Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2011

Lord De Mauley Excerpts

Wednesday 7th September 2011 Grand Committee

[Lord De Mauley]

That the Grand Committee do report to the House that it has considered the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2011.

Relevant document: 27th Report from the Joint Committee on Statutory Instruments

[Lord De Mauley]

My Lords, the purpose of this order is to ensure that the regulation of the sale and rent-back market will operate as originally intended and deliver appropriate consumer protections. To set it in context, I hope that your Lordships will allow me to give a little background on the sale and rent-back market.

These schemes allow consumers to sell their property to a public or private sector organisation and then rent it back. This allows a consumer to stay in his or her own home and avoid the distress and expense of repossession. In 2008, the Office of Fair Trading published a study of the market. It found that it was not working well for consumers and recommended that the Treasury should introduce regulation by the Financial Services Authority. This was deemed necessary because the sale and rent-back market suffers from an imbalance in the relationship between those consumers considering taking up a sale and rent-back agreement and those selling the schemes.

Sale and rent-back agreements are extremely complex contracts. The OFT study showed that consumers entering into these agreements are often vulnerable people with low levels of financial understanding. They are often already in debt and believe that their financial situation is out of control. They are unlikely to seek independent financial advice, probably because they do not know where to go. Conversely, the sellers of sale and rent-back agreements are professional salespeople, who in some cases may also play on the emotional aspects of a sale and rent-back agreement—for example, the consumer’s attachment to the family home. This results in two significant impacts on the consumer. First, there is financial loss to the consumer through a distressed sale. Evidence suggests that most sale and rent-back providers pay between 70 per cent and 90 per cent of the market value of the property. Secondly, there is a lack of security over tenure for the consumer, who may believe that they cannot ever be evicted from their home, whereas in reality, many consumers suffer rising rents or, indeed, eviction.

Following the OFT study, an interim system of FSA regulation was introduced in July 2009. This was replaced by a full regime in June 2010. Today’s order amends the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 to make clear that any provider of a sale and rent-back agreement, unless they are closely related to the consumer, will be regarded as doing so by way of business and will therefore need to be FSA-regulated.

Currently, the FSA’s regulation captures only those firms that meet the strict “by way of business” test. That test is intended to include firms who carry out the specified activity as a business arrangement but exclude those who carry it out for other purposes, such as arrangements with immediate family members. However, some providers have misunderstood whether they are entering into a regulated activity, while others, dare I say it, have chosen to interpret the rules such that they are not acting by way of business and thereby have avoided FSA regulation

The order clarifies the position. Everyone who enters into a sale and rent-back agreement, unless they are closely related to the consumer, will be regarded as doing so by way of business and will therefore need to be FSA-regulated. About 80 per cent of sale and rent-back transactions are still taking place outside regulation, despite the intention of the original regime, so the sale and rent-back market continues to generate a high level of consumer concern. In the 12 months from April 2010 to March 2011, citizens advice bureaux received more than 1,000 inquiries about sale and rent-back providers. In March this year, a report by Which? highlighted cases where a number of firms were acting outside FSA regulation. In July this year, there was an investigation by Channel 4’s “Dispatches” into sale and rent-back providers. Citizens Advice, Shelter and Which? have all publicly supported the Government’s work to address this genuine gap in the regulatory architecture and make it clear to providers when they are acting by way of business.

The costs and benefits of the order were set out in the impact assessment. The order will ensure that FSA regulation of sale and rent-back agreements operates as originally intended, when the costs were expected to be incurred at the time of the original legislation. The benefits of the order will be felt by those individuals who sell and rent back in their houses through fairer sale prices and fairer tenancy agreements. The FSA’s regulation of the sale and rent-back market attempts to address those issues through, for example, pre-sales disclosure and rules on terms and conditions of tenancy agreements.

The option for a consumer to avoid repossession and have the choice to enter into a sale and rent-back arrangement, and remain in his home when it is financially viable to do so, is important, but it is equally important that appropriate consumer protection is in place. The order is scheduled for debate in another place next week.

I hope that I have reassured your Lordships that the order merely clarifies the intent of previous efforts to address issues in that market and that the Committee will therefore give its support.

[Lord Newby]

My Lords, in view of the statement by the Deputy Chairman at the start of our proceedings about about the photographer, I am now tempted to give a 45-minute speech just to make sure that I get my picture taken in action to prove that I do things in your Lordships’ House other than turn up. However, I probably will not.

