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| Regulation Of Financial Services (Land Transactions) Bill |
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These notes refer to the Regulation of Financial Services (Land Transactions) Bill REGULATION OF FINANCIAL SERVICES (LAND TRANSACTIONS) BILL________________ EXPLANATORY NOTESINTRODUCTION 1. These explanatory notes relate to the Regulation of Financial Services (Land Transactions) Bill as introduced in the House of Commons on 25 May 2005. They have been prepared by HM Treasury in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament. 2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given. BACKGROUND AND POLICY OBJECTIVES 3. The Financial Services and Markets Act 2000 ("FSMA") provides consumer protection by, amongst other things, allowing only authorised or exempt persons (as those terms are defined in FSMA) to carry on a "regulated activity" in the United Kingdom. In order for an activity to be regulated under FSMA, it must be carried on by way of business and be specified in an order made under section 22 of FSMA. Schedule 2 to FSMA sets out in broad terms the kinds of activities and investments which can be specified in an order under section 22. Whilst it covers contractual rights in respect of loans secured on land, it does not cover such rights in respect of other types of finance provided in connection with the acquisition or disposal of land. 4. On 12 December 2001 it was announced that the Financial Services Authority ("FSA") would regulate activities relating to mortgages. Regulation of mortgage activities commenced on 31 October 2004 1. 1 Financial Services and Markets Act 2000 (Commencement of Mortgage Regulation) (Amendment) Order 2002 SI 2002/1777.5. The Government announced it would look at regulation of activities relating to home reversion schemes 2 in its Green Paper "Simplicity, security and choice: working and saving for retirement" published on 17 December 2002. On 5 June 2003 the Chief Secretary to the Treasury announced that the Government would carry out an open consultation on whether activities relating to home reversion schemes should be regulated by the FSA. 2 An arrangement whereby a homeowner sells all or part of his house at a discounted rate to a reversion provider in return for a lump sum and/or income and continues to live in the house rent-free for life.6. The consultation document "Regulating home reversion plans" was published on 11 November 2003. On 10 May 2004 the Financial Secretary to the Treasury announced the Government's intention to bring home reversion schemes into the scope of FSA regulation. 7. During the process described above, it was recognised that Ijara products 3 and flexible tenure products 4 share many features of home reversion schemes and are also unregulated. A further consultation document 'Defining Home Reversions' was published on 26 July 2004 and consulted on the content of the definition, including whether Ijara products and flexible tenure products should be included. 3 There are two main types of Islamic compliant products: Murabaha and Ijara. Murabaha is an arrangement whereby a scheme provider buys a house and then sells it to a customer at a higher price to be repaid over time. The house is registered in the customer's name and a charge given over it in favour of the scheme provider. Murabaha is already covered by FSA mortgage regulation since it meets the requirements of a "regulated mortgage contract". Ijara is an arrangement whereby the scheme provider buys a property, rents it to the customer over a term and sells it to the customer at the end of the term for the original purchase price.4 An arrangement whereby a homeowner can increase or decrease equity ownership by transferring interests in a property to and from a finance provider, such as a local authority. 8. A consultation response document was published on 16 December 2004 which announced that both Ijara products and flexible tenure products would be brought within the scope of FSA regulation, to create a level playing field between these products and mortgages and to increase consumer protection. However as flexible tenure products are currently only provided by local authorities and registered social landlords and the intention is to exempt these entities from FSA regulation in the same way as for regulated mortgage contracts, it is not intended to make an order under section 22 in relation to flexible tenure products for the time being. The Bill is wide enough to ensure that flexible tenure products can be regulated in the future as this market develops. OVERVIEW OF THE BILL 9. The purpose of the Bill is to enable activities relating to financial arrangements involving the acquisition or disposal of land to be specified as "regulated activities" under section 22 of FSMA, and hence to be brought under FSA regulation. TERRITORIAL EXTENT 10. The Bill extends to England and Wales, Scotland and Northern Ireland. TERRITORIAL APPLICATION: WALES 11. There is no effect on the National Assembly for Wales and no particular effect on Wales. COMMENTARY ON CLAUSES 12. Clause 1 amends Schedule 2 to FSMA to add financial arrangements where the finance provider either (i) acquires a major interest in land from the person being provided with finance or (ii) disposes of a major interest in land to the person being provided with finance. "Major interest" means a freehold or leasehold interest and is defined separately for England and Wales, Scotland and Northern Ireland to take account of the different property laws in the three jurisdictions. The transfer of the major interest in land can be made either directly between the finance provider and the person being provided with finance or via an intermediary. 13. The amendment of Schedule 2 is in broad terms, consistent with the approach taken in the existing provisions of Schedule 2. The definition of home reversion schemes and Ijara products, and the description of activities to be regulated in connection with them, would be described in detail in the order which it is intended to make under section 22 of FSMA. However the breadth of the amendment in clause 1 would also allow other financial arrangements involving the acquisition or disposal of land to be brought under FSA regulation, if it became appropriate to do so in the future (for example, for new products which may emerge in the market). FINANCIAL EFFECTS OF THE BILL 14. The Bill will not have any effect on either the Consolidated Fund or National Loans Fund. The Bill is likely to lead to a small increase in the expenditure of the FSA, which will be met by an increase in the fees levied by the FSA under FSMA. EFFECTS OF THE BILL ON PUBLIC SERVICE MANPOWER 15. This Bill will not result in increased manpower for any government bodies. SUMMARY OF THE REGULATORY IMPACT ASSESSMENT 16. The RIA looks at the implications for types of individual firm. In calculating the costs for individual firms we attempted a read across to the arrangements that the FSA has put in place for firms that sell lifetime mortgages under statutory mortgage regulation. We used the cost benefit analyses that the FSA carried out for this purpose. 17. Using the figures above and the estimated costs of FSA regulation, the total one-off compliance cost to the industry for home reversions would be approximately £11million. It is estimated that ongoing costs would total approximately £5.4 million. 18. It is anticipated that the one-off costs for providers and intermediaries of Ijara products would be similar to those identified for Home Reversion providers. The FSA's regulatory rules would be tailored to each product but similar standard requirements to those identified for home reversion plans would probably apply. These markets are developing at present, but the immediate cost of regulation to these markets is anticipated to be small. 19. The RIA is available from the Treasury website at the following link: http://www.hm-treasury.gov.uk./consultations_and_legislation/home_reversions /consult_homereversions_index.cfm EUROPEAN CONVENTION ON HUMAN RIGHTS 20. The Bill is an enabling provision. The secondary legislation to be made in consequence of the Bill will engage Article 1 Protocol 1 (Protection of property) of the ECHR. This is because FSA regulation of persons engaged in the new regulated activities would be likely to, for example, constrain the way in which such persons use their property when providing finance for home reversion schemes. This would interfere with the peaceful enjoyment of their possessions. The secondary legislation will be compatible with Convention rights as any such interference will be justified on the grounds that it is in the public interest, since it will provide consumer protection and will ensure a level playing field with mortgage regulation. 21. Section 19 of the Human Rights Act 1998 requires the Minister in charge of a Bill in either House of Parliament to make a statement about the compatibility of the provisions of the Bill with the Convention rights (as defined by section 1 of that Act). The statement has to be made before second reading. On 16 May 2005 the Economic Secretary to the Treasury made the following statement: 'In my view the provisions of the Regulation of Financial Services (Land Transactions) Bill are compatible with the Convention Rights.' COMMENCEMENT 22. The Bill will come into effect two months after being passed. |
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