper recommending the statutory regulation of the sale and rent-back market by the then Financial Services Authority. An interim system was introduced to regulate the market in 2009, but it was then replaced in June 2010 by full regulation, as the Government legislated to add sale and rent-back agreements to the list of financial services activities regulated by the FSA. This meant that the FSA was given the powers to make and apply appropriate regulatory rules. The regime developed by the FSA included a requirement for providers to offer a minimum tenancy length of five years, a requirement for independent property valuation and a ban on high-pressure sales tactics. However, even following the introduction of regulation, consumer groups and other housing market stakeholders continued to report the widespread occurrence of detriment caused by purchases failing to meet the standards set by the new regulatory regime.

In response to this, the FSA conducted a thematic review of the market in 2011. The review confirmed that new regulatory standards were not being met in a number of key areas. These areas included, but were by no means limited to, the requirements for tenancy agreements, the form of financial promotions and the disclosure that customers received. In the light of these findings, the FSA temporarily closed down the market to protect customers.

In addition, the report highlighted that many firms were using complex financial arrangements with private financial investors, which providers argued meant that they did not fall within the scope of the regulation as set out in the legislation. It was the private investors who actually entered into the agreements, often on a one-off basis, which allowed them to argue that they were not doing so in the course of business, and therefore they fell outside the scope of regulation and did not need to comply with the requirements intended to protect consumers.

In response to this latter point, the Treasury worked with the FSA to develop the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2011. That made it clear that all sale and rent-back agreements should be within the scope of regulation unless it was a transaction between two family members. It ensured that the FSA was able to regulate this market effectively, as was originally intended by both this Government and the previous one.

17:29

I will now deal specifically with the draft order before us today. The amendment I have just described, which ensured that all transactions that were not between family members were within scope of regulation, had a sunset clause attached in line with the Government’s Better Regulation principles. That means that it is due to expire at the end of this year unless it is renewed. The statutory instrument we are debating today is to renew this regulation. As such, it effectively maintains the existing regulatory arrangements. That is reflected in the impact assessment published alongside this statutory instrument, which confirms that there will be no new impacts on firms, consumers or wider society. This measure’s zero-net cost classification has been approved by the Regulatory Policy Committee and, as a result, it will have no impact on HM Treasury’s net position against the one-in, two-out requirements brought in by the Government to help reduce the overall level of regulation.

In line with the requirements set out in the original amending legislation, the Treasury also conducted a review of the amendment in 2012. The purpose of the review was to determine whether the amendment had been effective in addressing its objectives: to allow what is now the FCA to regulate the market effectively. It concluded that it was difficult to make that assessment, as there had been only a very limited number of transactions in the market following the introduction of the amendment. At that time the Government suggested that without this evidence it would be difficult to justify the extension of the amendment.

However, the Government have considered the case for regulation again. In the absence of market activity that the Government could analyse, this review focused on whether the original case for regulation was still valid. The Government concluded that the structural features of the sale and rent-back market, which I described earlier, had not changed. Customers engaging in such agreements would be vulnerable to significant detriment without some appropriate protections.

The analysis in our impact assessment, which has been validated by the independent Regulatory Policy Committee, sets out our expectation that allowing this amendment to lapse under the sunset clause would result in a net cost of £35.8 million due to the customer disadvantage that would ensue. The case for the effective regulation of this market therefore remains strong, so the Government concluded that the amendment should remain in place and be renewed. However, the Government’s commitment to better regulation, including the use of sunset clauses, is ongoing, so the amendment under discussion today requires the Government to undertake a further review in 2017, and includes a provision for the legislation to expire in 2022. I commend the order to the Committee.

[Lord Tunnicliffe (Lab)]

My Lords, this is a perfectly sensible order, which we support. It opens up the opportunity for a philosophical debate on sunset clauses—but because it is Christmas, I will not press the matter further.

Motion agreed.

Committee adjourned at 5.33 pm.