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Memorandum submitted by Which? (CEAR 01)
Briefing on the Consumers, Estate Agents and Redress Bill
Section 1 Introduction to Which?
Which? Is the largest consumer organisation in Europe, with around 700,000 members. Entirely independent and not-for-profit, we are founded through the sale of our Which? range of consumer magazines and books.
1.1 Key Issues
> There should only be one estate agent redress scheme that deals with all consumer complaints about all estate agents > The scheme must be independent and transparent and provide efficient and effective redress for consumers > Estate agents should be properly regulated to prevent problems occurring
1.2 Overview
Which? supports the provisions in the Consumers, Estate Agents and Redress Bill, particularly proposals for all estate agents to sign up to an independent complaints scheme. This means all home-movers can get redress without having to go to court. This does not come before time: Which? research in June 2006 shows that over eight in ten people think the Government should set up an independent body to deal with complaints about estate agents within the next three years -43 per cent think this is urgent and it should be set up in the next 12 months1.
We also support the provisions in the Bill to toughen up enforcement and increase powers of inspection. However, we still don't think this goes far enough and believe there should be full regulation or licensing of the estate agency industry, including proper training for estate agents, as well as enforcement and monitoring (eg mystery shopping), to prevent the widespread problems occurring in the first place.
Which? broadly welcomes the consolidation of a number of bodies representing the consumer interest (eg the National Consumer Council) and the wider measures for consumer redress. We are also pleased the Financial Services Consumer Panel will remain outside the new structure, as it will be most effective if It remains linked to the FSA. However, we hope the merging of several consumer interest organisations will not see a drop in resources for essential consumer protection. The rest of this briefing deals exclusively with the provisions for estate agent redress.
1Online omnibus of 1,566 GB Suits 26 May to 1 June 2006 2The NAEA does provide training for estate agents, but of course, membership of the NW Is not mandatory.
Section 2 The current regulatory regime for estate agents
Which? research shows that 94 per cent of people think estate agents over-value properties.3
About 1.8 million of us buy and sell homes every year and it's the largest single transaction most of us wilt ever make. It can also be one of the most stressful experiences of a person's Life. However, estate agency services are not designed with the best interest of the consumer in mind. In fact, people have more protection when buying a tin of beans4 than they do when buying a home.
2.1 The Which? campaign
Which? has been campaigning for reform in the estate agency market since 1963. In 2004, we Launched our Move It campaign, setting up a fake estate agency - Cheatem & Ripoff - to demonstrate the lack of regulation governing the industry. Without any training, we bought an 'off the shelf company for £140 and were in business within days. The focus of the campaign is for an independent body to be set up to deal with complaints about any estate agent. Which? research shows 86 per cent of people would support this5. Further reforms should include a review of contract terms, better enforcement of the existing Law and proper training for estate agents so they understand the Law.
2.2 The Estate Agents Act and other legislation
The Estate Agents Act 1979 (EAA) is intended to regulate the work of estate agents so that both buyers and setters of property are treated honestly and fairly. It covers activities such as how offers should be handled, the information agents must provide to clients and the way in which certain terms must be explained if used in estate agency contracts. The EAA imposes a 'negative licensing' regime in which an agent shown to have breached certain provisions of the EAA, and/or to have been convicted of certain criminal offences, may be banned from continuing estate agency work.
So the EAA should set the minimum standards of behaviour across the industry6. But it needs to be made more enforceable - for example, much of the buying and selling process is conducted orally, meaning there is little documentation that can be used as evidence. A key part of the EAA is section 22, which sets out standards of competence but has never been enacted. We think it should be. In the House of Lords, an attempt by the Earl of Caithness to do so was defeated on a division at 3rd Reading on 6th February 2007.
3Online omnibus of 1,568 GB adults 26 May to 1 June 2006 4For example, food safety legislation, Sales of Goods Act, Trade Descriptions Act etc. 5Omnibus survey of 1,821 consumers in England and Wales October/November 2003 (published in the Which? Move It policy report) 6 Estate agency market in England and Wales, OFT, March 2004, paragraph 1.20
The EAA also needs modernising as it is over 25 years old, although there has been more recent Legislation concerning the industry. Under the Property Misdescriptions Act 1991, it is a criminal offence to make a false or misleading statement about certain matters concerning a property in either written or verbal communication with a prospective client. The Enterprise Act 2002 also gave the Office of Fair Trading (OFT) and Trading Standards the ability to obtain injunctions quickly to stop conduct breaching consumer protection legislation.
