Draft Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2014
The Committee consisted of the following Members:
† Barwell, Gavin (Lord Commissioner of Her Majesty's Treasury)
† Cunningham, Mr Jim (Coventry South) (Lab)
† Dakin, Nic (Scunthorpe) (Lab)
† Fabricant, Michael (Lichfield) (Con)
† Glindon, Mrs Mary (North Tyneside) (Lab)
† Hames, Duncan (Chippenham) (LD)
† Harrington, Richard (Watford) (Con)
† Heaton-Harris, Chris (Daventry) (Con)
† Hemming, John (Birmingham, Yardley) (LD)
† Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op)
† Johnson, Gareth (Dartford) (Con)
Kaufman, Sir Gerald (Manchester, Gorton) (Lab)
† Leadsom, Andrea (Economic Secretary to the Treasury)
† Leslie, Charlotte (Bristol North West) (Con)
† Norman, Jesse (Hereford and South Herefordshire) (Con)
Shannon, Jim (Strangford) (DUP)
† Stringer, Graham (Blackley and Broughton) (Lab)
Marek Kubala, Committee Clerk
† attended the Committee
Fourth Delegated Legislation Committee
Wednesday 10 December 2014
[Mr Adrian Sanders in the Chair]
Draft Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2014
8.55 am
The Economic Secretary to the Treasury (Andrea Leadsom): I beg to move,
That the Committee has considered the draft Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2014.
It is a pleasure to serve under your chairmanship, Mr Sanders. I am pleased to introduce this draft order, and it will be helpful if I start by outlining its background.
The term “sale and rent back” refers to a type of transaction whereby home owners agree to sell their property, usually at a discount, in exchange for tenancy rights. The product reached the peak of its popularity in 2008, with the Office of Fair Trading estimating that 50,000 transactions had taken place up until that point. The product was mainly attractive to home owners who were struggling to meet mortgage repayments but who wished to stay in their family home. However, a number of questions were raised on whether customers taking out such agreements were receiving fair treatment.
In 2008, the OFT investigated business practices in the market and published a report that confirmed the presence of significant consumer disadvantage. In particular, the report identified two ways in which customers were frequently losing out. The first was through financial loss to the customer when the property was sold. The OFT found evidence to suggest that most sale and rent back providers bought the properties at a significant discount, paying between 70% and 90% of their market value.
The second way in which consumers were losing out was through a lack of security of tenure. Sale and rent back agreements make a virtue of the home owner’s ability to continue to live in their home. However, the OFT report showed that, in many cases, people were being evicted from their home relatively quickly, despite having been led to believe that they would be able to stay over the medium to long term.
The OFT identified a number of market failures that led to those poor outcomes. Those failures included the asymmetry of information between vulnerable individuals with low levels of financial capability and the professional salespeople who were offering such agreements. That was a particular problem in this market because transactions tended to be undertaken by people in difficult and stressful circumstances who may not have been in a position to weigh all their options carefully and objectively.
Another factor was that relatively few home owners took out such agreements, which means that the firms offering them were not subject to reputational risks in the same way as many other types of firm, thereby limiting the ability of an effective feedback mechanism
to operate where customers were consistently receiving poor outcomes. Additionally, the OFT found that such market failures were often compounded by the deliberately misleading high-pressure sales tactics used by many providers.We should never allow that state of affairs to occur again. As a result of the OFT report, the then Government issued a consultation paper recommending the statutory regulation of the sale and rent back market by the then Financial Services Authority. An interim system was introduced to regulate the market in 2009, and it was replaced by full regulation in June 2010 as the Government legislated to add sale and rent back agreements to the list of financial services activities regulated by the FSA. That meant that the FSA was given powers to make and apply appropriate regulatory rules. The regime developed by the FSA included a requirement for providers to offer a minimum tenancy length of five years, a requirement for independent property valuation and a ban on high-pressure sales tactics.
However, even following the introduction of the regulations, consumer groups and other housing market stakeholders continued to report the widespread occurrence of detriment caused by purchases failing to meet the standards set by the new regulatory regime. In response, the FSA conducted a thematic review of the market in 2011, which confirmed that new regulatory standards were not being met in a number of key areas. Those areas included, but were by no means limited to, the requirements for tenancy agreements, the form of financial promotions and the disclosure that customers received. Following that, the FSA temporarily closed down the market to protect customers.
In addition, the report highlighted that many firms were using complex financial arrangements with private financial investors, which, providers argued, meant that they did not fall within the scope of the regulation as set out in the legislation. The private investors often entered into the agreements on a one-off basis, which allowed them to argue that they were not doing so in the course of business, and that they should therefore fall outside the scope of regulation and did not need to comply with the requirements intended to protect consumers. In response to that latter point, the Treasury worked with the FSA to develop the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) (Amendment) Order 2011, which made it clear that all sale and rent back agreements should be within the scope of regulation, unless it was a transaction between two family members. That ensured that the FSA was able to regulate this market effectively in the way originally intended by both this Government and the previous one.
