House of Commons
|Session 2008 - 09|
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Public Bill Committee Debates
The Committee consisted of the following Members:
Anne-Marie Griffiths, Sara Howe, Committee Clerks
attended the Committee
Fourth Delegated Legislation Committee
Thursday 18 June 2009
[John Cummings in the Chair]Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2009
That the Committee has considered the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2009 (S.I. 2009, No. 1342).
It is a pleasure to serve under your chairmanship to discuss the order, Mr. Cummings. I thank those hon. Members who have taken time out from the Finance Bill Committee to be here.
The order extends the scope of Financial Services Authority regulation to include the sale and rent-back market. Regulation will bring important protections for consumers in that market, preventing exploitation of vulnerable home owners and providing means of redress for those who experience problems.
The sale and rent-back market, which is sometimes referred to as the sale and lease-back market, offers home owners the option of selling their properties at discounted rates in exchange for tenancy arrangements. Sale and rent-back agreements effectively combine two transactions: first, individual home owners sell their property at a discount; and, secondly, they are offered an agreement to remain in the home as a tenant.
The sale and rent-back market is relatively new and has grown rapidly in recent years. The Office of Fair Trading suggests that it is highly fragmented, with perhaps more than 1,000 providers, comprising a large number of small firms and a small number of larger providers. The OFT estimates that as many as 50,000 sale and rent-back agreements may have taken place.
A range of stakeholders, including consumer groups and mortgage industry representatives, have raised concerns about the market. The main concerns are that arrangements are often taken up by vulnerable home owners who face repossession; that home owners may enter agreements mistakenly believing that they offer secure tenure in the medium-to-long term; and that the increasing number of home owners experiencing financial difficulty as a result of the global financial downturn means that the scale of the problem is likely to increase.
Hon. Members probably have constituents who have entered into such arrangements and may be all too aware of the problems that some home owners have experienced. Case studies published by the OFT show that some consumers have sold their properties for as little as half the market value. Citizens Advice recently confirmed that it continues to see problems in the market. Responding to the results of the Governments consultation, Peter Tutton, of that organisation, said:
We have seen a number of cases where people in mortgage arrears and facing the threat of repossession have gone ahead
The statutory regulation of mortgages already provides home owners with important protection and appropriate means of redress. In 2004, the Government extended the scope of FSA regulations to cover first-charge residential mortgages. The FSAs regime requires lenders to treat their customers fairly and to treat repossession as a last resort.
Against that backdrop, the Government propose specific protections for those who may be considering a sale and rent-back agreement. That action follows consideration of the sale and rent-back market by the OFT. In response to stakeholder concerns, we asked the OFT at Budget 2008 to investigate the market and, where appropriate, to consider options to strengthen consumer protections.
On 14 May 2008, the OFT announced that it would conduct a formal market study, working to an expedited time scale in light of concerns about the market. The OFT published its report on 15 October. The study found that the potential for severe consumer detriment in connection with sale and rent-back arrangements is unlikely to be addressed through the existing framework of consumer protection, Government initiatives under way at the time of reporting to help home owners in difficulty or industry self-regulation. The report recommended that the sale and rent-back market be regulated by the FSA.
The 2008 pre-Budget report confirmed the Governments intention to consult on strengthening consumer protections in the market, including by extending the scope of FSA regulation, and we published our consultation on 6 February 2009. The consultation sought views on three options: maintaining the existing framework, self-regulation and FSA regulation. The consultation also invited views on the proposal for the FSA to put in place its regulatory regime via a two-stage approach. That would involve an interim regulatory regime that would take effect as soon as the statutory changes came into force, followed by a full regulatory regime at a later date and after a consultation and cost-benefit analysis by the FSA.
Alongside the Governments consultation, the FSA published a consultation on an interim regulatory regime, so that it would be ready swiftly to introduce consumer protection if asked. Both consultations closed on 1 May, and the Government published a summary of responses to the consultation on 2 June. The Government then laid before Parliament the order that we are debating today.
We consider that extending the scope of FSA regulation to include sale and rent-back agreements is the most appropriate way of ensuring consumer protection. We believe that a two-stage approach to introducing regulation, including the use of an interim regime, is an appropriate and proportionate way of balancing quick action to protect consumers with the rights of firms already conducting business in the market.
The order introduces the regulation of sale and rent-back agreements by this two-stage approach. A full regulatory regime will take some time to design and implement. That is why interim regulation is to commence on 1 July
The interim regime will provide a level of consumer protection much sooner than would otherwise be possible. Under the interim regime, existing sale and rent-back providers who wish to continue doing business will need to meet FSA threshold conditions, including the requirements to have adequate resources and to be run by fit and proper people. No new entrants into the market will be allowed during the interim regime. Firms will also have to comply with the FSAs principles for businesses, including the requirement to treat customers fairly, and meet a number of systems and control requirements and conduct-of-business rules, including rules on disclosure.