2.3 The OFT
Unfortunately, the OFT has a history of inaction in this area: As part of the research for our report in May 2005, we came across 29 estate agents contracts that we believed breached the EAA or the Unfair Contract Terms Regulations. It took the OFT over a year to investigate, despite the fact that it upheld all but one of our complaints. Furthermore, although the OFT received 430 complaints about estate agents between March 2004 and March 2006, it only issued 8 Notices of Warning under the EAA.7 It has also only issued 18 Notices of Prohibition under the EM, stating in a Letter to Which?: "There are very few criminal offences associated with the EM. Our preference has been to take 'fitness action' under the EM or to seek to change conduct using our powers under... the Enterprise Act 2002 in preference to prosecution". This appears to us to mean an estate agent is free to lie to buyers and sellers for their own gain in the full knowledge that, in the unlikely event they are caught red-handed, the worst they can expect is a slap on the wrist and a warning not to do it again.
2.4 Trade Bodies
There are a number of trade bodies in the estate agency market - the best known being the National Association of Estate Agents (NAEA) and the Royal Institution of Chartered Surveyors (RICS). There is a voluntary ombudsman scheme for estate agents, the Ombudsman for Estate Agents Ltd (OEA), but only about 66 per cent of estate agents are members. According to Which? research in 20038, only 12 per cent of consumers have heard of the OEA, although 69 per cent believed there was an ombudsman who can hear complaints about any estate agent.
7Although it did issue 273 warning/advisory Letters to estate agents 8Omnibus survey of 1,821 consumers in England and Wales October/November 2003 (published in the Which? Move It policy report)
Section 3 Problems In the Industry Which? research shows that 72 per cent of people think estate agents invent offers from non-existent buyers.'
The OFT published a report in March 2004 on the estate agency market In England and Wales. It found a quarter of sellers said they were dissatisfied with the service provided by the estate agent who sold their home. 21 per cent of sellers and 23 per cent of buyers said they had experienced a serious problem with their agent, for example failure to pass on offers, suggestions that a buyer would be more likely to be successful if they also used the financial services offered by the agent, and failure by the agent to declare a personal interest. Of the, 71 per cent of sellers and 55 per cent of buyers complained. In the majority of cases, nothing happened or the complaint was not resolved satisfactorily.10
3.1 Consumer dissatisfaction
Consumer dissatisfaction with estate agents is increasing. In 2005, the OEA received 6,021 complaints" - a nine per cent increase on 2004 and a staggering 37 per cent increase on the number received in 200012. Based on an estimate that there are about 24,000 people employed in estate agency in the UK, this represents about one complaint for every four estate agents. However, since the OEA scheme still only covers two thirds of all estate agents13, the potential level of complaints is likely to be much higher (for example, complaints to Trading Standards). Furthermore, the complaints received are likely to be the tip of the iceberg since many consumers won't even know they've been cheated.
Which? research14 shows that only one person in ten thought you could usually trust an estate agent. It also showed less than half of those who had bought or sold a home were always happy with the service they received from estate agents. Further results showed:
> 70 per cent of people think estate agents frequently give misleading information about properties > 29 per cent think their estate agent did not keep them well informed > 14 per cent said the estate agent incorrectly described the property they wanted to buy or sell > 12 per cent said the estate agent put too much pressure on them > 9 per cent reported they thought their estate agent behaved unethically > 3 per cent said they had to pay commission fees when they were not due
9'Online omnibus of 1,568 GB adults 26 May to I June2006 10Estate agency market In England and Wales, OFT March 2004, pp4 and 55 11Over half of these were, however, about non-member agents 12OEA Annual Reports 2004 and 2005 13Accoiding to industry figures there are 10,800 estate agency offices in England and Wales and the OEA has 7,194 members mat 15 November2006. 14 Omnibus survey of 1,821 consumers In England and Wales October/November 2003 (published in the Which? Move It policy report)
3.2 Valuations
A Which? magazine article in May 2005 showed estate agents' valuations can vary wildly, sometimes by up to £125,000. Which? researchers, posing as sellers, invited estate agents to value 14 homes throughout England. In six of the homes the top valuation was 25 per cent or more above the lowest. Halifax valued one home in Tyne & Wear at £200,000, while Moody and Co suggested £325,000- 63 per cent more. Bradford & Bingley thought a house in Liverpool worth £125,000, while Halifax came in at £180,000 -44 per cent higher.
