Communities and Local Government CommitteeWritten evidence submitted by the Office of Fair Trading

Summary

1. The Private Rented Sector (PRS) is one which generates many complaints. In recent years the PRS has grown, largely due to a general housing shortage and reduced mortgage lending, with a consequence being that demand may be outstripping supply. Generally tenants choose properties not agents or landlords and it is often hard for consumers in the market to make fully informed decisions.1 These factors mean that incentives on providers to be customer focused are not as strong and consumers are sometimes forced to make unwilling choices for what is a high cost necessity. There are therefore complex policy considerations when considering interventions.

2. Our view is that a number of problems are covered by existing consumer protection laws and general housing law, many aspects of which can be enforced by local authorities and should improve if enforcement and compliance activities were prioritised more consistently at a local authority level.

3. However we also think government (including enforcers) and industry should consider taking further steps to improve a number of problems we, and others, have identified. These include:

improving transparency of pricing further, to tackle high or unexpected fees;

initiatives which make it easy for consumers to assess quality and compare one agent’s service against another;

a general arbitration/redress mechanism so landlords and tenants can sort out problems when they do occur without incurring expensive legal fees;

more consistency within the industry—so that common principles are applied throughout the industry, for example on how tenants are considered for suitability;

mechanisms which protect money, specifically more widespread use of client money protection mechanisms and the mandatory Tenancy Deposit Scheme; and

an agreed enforcement strategy.

4. The OFT has identified these steps following our assessment of complaints data which we have set out in an Intelligence Report (previously submitted to the Committee) and an assessment of the main issues in the lettings market.2

5. We also think it would be useful for the UK Government to consider whether the level of consumer protection law coverage is right in the context of the lettings market, and if not whether any legislative changes should be made to deal with this. This could be in the context of a wider review of consumer protection law and should include assessment of the effectiveness of the reforms enacted by the Devolved Administrations, in order to consider whether any aspects of these would be appropriate in England.

6. However, any changes must be assessed carefully against the risk that they might aggravate the already problematic supply side problems leading to increased consumer detriment.

Introduction

7. The OFT is currently producing a report on problems that we have seen reported in the lettings market. This focuses on the role of agents in the relationship between landlords and tenant, but also discusses the responsibilities of professional landlords towards tenants. The lettings report will reflect the OFT’s views, as set out in this submission, based on a review of nearly 4,000 complaints made to Consumer Direct (CD) during 2011 and maps out issues raised by consumers and sets out OFT thinking on how standards can be raised.3

8. We are of course very happy to discuss these views with the Committee and more widely with other stakeholders and are keen, so far as our remit allows to play, a role in supporting the development and implementation of any strategy to bring about improvements. We will forward a copy of our report to the committee.

9. The OFT is responding to an invitation for written evidence issued by the Communities and Local Government Committee on its inquiry into the PRS. This paper sets out:

(a)the role of the OFT;

(b)an overview of OFT’s work in the lettings market;

(c)an overview of CD complaint data from 2011;

(d)the relevant consumer protection law which applies to the lettings market;

(e)our thoughts on the key features of a well functioning market; and

(f)proposals as to how, in our view, the lettings market could be improved.

Role of the OFT

10. The OFT’s mission is to make markets work well for consumers. Our goal is for competitive, efficient, innovative markets where there are high standards of consumer care; consumers have choice and are empowered and confident about making choices. We also aim for markets where businesses comply with consumer and competition laws but are not disproportionately burdened by regulations, or restricted and harmed by market abuse. We achieve this goal by using tools within consumer and competition law regimes which enable us to look at all aspects of markets to ensure that they are working well for consumers and taking appropriate, proportionate enforcement action.

