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Mr. Henry Bellingham (North-West Norfolk) (Con):
There have been reports in the press of relatives who had been expecting to inherit the home getting upset when their interests are not properly protected. Obviously it is important that people who want to take out an equity release scheme should be able to do so, but what is his advice to relatives, who in some cases have ended up suing solicitors and other professional advisers?
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Mr. Ivan Lewis: I cannot comment on individual cases: it depends on the circumstances. Most older people are perfectly able and sufficiently lucid to make judgments about what they want to do with their assets. Obviously, if financial advisers or others are seeking to exploit and abuse these situations, it is right to ensure that we have a level of regulation that is appropriate in the circumstances. From that point of view, I welcome the hon. Gentleman's intervention. He makes the point that FSA regulation would give enhanced protection. That is important. As I said, there is a consensus that this is appropriate, not excessive, regulation.
Dr. Julian Lewis (New Forest, East) (Con): I am a little concerned about the case of some of my constituents who are involved in some specific equity release schemesinvolving Barclays Bank, if I remember correctlywhereby if they wanted to sell the property if their circumstances changed, they would have to part with something like three quarters of the increase in the value of the property. They were not paying interest; they entered into this deal instead. Such schemes have been discontinued, but some people are effectively trapped in homes they cannot sell because the vast amount of increase in the price would go to the company that gave them the interest-free loan against the equity of the property, and they could not find another more suitable property. Are the Government proposing to do anything to help those people out of the trap in which they find themselves caught?
Mr. Ivan Lewis: The hon. Gentleman understands that we cannot introduce retrospective legislation, but we sympathise with people who find themselves in such circumstances. If is incredibly difficult to help people if those transactions were perfectly lawful, even if they have had unintended consequences. The hon. Gentleman mentioned Barclays bank, and if he feels that it has behaved unreasonably, he should take the matter up directly with its senior management on his constituents' behalf.
Two main types of home finance products are currently aimed at meeting the religious needs of Muslim consumers in the UK. The first, murabaha, involves a financial institution purchasing the chosen property and then selling it immediately to an individual at a higher price. The higher price is then paid back on a monthly basis to the financier over a period of up to 15 years. Those products are already covered by FSA regulation.
The second type, ijara, involves a financial institution purchasing the chosen property, at which point the individual agrees to pay back the exact purchase price either over a period of up to 25 years or at the end of the payment term. Ownership of the property remains with the lending institution until the payment term is up. The individual pays rent to the financial institution over the payment term and becomes the owner of the property once the purchase price paid by the financial institution is repaid. The financial institution makes its profit from the rent paid, which is seen as a fair payment for use of the property rather than a charge for borrowing money. That arrangement is not currently covered by FSA regulations.
Mr. Sadiq Khan (Tooting) (Lab):
I recently chaired a meeting in the House hosted by the Muslim Council of
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Britain and attended by some of the world's leading sharia finance experts. Does the Minister agree with those experts that the UK leads the western world in the provision of sharia-compliant financial services? Does he also agree that the Bill will ensure that those of our citizens who choose sharia-compliant products get the same protection as other consumers?
The Bill will remove the current imbalance between the regulation of murabaha products and the lack of regulation of ijara products. It will ensure proper protection for all consumers who choose to use non-interest bearing products for reasons of conscienceother consumers may feel the same way as members of the Muslim community about such products.
The Bill will allow us to bring flexible tenure products into the scope of regulation, if that becomes necessary or desirable in the future. At present, providers of such products are exempt from FSA regulation, as they are registered social landlords. In response to the consultation, however, we have undertaken to consider the regulation of those products, if private providers enter the market in the future. Any action to introduce regulation in that area would be subject to a rigorous cost-benefit analysis and would require secondary legislation. I hope that hon. Members now have a clearer picture of the characteristics of the products that form the focus of the Bill.
The FSA assumed responsibility for the regulation of first-charge mortgages secured on a purchaser's primary residence from 31 October 2004. The Government's decision to regulate in this area was announced by the then Economic Secretary in December. The decision was taken to ensure that people had adequate protections when they made what for many is one of the most significant financial decisions of their lives. The size of most mortgage loans, combined with the long repayment cycles and the fact that default can mean the loss of family homes, means that they are qualitatively different from other common financial products and as such require particularly rigorous and careful regulation. The Government's decision to regulate was broadly welcomed by both the industry and consumer groups.
Mr. Nigel Dodds (Belfast, North) (DUP): I welcome these sensible regulatory measures, but I seek clarification. Will all the provisions apply directly to Northern Ireland or will further secondary legislation be required?
With FSA regulation, lenders and intermediaries are required to provide a high standard of advice to the tens of thousands of people who take out mortgages every year, which should help avoid mis-selling scandals in future and allow consumers to make informed choices about the mortgages that are best for them. Informed and confident consumers should in turn support the stable future development of the UK's diverse and competitive mortgage market. The Bill seeks to extend those benefits of regulation.