Touting' for business - deliberately overvaluing - is a common problem. Some agents give high valuations to get a customer's business, then suggest a more realistic price once they've locked sellers into a contract. Undervaluing is also a problem. A contributor to Which?'s Move It website sold his house in Exmouth and was glad he'd had three valuations, as otherwise he'd have lost £70,000. Two estate agents valued his home at under £250,000, but a third, Bradleys, recommended a price of £325,000. Bradleys eventually sold the home for £320,000.
3.3 Breaching the law and unfair contracts
A Which? investigation into estate agents in 2003 uncovered serious breaches of the law and widespread use of complicated and misleading contracts, and contracts with clauses that could be legally unfair. Which? asked ten home owners in England to put their properties on the market. Each requested valuations from three estate agents and asked for copies of their contracts. Researchers then posed as potential buyers for the properties.
Even in this snapshot test, Which? found one agent seriously violated the law. It lied to one of Which?'s buyers by saying a higher offer had already been rejected and encouraged them to come back with another offer - the higher offer was a complete fabrication. Less serious breaches were more widespread in the investigation. Only two of the six agents that received offers passed them on promptly and in writing. The others passed on information only over the phone, and several were less than prompt in telling their clients what was going on.
Unfair or misleading contracts were the most common problem found by Which?'s undercover researchers. Some contracts were needlessly complicated, some misleading and some potentially unfair in law. In the worst cases, unfair or misleading contracts leave people paying thousands of pounds, even if an agent has done nothing to help the sale. Most estate agents we investigated weren't even following the basic provisions of the law, such as passing on all offers promptly in writing. Section 4 The redress scheme Which? research shows that 74 per cent of people think estate agents and property developers work together in a dishonest way for their own cash benefits'15 We welcome the proposals for reforming the estate agency market set out in the Consumers, Estate Agents and Redress Bill. We believe the Bill is long overdue and have criticised both the Government and the OFT for taking so long to act, despite the OFT's report which criticised the industry in 2004 and the cross party support received for the two private members' bills Which? supported in Parliament.16'
4.1 Principles of a good redress scheme
Which? believes there should only be one ombudsman scheme covering all estate agents. This is by far the simplest solution for consumers, who want a straightforward, simple, accessible and effective resolution to their complaint. Furthermore, having only one scheme would be much cheaper and more efficient. We welcome the provisions in the Bill to enable the scheme to have voluntary jurisdiction over other areas of the property industry. This would allow, for example, complaints about lettings and surveyors to be dealt with under the scheme.
The process for approving a redress scheme must be public and allow for consultation with consumer groups as well as the industry. The approval criteria should include that the scheme will cover all consumer complaints about all estate agents and applications should set out how they will work with the OFT. In addition, we would want to see schemes meet the following criteria, which we've identified as crucial for any good ombudsman scheme:
> Accessibility - information needs to be widely available; the ombudsman must be directly accessible and free to the complainant; the scheme should be straightforward and easy to use > Independence including appointments according to Nolan principles, independent budgets, agreed terms of reference, and a majority of consumer/user representation on governing bodies > Fairness - full investigations with equal access to information for companies and individuals; complainants able to complain against the ombudsman and pursue their claim in the courts; consistent decision making > Transparency - clear reasons for decisions; satisfaction monitoring; clear consumer pathway; keeping consumers informed; publishing information about how the scheme works and upheld decisions > Effectiveness - right tools for the job; access to information; able to enforce decisions and make them binding on industry; comprehensive coverage of sector; a single body and process; adequate financial and expert resources
15Oniln.omnnlbwotiMSGBadults26Msvto I JwwZOO6 16The Estate Agents (Independent Redress Scheme) Bill, sponsored by Rt Hon Alan Williams MP end then Lord Dubs In 2005
> Efficiency - performance indicators; speedy response (although consumers rate thoroughness and fairness above speed); information provision to help promote good practice > Confidentiality - must maintain confidentiality of complainants and third parties; build and maintain trust of the industry.
4.2 Independence
It is vital that any redress scheme is not just independent but seen to be independent. Which? does not think the current OEA scheme meets this criteria, in particular, its structure compromises its independence and should be reformed. The same person is both the chief operating officer and chairman of the Board of the OEA Company Ltd and, while this may be in line with company law, it isn't suitable for an ombudsman, where it is vital to ensure there are no conflicts of interest. The chairman should also be holding the chief operating officer to account for day-to-day management, providing a useful balance.