Overview of OFT work in the lettings market

11. The OFT has done a significant amount of work to raise standards in the lettings market, besides our current review of the market.4 This has looked at the problems faced not just by tenants, but also landlords. We have:

provided sector specific guidance on the fairness of terms in tenancy agreements;5

worked with The Property Ombudsman (TPO) on an industry code of practice for agents;6

held an industry event in September 2011 on “Fairness and Transparency in letting agents’ charges”; and

tackled problems faced by consumer landlords as a result of unfair commission fees charged by agents.7

Overview of CD Complaint Data From 2011

12. In order to have a better understanding of the problems in this sector the OFT reviewed a sample of 3,951 consumer complaints about letting agents made to CD in 2011.8 The complaint figure rises to 5,194 if each issue is considered as a separate complaint in circumstances where complainants reported multiple problems. These represent complaints made by both tenants and landlords (who may in some circumstances be considered consumers, see paragraph 16).

13. The five main areas and number of complaints raised by landlords and tenants about letting agents were:

Fees and charges

(1,557, 30%)

Agents providing poor service

(1,211, 23%)

Security deposits

(1,015, 20%)

Delayed and substandard repairs

(668, 13%)

Unfair business practices

(565, 11%)

14. More detailed information is in the Intelligence Report previously forwarded to the Committee.

Relevant Consumer Protection Law

15. Law governing the lettings market is complex and comprises both housing law (which is generally outside OFT’s remit) and law which provides economic and general fairness protection (“consumer protection law”).9

16. Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs), the Supply of Goods and Services Act 1982, the Consumer Protection from Unfair Trading Regulations 2008 (CPRs), and the Business Protection from Misleading Marketing Regulations 2008 (BPRs).

17. The UTCCRs protect consumers against unfair standard terms in contracts with traders, which are subject to a fairness test under the regulations. Examples include terms that reduce consumers’ statutory or common law rights and terms that seek to impose unfair burdens on the consumer, for instance, over and above the obligations of ordinary rules of law. An unfair term is not binding on the consumer. Only the courts can finally decide whether a term is or is not unfair.10

18. Consumers also have protection under the Supply of Goods and Services Act 1982, which implies a term into contracts for the provision of services that services will be carried out with reasonable care and skill and within a reasonable time unless agreed otherwise.11

19. The CPRs were introduced alongside the BPRs in 2008. The CPRs prohibit traders from using unfair commercial practices, (whether occurring before, during, or after a contract has been made), including misleading and aggressive practices that either do, or are likely to, cause the consumer to take a different decision. The CPRs contain a general prohibition of unfair commercial practices and also prohibit 31 specific commercial practices. The BPRs prohibit businesses from advertising in a way that misleads traders, and set out the conditions under which comparative advertising is permitted.

20. The CPRs and BPRs can be enforced by the OFT, and TSS through civil and criminal enforcement powers. This law also forms a significant basis of the Code of the Advertising Standards Authority (ASA).

21. It is important to note that private landlords can be and frequently are professionals for the purposes of consumer legislation. All landlords who are companies, and individuals who let numerous properties, or who operate professionally, fall into this group. But though consumer landlords may not account for most tenancies this does not mean that they are few in number. Many private citizens from time to time let their home, or parts of it, on a non-professional basis. A significant proportion of landlords are, therefore, considered to be consumers, at any rate in their dealings with traders and professionals such as letting agents and solicitors.

22. Whilst it is possible to take a view on when a landlord is a consumer and when a trader, there is no clear marker as to where the line falls. In practice this means that there is a lack of clarity regarding important rights and obligations leading to uncertainty for landlords, agents and tenants.

23. Scotland has specific laws that apply to all types of private letting. In November 2012 the Scottish Government took steps to prohibit all tenant charges, other than rent and a refundable deposit. In addition, all private landlords must register with their local authority to ensure they are a “fit and proper person” to let property.12

24. In July 2011 the Welsh First Minister announced the Welsh Government’s Legislative Programme for 2011–16, including an intention to legislate to “Improve the quality of accommodation in the private rented sector.” In May 2012 the Welsh Government published a Housing White Paper for consultation, which includes proposals to licence and register landlords and agents.