I turn to the draft order under discussion today. The amending order that I just described, which ensured that all transactions not between family members were within the scope of regulation, had a sunset clause attached in line with Government better regulation principles. It is therefore due to expire at the end of this year unless renewed. The statutory instrument we are debating today renews the regulation. As such, it effectively maintains the existing regulatory arrangements. That is reflected in the impact assessment published alongside the statutory instrument, which confirms that there will be no new impact on firms, consumers or wider society. The measure’s zero net cost classification has been
approved by the Regulatory Policy Committee. As a result, the measure will have no impact on the Treasury’s net position against the “one in, two out” requirements brought in by this Government to help to reduce the overall level of regulation.In line with the requirement set out in the original amending legislation, the Treasury also conducted a review of the amendment in 2012. The purpose of the review was to determine whether the amendment had been effective in addressing its objective to allow what is now the Financial Conduct Authority to regulate the market effectively. The Treasury concluded that it is very difficult to make such an assessment, as there have only been a limited number of transactions in the market following the introduction of the amendment. At the time, the Government suggested that, without that evidence, it would be difficult to justify the extension of the amendment. However, ahead of reaching a final decision about whether to renew the amendment, the Government considered the case for regulation again. In the absence of market activity that the Government could analyse, that review focused on whether the original case for regulation was still valid. The Government concluded that the structural features of the sale and rent back markets which I described earlier have not changed. Customers engaging in such agreements would be vulnerable to significant detriment without some appropriate protections.
The analysis in our impact assessment, which has been validated by the independent Regulatory Policy Committee, sets out our expectation that allowing this amendment to lapse under the sunset clause would result in a net cost of £35.8 million due to the customer disadvantage that would ensue. The case for effective regulation of this market therefore remains strong, and the Government concluded that the amendment should remain in place and be renewed. It is worth adding that the Government’s commitment to better regulation, including the use of sunset clauses, is ongoing. As such, the order requires Government to undertake a further review in 2017, and includes a provision for the legislation to sunset in 2022.
I hope that my words have assured members of the Committee that the statutory instrument is needed to ensure that the Financial Conduct Authority retains the powers it needs to effectively regulate this market in the interests of consumers. Without the instrument, it would be significantly restricted in its efforts to protect customers from practices that have previously caused significant loss and distress.
9.4 am
Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co-op): It is a pleasure to be here to speak to the draft order. The Minister thoroughly set out the history and the reasons that the provision was initially brought in, and referred to the problems faced by consumers regarding sale and rent back. A thorough impact assessment accompanies the explanatory note, so I do not need to repeat everything that she said.
The regulation that was brought in recognised not only that some people who had struggled to keep up their mortgage payments needed to find a different arrangement, but that we needed to ensure that they were not ripped off by others who wanted to make a
profit. The review found that some people suffered a substantial financial loss due to the sale price of the property. Many found that they did not have the security of tenure that they anticipated.The previous Government introduced the regulation initially on an interim basis and then there was full regulation by the FSA. Even following that, concerns continued about abuse and failure to meet the regulatory standards. The Minister explained what happened with the review, the temporary closure and the need to move to further regulation.
I am pleased to support the draft order. What has been done to continue the regulation is correct: there is a thorough impact assessment and the Government have considered whether the measure should be dropped or should continue. The only question I have for the Minister—I would never get to the point of not having at least one question to ask her—is, why was 2017 chosen for the review, when 2022 is the proposed date for the sunsetting? If this is assessed to be a structural problem, is that happening only because the Government’s policy is to have sunset clauses? If it is a structural problem, why has the regulation not been put in place on a more permanent basis? If she can answer those questions, she will have my support.
9.7 am
Andrea Leadsom: I am pleased to hear that the Opposition will support the statutory instrument. It is quite clear that there would be potential for grave detriment to consumers if we were to allow the measure to sunset. I am grateful to the hon. Lady for her question about the reason that the review of the amendment will be in 2017, whereas the sunset is not until 2022. The answer is simply that it is Government policy to review sunsetable measures on a regular and ongoing basis. There is no specific mechanical formula for a 2017 review but it is there to ensure that we look at these things on a regular basis so that we do not lose sight of something and unnecessarily continue with regulation that is no longer needed.
Michael Fabricant (Lichfield) (Con): I have been listening to the debate with considerable interest and I understand why we introduce sunset clauses. Does the Minister agree that the cynics here might think that such measures are a job creation scheme for the SI industry? If the legislation is good—surely she would not bring it before the Committee if it were not—why do we have to review the measure regularly, every so many years, merely to rubber-stamp it and endorse it time and again?
Andrea Leadsom: My hon. Friend makes a good challenge. We are talking about a 2017 review—three years from now—and a sunset in 2022. Those are not very short time periods. As I said, the idea of sale and rent back was to enable people who were struggling financially to sell their home but stay in it. The intention was positive. Closing down that market, because of the unintended consequences for customers, has taken away one option for home owners who are in financial distress. It is reasonable that we look at the issue again, periodically, to ensure that there is not a reason to decide that things have changed and that, therefore, we could permit sale and rent back.
If we were reviewing every year, I would take my hon. Friend’s point, but I think that three years is a suitably long period, and the sunset clause is not for a good number of years. We would not be talking about regulating again but merely reviewing whether the facts that are true today are still true in 2017; it is a minimal review.
Jesse Norman (Hereford and South Herefordshire) (Con): I hope that my hon. Friend will not mind if I weigh in on her behalf in favour of sunset clauses. I wish that they were much more widely applied. If a sunset clause had been applied to the Fixed-term Parliaments Act 2011, we might have been rather grateful—who knows?
Andrea Leadsom: I assume that my hon. Friend means within three years. I am a big fan of sunset clauses as well. I could even name a number of pieces of legislation that are, extraordinarily, still on the statute book after hundreds of years, let alone a few, so it is important that we review such things on a regular basis.
I am delighted that the Opposition are going to support the change and I am grateful to all hon. Members for taking part.