Mr. Michael Jack (Fylde) (Con): I am listening carefully to the Minister. Do the regulations also apply to businesses that operate and are registered outwith the United Kingdom that might, for instance, carry out their transactions on the internet?
Ian Pearson: My understanding is that the interim regime that will be introduced on 1 July will cover all existing providers of sale and rent-back agreements.
Mr. Jack: I am grateful to the Minister for telling us that, but that is what he said in his speech. My question was this: if someone was established outwith the United Kingdom and operated on the internetin other words, there was no person-to-person interfacewould the regulation provide protection for such transactions?
Ian Pearson: I do not quite understand what the right hon. Gentleman does not understand about the word all. I believe that all overseas firms will be included, and I imagine that that must include internet firms.
The interim regime will also provide consumers who experience problems a means of redress by giving them recourse to the Financial Ombudsman Service. The details of the FSAs full regime are a matter for consultation later this year, but the FSA has already said that the full regime will include full authorisation, prudential requirements and further conduct-of-business rules in addition to those of the interim regime.
The Committee will rightly be interested in the costs to business that will result from the order. In its consultation, the FSA estimated that the costs for each firm would be £8,000 incurred in preparing for regulation, and ongoing annual costs of £14,100 to £21,100, of which about £1,100 would be fees to the FSA; the remainder would be compliance costs.
We believe that the order is a proportionate way of dealing with the problems that have become apparent in the sale and rent-back markets. I am sure that right hon. and hon. Members will welcome the important protections that we are seeking to introduce today.
Mr. Jack: Does the new regulatory regime introduced in this area of financial transactions have the same type of cooling off period that exists for the sale of many forms of financial product and that enables consumers to carry out a proper evaluation of offers that they will have received under the new regulatory terms?
Ian Pearson: I think that that is the case. If the right hon. Gentleman wants to make a contribution to the debate, I am sure that the Committee will be grateful to hear his wise words on this matter. I understand that the normal regulatory rules would apply, but if I get any better information, I will be happy to reply to him.
The protections that we want to introduce are important, and I hope the Committee will agree to them.
Mr. David Gauke (South-West Hertfordshire) (Con): It is a great pleasure to serve under your chairmanship, Mr. Cummings, and I welcome the hon. Member for Leeds, East to his new post as the Government Treasury Whip. I had the pleasure of serving on the Treasury Select Committee with him, and I assure the Committee that the Select Committees loss is the Government Whips gain. I am sure that he is already having an interesting time in his new role.
Let me say at the outset that we recognise the need for improved consumer protection in the sale and rent-back market. I think that you have received a letter from the Council of Mortgage Lenders, Mr. Cummings, which sets out why there is a need for improved consumer protection in this area. There is an imbalance in power between the seller, who is often in a distressed situation, and the buyer. Sellers are not always able to give the matter proper consideration because of the pressures that they may find themselves under as a result of their inability to service their mortgage and associated financial difficulties. In those circumstances, they may be tempted to avoid taking independent or professional advice, because of the cost, and they may end up making an arrangement that is not to their advantage.
We fully understand why the Government have taken the route of applying FSA regulation in this area, but I have several questions for the Minister. I am sure that he will oblige the Committee by responding to them all. On the number of sale and rent-back providers that will be affected by the order, he quoted the OFT number that about 1,000 firms were likely to be affected, including both large and small providers. However, the impact assessment refers to evidence suggesting that the number might be significantly higher or lower. There is also some suggestion that there is a falling market, and that the number of transactions and providers may have reduced by about 50 per cent. since the OFT report in October 2008. What is the Governments view about the number of firms that are likely to seek or require either authorisation or an extension of their scope of permission under the order? How many firms are we talking about? Is the Minister able to guide us regarding how many existing firms will seek to extend their scope of permission to make arrangements or provide advice in this area? How many firms that currently are not regulated by the FSA will now fall under its regime?
I would also be grateful if the Minister indicated how the Government think the market will look after the order comes into effect. I ask him to do that because we have heard what the average regulatory cost is likely to bearound £14,000and we know that the market is fragmented, with both large providers and some entities that appear to make arrangements or provide advice on a one-off basis. It seems to me that the cost of being regulated in this area will make it difficult for those who
I note that the usual exemptions for making arrangements or providing advice through authorised persons apply here. Will those one-off providersif I can use that termwork through the relatively small number of regulated firms? It is some years since I was familiar with the intricacies of the Financial Services and Markets Act 2000 and its regulatory regime, but there certainly used to be an appointed representatives system that enabled unregulated firms to enter into arrangements on a more formal basis with authorised firms and gain the benefit of that regulatory cover. Does that apply to sale and lease-back?