Lettings MarketEnforcement of Consumer Protection Legislation

25. It is the OFT’s view that in most cases local TSS are best placed to investigate breaches of consumer law by individual letting agents or landlords, many of whom have a local/regional presence , and to take action in respect of those breaches. This is because local TSS have in-depth knowledge of local markets, businesses and housing issues. Coupled with their wider fair trading functions, such as business advice on compliance, they are often able to secure quick behavioural change from individual traders and to achieve resolution for consumers. However, it should also be recognised that local TSS are under significant funding pressures.

26. In general the OFT takes enforcement action where there are issues of national significance or market-wide concern. We also take cases on specific issues to create legal precedents which have wider impacts across the economy.

27. In the new consumer landscape following the Department for Business Innovation and Skills (BIS) consultation,13TSS will have more capacity and responsibility for taking national cases, prioritised and coordinated through the National Trading Standards Board (NTSB) in England and Wales and by the Convention of Scottish Local Authorities (CoSLA) in Scotland, and working closely with the Department of Enterprise Trade and Investment in Northern Ireland (DETINI). However, the OFT, which will become part of the Competition Markets Authority in the new regime, will retain a leadership role in relation to the UTCCRs.

28. Priority areas for intervention will increasingly be guided by the recently established Strategic Intelligence Prevention and Enforcement Partnership (SIPEP) which brings together key stakeholders in the consumer landscape. The OFT and TSS work in partnership and will assist each other on appropriate cases, which will increasingly be focussed within these prioritised areas. The OFT is committed to working with TSS to ensure coordinated enforcement action. To achieve this we plan to discuss and agree an enforcement strategy with TSS for traders who do not comply with the law in the lettings sector.

Key Features of a Well Functioning Market

29. Even though the current regime has well regarded self regulatory initiatives, the lettings market is a sector where almost all stakeholders consider changes are necessary, with representatives of both traders and consumers lobbying the UK government for some reform.

30. We believe it is important to consider what a healthy lettings market looks like to help identify what changes, if any, may be needed. In our view any market is healthy where active consumers (here, tenants) make informed choices from fair-trading businesses (here, landlords). In a healthy lettings market agents play an important “market making” role bringing together informed tenants and fair-trading landlords to help match supply and demand, and competition between agents (and from other sources) ensures landlords and tenants are clear up-front regarding the structure and level of fees they may be charged for this. But when demand outstrips supply in the lettings market, incentives on landlords to provide high-quality lettings and on agents to be customer-focused are not as strong.

31. In a healthy lettings market, landlords and tenants will also receive the desired level of quality from the letting agent, at a price they are willing and able to pay. Landlords and tenants should be able to judge the level of quality they will receive before signing a contract or starting a tenancy agreement.

32. It is our view that participants in the market should also have access to an adequate redress mechanism so that any problems that may arise are dealt with quickly and easily. In addition, there would need to be clarity about the level of protection such a redress scheme provides, so that all participants in the market understand what their position is if things should go wrong, and they can plan accordingly.

33. We believe the lettings market needs a number of key features to make it work more effectively and to ensure minimum standards. In summary these include:

34. Better compliance with legislation already in existence and in particular better up front information: agents should provide landlords and tenants with full information of the charges payable including when they are payable, how they are calculated and what they are for. In the OFT’s view in order to avoid problems of all kinds, legal and otherwise, these fees should ideally be set out and described in a clear tariff of charges, before any contract is signed.

35. The OFT supports initiatives which make it easier for landlords and tenants to assess quality and compare one agent’s services against another, such as recognised logos which signify minimum standards are met.14 As indicated above, our view is that it would be beneficial for there to be a general redress mechanism so landlords and tenants can sort out problems when they occur.15 This is supported by a number of industry players. Consideration needs to be given to the cost this would impose on traders and the extent to which it would restrict new entry to the lettings market.

36. More consistency within the industry so that common principles are applied throughout the industry, for example agreement on how tenants are considered for suitability, what information is used for pre tenancy checks, and which of this information the tenant can supply themselves.

37. We support mechanisms which protect money ie more widespread use of client money protection mechanisms and better compliance with the mandatory Tenancy Deposit Protection Schemes. We think that greater transparency about these requirements would be helpful, so any additional steps the UK Government, industry and consumer groups can take to raise awareness would be particularly useful.