The OEA Board is entirely made up of members of the industry (including NAEA and RIO) -instead there should be a lay majority with experts in consumer affairs. There is a Council "to ensure the Ombudsman's independence and resourcing; to act as an advisory body to the Ombudsman; and to refer matters for consideration by the OEA Board", but some members also hold Board positions, eg the chief operating officer. Board members, who are responsible for the running of the business, should not serve on the Council, which is responsible for ensuring the independence of the Ombudsman. Appointments to the Council should be based on Nolan principles.
4.3 Redress
There also needs to be a clear system of awards, which takes into account distress, actual and/or potential loss and the amount of commission paid to an agent. The OEA states it makes awards on the basis of actual proven financial loss and distress. But the Ombudsman has acknowledged that this is very difficult to prove and there is no scale to work from. Which? doesn't think the awards made by the OEA are transparent enough and we are concerned that most are at a very low level: Although the maximum is £25,000, in 2005, out of 497 cases, only six awards were over £3,000; 192 were between £100-£499.
Which? believes that where a seller has a complaint about the unsatisfactory service of their estate agent they have a legitimate right to withhold some, or all, of the commission fee. However, the Ombudsman stated in his 2005 annual report that: "If such a case is referred to my office, I am likely to support the agent's contractual entitlement to the commission fee - but I will then consider what level of financial compensation is appropriate". We think this approach is the wrong way around and in future want to see an ombudsman have the power to withhold an agent's fees and exercise that power.
4.4 Monitoring
A statutory scheme should also ensure there is a robust monitoring system in place to identify potential problems and help raise standards in the industry. We have also raised concerns about the OEA's monitoring, which only includes consumers who have completed transactions and does not extend to measuring satisfaction with its own services. Neither does it proactively monitor companies through mystery shopping or unannounced visits to agents. Which? has raised these issues with the OFT as part of the review of the OEA's code of practice.
4.5 Penalties and enforcement
A redress scheme has to be acting in the interests of consumers, which means taking disciplinary action against estate agents who breach the code, including 'naming and shaming' those who have had complaints upheld against them so consumers can make informed choices. We don't think the OEA scheme currently measures up. In 2005, even though the Ombudsman acknowledged "some complaints that we deal with have revealed some particularly serious breaches of the Code of Practice", and he passed 18 cases to the OEA Council, the Council was "satisfied that none of the cases warranted further action against the agencies concerned"17 Which? is also unclear whether the OEA referred any members who were potentially breaking the law to the OFT. The OEA has also said: "The OEA does not 'name and shame' - all of its cases remain confidential. Furthermore, it removes the criminality aspect".18
As far as the Bill is concerned, we are not sure of the rationale for setting the time limit for enforcement of a penalty charge notice at six months after the day on which the breach (ie not joining the redress scheme) occurred (Schedule 6, new section 23B (2)). In the Lords, the Minister sought to reassure Peers that this was linked to existing enforcement rules for Trading Standards. However, we would want to be sure that estate agents won't escape a penalty charge just because the time limit expires and that the OFT, for example, would be able to enforce penalty charges after this.
We were also concerned that the maximum amount for penalty charges for operating outside the scheme was originally set at £500 (Schedule 6, new Schedule 4 section 2). When the average estate agent's commission is £3,183 19, a £500 fine, even for every property sold while not a member of the scheme, is not a great disincentive. In the House of Lords, the amount was increased to £1,000 through an amendment which the Government Minister accepted. The amendment was promoted by Which? and tabled by Lord Dubs on 6th February 2007 (col 615) though we would prefer the maximum to be even higher.
17 Ombudsman's report, OEA Annual Report 2005 18 OEA paper to RICS members, section 4 on dealing with Trading Standards 19Estate Agency News, September 2006
We also support the requirements under the Bill for estate agents to make and keep written records for six years and proposals to toughen up the OFT's powers of enforcement and the powers of inspection (these currently only apply if an agent is suspected of a criminal offence, but this will be extended to apply to any breach of the EAA).
4.6 Buying from developers
We believe the redress scheme should extend to the sale of newly built houses directly to consumers by developers (either off plan or once built by the builder). There is considerable scope for consumer detriment when so many of these properties will be bought unseen from plans and consumers should have an easy way to get redress in these circumstances. Which? promoted an amendment to the bill to include new build developers during House of Lords stages, but the Government minister resisted their inclusion.
