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

Lord Newby Excerpts

Wednesday 7th September 2011 Grand Committee

[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.

[Lord Davies of Oldham]

My Lords, I am somewhat shocked that the noble Lord, Lord Newby, feared that our proceedings might be concluded before the photographer arrives; I have my customary one-hour speech on a statutory instrument, so there is no call for anxiety on that front.

I thank the Minister for both the clear way in which he presented the issues around the SI, and for the sympathetic way in which he addressed himself to those who may be involved in this exercise by being forced by financial circumstances to engage in this operation. As he rightly says, there is an obvious imbalance between the professional service of those who provide the resources and seek to strike the agreement and the householder who most often is already entering into these arrangements through fairly dire financial circumstances. As the Minister accurately said, they are unlikely to think of recourse to financial advice or even to be able to afford it anyway, even if they thought it was a good idea.

This is consumer protection legislation, after all, and we are at one with the Government in seeking to enhance it, particularly as it is derivative from the 2009 Act passed by the previous Labour Administration. However, I ask the Minister to address himself to several points. First, because the order follows reasonably quickly from its predecessor, it is suggested that there was no need for further consultation. On the whole, all such SIs of this kind, prepared by the Treasury and other government departments, should be subject to consultation beforehand. After all, the previous consultation took place against different terms from this order. I am therefore somewhat surprised that no consultation took place specifically on this order.

Secondly, will the Minister address himself to the important point that the noble Lord, Lord Newby, expressed? I am sure that the Committee will be grateful for the clarification—and, I hope, confirmation—that the Minister will be able to give about the nature of the rent position regarding the law and this order.