38. The fragmented nature of the market requires an agreed enforcement strategy, to identify where enforcers should focus their efforts, such as protecting consumers who are most vulnerable and tackling agents who could be considered a higher risk, especially in relation to problems that will not be solved by established industry schemes.

39. In our view the UK Government, industry and enforcers need to work together, to devise and deliver an agreed strategy to raise standards within the letting sector. To achieve this we think it would be useful:

For the UK Government to consider:

(a)whether it would be beneficial to require agents to sign up to a code of practice, or join a redress scheme, and give some thought to what sanctions would be required to support this obligation. Whilst such a requirement may have obvious benefits in terms of providing redress, there would also be implications such as the financial burdens this might place on business (and attendant potential increase in costs for consumers and reduction in competition). We think it is also important to consider this in light of the European Commission’s draft Directive on alternative dispute resolution for consumer disputes (Directive on consumer ADR) and a draft Regulation on online dispute resolution for consumer disputes (Regulation on consumer ODR).

(b)whether the level of consumer protection law coverage is right in the context of the lettings market, and if not whether any legislative changes should be made to deal with this. This could be in the context of a wider review of consumer protection law.

(c)the impact of introducing any elements of other regulatory regimes into the lettings framework in England. This should include assessing the effectiveness and impact on the market of the reforms enacted by the Devolved Administrations, and in particular whether greater regulation of landlords would be likely to constrain supply of properties to tenants, which could lead to higher prices for tenants.

For UK Government and industry to:

(a)discuss if more could be done for landlords and tenants to understand and compare what existing codes offer, so they can more easily make informed choices and know what to look for when trying to find a good letting agent.

(b)think about the feasibility of “portable” reference checks, so that consumers could provide and reuse reference and credit checks, instead of paying for this service each time they try to secure a property.

For industry bodies to think about the feasibility of introducing common principles to achieve more consistency, so tenants’ experience in the renting process is more predictable, and it is easier to shop around for properties.

40. The OFT is keen, so far as its remit allows, to play a role in supporting development and implementation of any overarching strategy, and we very much want to discuss our current thinking with interested bodies. We will be holding a round table event in February to do this, along with arranging various other meetings to discuss our recommendations. These will inform our views on next steps.

41. In addition to producing our Lettings Report and accompanying Annexes, the OFT will seek feedback on sample “Quick Guides” for tenants and landlords (and other information sources for tenants and landlords to help them engage better with the lettings process), consult on UTCCRs/CPRs/BPRs Guidance for letting agents, and review the substance and accessibility of existing OFT Guidance on unfair terms in tenancy agreements.

42. We also intend to launch a UTCCRs Hub, similar to the Distance Selling Regulations (DSR) and Sale of Goods Act (SOGA) Hubs, which we hope will be a useful resource for agents and professional landlords.

43. We will also discuss and agree an enforcement strategy with Trading Standards Services for traders who do not comply with the law.

January 2013

Annex A

OVERVIEW OF OFT WORK RELEVANT TO THE PRIVATE RENTED SECTOR

The OFT has undertaken numerous activities to tackle many of the problems associated with the Private Rented Sector.

The table below provides an overview of these. Additionally we provide a significant amount of case support and advice to Trading Standards Services (TSS) in the localities to enable TSS to carry out their regulatory and enforcement activities effectively.

2005

Produced sector specific guidance on Assured Shorthold Tenancies ie “Guidance on unfair contract terms in tenancy agreements” 16

February 2008

Issued High Court17 proceedings against Foxtons Limited under the UTCCRs regarding concerns with Renewal Commission, Third Party Renewal commission and Sales Commission.

May 2008

Jointly with BIS, produced Guidance on the Consumer Protection from Unfair Trading Regulations (CPRs) 2008

July 2009

Secured a High Court judgment in which Mr Justice Mann ruled that certain terms in Foxtons’ contract are unfair under the UTCCRs

December 2009

Secured a High Court Order against Foxtons, which prohibited sales commission and third party renewal commission and which required greater transparency in contracts re renewal commission.