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As I have said, neither home reversion plans nor ijara home finance products are currently regulated by the FSA. Those products are not currently specified as regulated activities pursuant to the Financial Services and Markets Act 2000. Of course, the fact that activities relating to reversion plans are not currently specified as regulated activities does not mean that there is not still scope for abuse. Indeed, given that these products, by their very nature, are aimed at sometimes vulnerable people, it is clear that we have a particular responsibility. Not only is there a risk of mis-sellingwe must remember that these products are not simple to understand and that they can have complex interactions with pensioners' benefit entitlementsbut there is currently a lack of redress if things go wrong.
I should not paint an incomplete picture for the House, because consumers of home reversion plans are not completely without protection at the moment. The home reversion market is subject to voluntary regulation through safe home income plans. Members of SHIP agree to comply with a code of practice and undertake to provide a fair, simple and complete presentation of any plan they offer. They also offer a guarantee that consumers will never owe a lender more than the value of their home, which is known as a no negative equity guarantee. However, those protections are a long way short of the protections offered by statutory regulation and the FSA's regime. Lifetime mortgages, which in effect are very similar products to home reversions, provide a clear model for what FSA regulation of home reversion plans might look like. They are considered to be high-risk products and are accordingly subject to rigorous rules.
The sort of rules that one would expect to see the FSA apply to home reversion schemes under the powers granted by this Bill include rules to ensure that providers must advise of risks as well as benefits when advertising reversion schemes; rules on advice to consumers which would ensure advisers considered implications for tax and benefits, as well as matching the consumers overall needs and circumstances to product features; and a requirement for firms to issue key product information to consumers in a clear and understandable format. Furthermore, FSA regulation will offer consumers access to the financial ombudsman service in the event that they wish to make a complaint, and it would also provide cover under the financial services compensation scheme. None of those protections is currently available to purchasers of home reversion schemes, which not only leaves elderly people in all our constituencies at risk of mis-selling, but creates a distortion in the equity release market and opens the door for confusion among consumers as to what is FSA regulated and what is not.
The industry has been a keen proponent of regulation for reversion plans in order to remove any consumer confusion and to boost consumer confidence in the equity release market as a whole. Although the market in home reversion products grew by 13 per cent. in the first quarter of 2005, it remains small at less than 3 per cent. of the total value of lending in the equity release market. FSA regulation is seen by many industry participants as a prerequisite of further expansion of this market. By boosting consumer confidence, it will ensure potential demand is realised, and by securing the reputational risk of reversion providers, it will encourage more players to enter the market.
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Having set out clearly where the Government see the benefits of extending FSA regulation in the way the Bill proposes, I should stress that we have arrived at a balanced view of the overall benefit of regulation following extensive consultation. In line with the Government's general commitment to better regulation, we have sought to ensure that the changes proposed by the Bill are necessary, and the costs justified. Our consultation exercises have demonstrated overwhelming support for the measures.
As I am sure hon. Members will have noted, the Bill is extremely short and very simple, weighing in at only two clauses. Many of us would welcome other Bills of a similar nature. The legislative background to the Bill is that in order for an activity to be regulated, it must be carried on by way of business and specified in an order made under section 22 of the Financial Services and Markets Act 2000. Schedule 2 to that Act sets out in broad terms the kind of activities and investments that can be specified in an order made under section 22. Although it includes loans secured on land or standard mortgages, it does not cover other types of finance provided in connection with the acquisition or disposal of land.
If, as I sincerely hope, the House sees fit to support the Bill, secondary legislation would be brought before the House in the form of an affirmative resolution statutory instrument which would precisely define the products and activities that would be regulated by the FSA in future. It is the Government's stated intention to consult publicly on the content of that secondary legislation to ensure that it is properly targeted and effectively focused. In addition, the FSA will consult publicly on the detailed rules that would apply to these products.
There is no reason to believe that any future regulation of home reversion plans and ijara products would be very different from that already in place for lifetime mortgages and murabaha products. However, it is important to note that the FSA is obliged to take account of the particular features of each product it regulates and to ensure that the rules it applies are proportionate to the risk posed.
I hope I have gone some way towards convincing hon. Members of the considerable merits of this Bill; it will be up to my right hon. Friend the Chief Secretary to finish the job. The Bill will extend important consumer protections to vulnerable and minority consumers, level the playing field in mortgage regulation and ensure that there are no artificial distortions, and bolster consumer confidence in these products and so help to ensure that their markets continue to develop. It has found strong support among consumer groups and industry alike, and I hope that it will garner support from all Members who contribute to the debate. I commend it to the House.
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