I noticed in the consultation document and the response that some suggested that other entities could have provided the regulation rather than the FSA. What consideration was given to other entities? Is there any other body in a position to regulate? Is the OFT a potential regulator? Why was the FSA the appropriate body? Can the Minister outline the details of the costs to the FSA of providing the service? The impact assessment refers to a £45,000 initial cost for the interim arrangements, followed by an additional £45,000 when the full regime comes into effect and an ongoing cost of £10,000 per annum. I assume that that is a net cost that takes into account the membership fees from firms conducting the regulated activities in the order. How many additional staff will the FSA need to take on? Will there be a dedicated team focusing on sale and lease-back? How many staff will focus on the approval system, that is, the arrangements that apply when a firm seeks authorisation to perform these activities? How many will be involved in ongoing supervision and how many in enforcement in the event of failures?
The impact assessment sets out what the Government see as the overall net benefit. By necessity, it is a vague number. I say vague but it is very specific in its parameters: the overall net benefit is somewhere between £547.4 million and £1,327.3 million over 10 years. We often see such net benefits in impact assessments, but I would be grateful to know whether the Government have any intention of reviewing it to see whether those numbers are accurate.
What is the effect on competition of the order and related regulations? Regulation creates a barrier to entry, which, on the face of it, reduces competition, but the OFT and the Government argue that there will be increased competition as a consequence of regulation. I understand that that is possible because more information is provided to consumers, and if the reputation of this area is improved it is possible that more mainstream providers will come into play. Will the Government explain what, on the face of it, is a slightly strange remark that regulation will improve competition in this particular area?
I would also like to ask one or two questions about the conduct of business rules that will apply in those circumstances. My understanding is that the rules will be based on the mortgage conduct of business rules that apply for a range of mortgages, but it would help the
I would also be grateful if the Minister could address the issue of a fair price. In the course of his remarks, he touched on circumstances where sellers appear to be selling their property for less than 50 per cent. of the market value. Indeed, in assessing the potential benefits of regulation, the point is made that there are very often substantial discounts and that if we take anything below 85 per cent. of the market value, that is a cost to the consumer and is part of the benefit of having regulation in this area. Is the intention of the Government and, more specifically of the FSA, that there would be a conduct of business rule that would mean that, for a firm to treat a customer fairly, it would be necessary to ensure that no less than 80 or 85 per cent. of the market value for the property is paid to the seller, or will the rules not be as prescriptive as that?
Returning to a point I made about the changing nature of the market, there appears to be conflicting evidence in this case, because one might think that, in a period of rising arrears and repossessions, demand for this product might be greater. However, the evidence referred to in the impact assessments suggests that demand may be diminishing. It would be helpful if the Government could give some indication as to where they think the position is. If it is diminishing, will the Minister explain, perhaps in greater detail, why it is necessary to have an interim arrangement, as opposed to going straight into the main situation and full regulation next year? I am not critical of the interim arrangement, but if the sale and lease-back market is dying at the moment, that suggests that there might be time to introduce it at a later stage, but we will listen with interest to what the Minister has to say. I stress that I am not opposing the interim arrangements; I think it is a reasonable question to ask. Subject to those points, we will not oppose the extension of regulation in this area.
Dr. John Pugh (Southport) (LD): It is a pleasure to serve under your chairmanship in this cosy little room, Mr. Cummings. The pleasure is offset only by the disappointment of missing the excitement of the Finance Bill. We support this regulation and I just want to make a few general remarks without going into specifics. I understand that the statutory instrument itself has been thoroughly consulted on. There is a genuine case for regulation, in so far as there are genuine risks for the consumer. The Minister has outlined them. At risk of losing a lot of equity for a very poor price, or getting a very poor tenancy agreement, it is always better not to avoid these arrangements and to hang on to the house if possible.
It is very disappointing that the Governments mortgage support scheme is having such little effect. The latest figures from the Department for Communities and
Given the lack of shopping around and the pressure under which decisions are taken, it is likely that many prospective sale and rent back consumers will not look for a badge of quality such as membership of a reputable industry association.
They also sayand I agreethat
it seems unlikely that self-regulation will have wide coverage and a strong disciplinary effect,
so one cannot really oppose the order.
However, I think that a point can be made about the uncertain regulatory impact that it will have, because it appears that the market is fragmented and not well understood. A majority of the providers of the facility in question have fewer than 10 properties, and some 5 per cent. of all landlords might be involved in such arrangements. That is an awful lot of landlords, probably more than the 1,000 that the Minister mentioned. That is why it is wholly appropriate to have a proportionate interim regime, which is what I think the statutory instrument contains.
I close by reiterating two points that have been made but are worth spelling out again. One is that there is a question of what it will actually do to the market. Will it create market attrition? Will people simply back out of the market, and will the market collapse? I suspect not, but the Minister must have some inkling of where we are heading. The second point, a germane point raised by the right hon. Member for Fylde, concerns the cooling-off period. Such decisions are made under enormous pressure. One can imagine people signing up one day and having second thoughts the next. It is important that the same protection applies to this financial arrangement as to insurance policies and the like.
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