I am extremely grateful to the Minister for his introduction to the order, because it filled out the information in the Explanatory Memorandum. The phrase “sale and rent-back” is new to me; I am used to the phrase “sale and lease-back”. My first question relates to that terminology: is there a difference in law between sale and rent-back and sale and lease-back? When I think of sale and lease-back, I have commercial activity in mind. I remember that Tesco was notoriously involved in sale and lease-back of properties via the Cayman Islands a few years ago. I wondered whether this regulation meant that commercial companies involved in those kinds of deals on commercial properties are now brought into the legislative net, or whether the phrase “sale and lease-back” is already recognised in law. If I decided that I wanted to buy a Tesco store and lease it back to them, would I be covered by something that already exists or would this newly apply to me?

My other questions relates to Article 6 about the sunset clause. Within a year, more or less, of this provision coming into force a report has to be produced on how effective it has been. Presumably, the intention is that between then and 2015, if the report suggests that it has been effective, a subsequent order will be made, which no doubt will cover lots of other things as well but would continue this provision. I cannot remember, from when the Financial Services and Markets Act was going through, how this sunset provisions worked. If, as I suspect, we would expect a successor order to this one to be introduced before 1 January 2015, how long would that last for? Is this a rolling series of orders that have to be renewed every five or 10 years? Subject to that, this seems to be a sensible additional component in the consumer protection framework.

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We are not in that position but we are not in an improving position either. The noble Lord knows already that the economic travails of this country are causing considerable difficulty among our fellow citizens—and the worst is of course yet to come. Those measures that really will bite upon those of limited resources are still very much in the pipeline, in the loss of jobs and the cuts in support for citizens from government or local authority resources. They are still to wreak their considerable damage upon significant numbers of our fellow citizens. That is why this statutory instrument is pertinent and important. I am glad that it has been presented at this stage and that the Minister has done so in such a sympathetic way. However, I hope he will also reply to the discrete points that have been made in this short debate.

[Lord De Mauley]

My Lords, I thank my noble friend Lord Newby and the noble Lord, Lord Davies, for their helpful and constructive comments and questions. Let me see if I can address them. First, my noble friend asked about the difference in law between a sale and rent-back agreement and a sale and lease-back agreement. Essentially, there is no difference between the two terms, but this order relates to where firms provide sale and rent-back arrangements to individual consumers. Commercial property is thereby not covered; that is the essential distinction.

My noble friend asked about the sunset clause and whether there will be a new order after 2012. It will be for the Treasury to decide whether to renew the order with a further order—with or without a sunset provision—depending on the outcome of the review.

The noble Lord, Lord Davies of Oldham, asked whether consumers who are already involved in an arrangement will gain protection through this order. This order clarifies that all providers entering into sale and rent-back arrangements need to be FSA-authorised. It is a matter for the FSA whether to take enforcement action against those firms who have already entered into existing arrangements outside regulation, and decide whether these have taken place by way of business. That is the key and the defining factor. Where an unregulated sale and rent-back transaction, which should have been FSA-regulated, has taken place, those consumers will still have recourse to the Financial Ombudsman Service.

The noble Lord asked why there had been no further consultation. This order merely clarifies the intention of the original order, which was subject to full consultation by the Treasury and the FSA. Perhaps I could also concur with the noble Lord in being concerned about people facing repossession. The Government are deeply conscious of the effect that this has on people and, as I think he intimated, the purpose of this order is absolutely to prevent exacerbation of the problem. I pay tribute to the work of the previous Government in setting us on this course in the first place.

This order amends the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 to make clear that any provider of a sale and rent-back agreement, unless closely related to the consumer, will be regarded as doing so by way of business and will therefore need to be FSA-regulated. The order improves outcomes for consumers entering into sale and rent-back arrangement first, by increasing the transparency of information provided by sale and rent-back providers; secondly, by reducing the potential for consumers to enter into unsuitable arrangements; and thirdly, by increasing product quality by driving providers to improve, or exit, the market.

It has been universally welcomed by consumer groups. Citizens Advice welcomed the government commitment to ensure that people with sale and rent-back agreements are protected against bad practices. The order will ensure that FSA regulation of sale and rent-back agreements operates as first intended. I commend this order to the Committee.

Motion agreed.