We would also welcome letting agents coming into the scope of the redress provisions.
SectIon 5 Conclusion
Which? supports the provisions in the Bill, but they don't go far enough. The complexity, size and infrequency of home-buying and selling transactions combine to produce a significant level of risk for consumers. These characteristic leave the door wide open for estate agents to behave either incompetently or unethically.
Incompetent behaviour involves unintentional failure to comply with procedures because of lack of knowledge and/or training, for example, an estate agent not realising that all offers should be passed on in writing.
Unethical behaviour involves the abuse of power in the pursuit of self-interest and is potentially far more serious. It includes the fabrication of offers, collusion with property developers, falsely advertising membership of the ombudsman scheme and other trade bodies and not declaring personal interest in a particular transaction.
Until these problems are rooted out at source, consumers will continue to suffer at the hands of estate agents. In the meantime, it will be crucial to ensure the criteria for the redress scheme are robust and developed in line with consumers' interests, not those of industry.
Section 6. Case Studies
Which? research shows that 85 per cent of people think estate agents refer people to 'impartial financial advisers' who are in fact linked to the agent?'
6.1 Misleading advertising
When Mrs B's mother inherited the bungalow next to her home, she appointed Chris Campbell & Co of Bexhill, partly because it was advertised as a member of the NAEA. She said she'd consider a lower offer from someone she'd like as a neighbour and accepted one of £158,000, £7,000 below the agency's recommended asking price, because she was told the purchaser was buying the property for their mother. But nobody moved in and a few months later the new owner, a property developer, sold the bungalow for £187,950. Mrs B suspected the agent had undervalued the bungalow and misled her mother about the buyer. She contacted the NAEA for advice- but it told her the estate agent was not, in fact, a member, so it couldn't help. Chris Campbell & Co admits its Bexhill office wasn't an NAEA member. It said it was misled by the buyer about his intentions.
Published in Which? magazine in June 2003
6.2 Unearned commission
Mr S was delighted to have his offer accepted on a property being sold through JAC Strattons of Finchley, north London. However, shortly before exchange, Mr S had a call from JAC telling him that another, matching offer had been made on the property. The new buyer was offering a retention fee of £6,000+VAT (equal to the commission fee) to the estate agent as an incentive. Mr S claims JAC proposed that if he also agreed to pay a retention fee, they would make sure he got the property. To avoid losing the house at such a late stage, Mr S agreed. It meant he was more than £7,000 out of pocket and that JAC received fees from both the buyer and the seller. JAC Strattons said: "Although we are of the view that the matter was properly and ethically handled in this situation, JAC Strattons Ltd has decided that it will not, in the future, be seeking and if offered shall not accept, retentions offered by purchasers in situations such as this."
Published in the Which? Move It policy report in April 2004
6.3 A £900 charge for doing nothing
In November 2003, Ms H signed a sole agency agreement with Whitegates in Liverpool to help her sell her house. However, after one potential buyer pulled out, she decided to make contact with a man who'd posted a note through her door earlier in the year about buying the property. After viewing the house, this buyer made an offer and Ms H accepted on the spot. She then set about cancelling her contract with Whitegates. However, despite the fact that Ms H's buyer had first contacted her before her house was even on the market, and the sale proceeded without any assistance from Whitegates, the estate agent still tried to charge her almost £900 in commission. Arnanda came to Which? for help, so we wrote to Whitegates and said we didn't think she should be liable for the charges. "I'm really glad that Which? was able to sort it all out for me," Ms H told us. "I didn't have to pay a penny to the agent and Whitegates removed the 'for sale' sign without any further fuss."
Published in Which? magazine in May 2005
6.4 No access to redress
In September 2005, Ms H and her partner were trying to buy a flat in Streatham but were told the owner would not accept their offer. Eventually she spoke to the owner herself, who not only accepted her offer but said she had never received it from the estate agent. She suspected the offer wasn't passed on because she refused to use the estate agent's mortgage adviser - particularly when they told her if she did she would be able to offer more for the flat! Because the agent is not registered with any trade body she can't complain unless she goes through the courts.
Published on Which? website www.which.co.uk/moveit
20Online omnibus 1,568 GB adults26May to I June 2OO6
April 2007
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