February 2010

Wrote to industry bodies (ARLA, NAEA and TPO) to inform them of the judgment and advised them to inform their members of the Foxons judgment.

December 2010

Published a market study into the Advertising of Prices.18

February 2011

Considered the Private Rented Sector as part of the Consumer Contracts Market Study.19

July 2011

Undertook an evaluation of the Foxtons case and published its findings.20

August 2011

The Property Ombudsman (TPO) TPO Code Letting Agents obtained OFT Consumer Codes Approval Scheme Stage 1 Approval.21

September 2011

Hosted an industry event “Fairness and transparency in letting agents’ charges” which sought to engage with letting agents, consumer groups, trade associations and government about problems in the market.

June 2012

Circulated an Intelligence Report on lettings to stakeholders, to seek feedback on whether OFT analysis was an accurate reflection of problems in the market. This Report was produced after reviewing almost 4,000 complaints made to Consumer Direct.

September 2012

Published guidance on property sales to help estate agents understand their responsibilities under the regulations. The guidance specifically covers CPRs and the Business Protection from Misleading Marketing Regulations 2008 (BPRs).22

1 In our work we have considered the “lettings market” to include the relationship between the tenant and landlord and the role of the letting agent in the relationship

2 The main issues identified in the OFT’s forthcoming report include: (1) Behavioural biases exploited by drip pricing, which affects the decisions of consumers in the market;(2) Information asymmetries between the letting agent and landlord and letting agent and tenant regarding additional fees charged after the tenant has paid a deposit or signed a lease and after the landlord has signed a contract with the letting agent; (3) Principal agent problems, which may mean agents provide what the landlord deems to be poor service (such as delayed or substandard repairs) if landlords’ and agents’ interests are not aligned.

3 Complaints about fees and charges were the main areas of concern for landlords and tenants. Agents providing poor service was the second most complained about area and complaints about security deposits the third.

4 See Annexe A for further details of work by OFT in the lettings market

5 Guidance on unfair terms in tenancy agreements (OFT356) September 2005

6 www.oft.gov.uk/news-and-updates/press/2011/88-11

7 www.oft.gov.uk/news-and-updates/press/2010/19-10; www.oft.gov.uk/OFTwork/consumer-enforcement/consumer-enforcement-completed/foxtons/

8 Combined CD/Citizens Advice complaints about letting agents for the period 1/1/2012 to 31/12/2012 totalled 3585

9 Strictly speaking the BPRs for the most part provide protection for businesses who are misled by another business (they deal with comparative advertising to consumers as well as businesses, but not advertising generally). However for ease of reference we include this law in the definition of ‘consumer protection law’.

10 A term may be challenged by the consumer or by an enforcer. Traders who seek to rely on an unfair term may also commit an offence under the CPRs.

11 The Supply of Goods and Services Act 1982 has been specified as a domestic infringement for the purposes of Part 8 of the Enterprise Act 2002. Part 8 of the Act enables specified enforcers to apply to the courts for an Enforcement Order to stop a business from breaching certain legislation, where the breach harms the collective interests of consumers.

12 www.scotland.gov.uk/Topics/Built-Environment/Housing/privaterent/landlords/registration

13 www.bis.gov.uk/Consultations/empowering-and-protecting-consumers

14 This is particularly important in relation to client money protection, where schemes are not consistent in the level of cover they require of members.

15 We would include disputes both between the agent and landlord or tenant, and between the landlord and the tenant.

16 www.oft.gov.uk/news-and-updates/press/2005/169-05

17 www.oft.gov.uk/OFTwork/consumer-enforcement/consumer-enforcement-completed/foxtons/

18 www.oft.gov.uk/news-and-updates/press/2010/124-10

19 www.oft.gov.uk/OFTwork/markets-work/completed/consumer-contracts#named1

20 www.oft.gov.uk/news-and-updates/press/2011/82-11

21 www.oft.gov.uk/news-and-updates/press/2011/88-11

22 www.oft.gov.uk/news-and-updates/press/2012/81-12

Prepared 16th July 2013