Cleaning up

Regulation of sale-and-rent-back will go a long way towards washing off many of the troublesome stains that have been plaguing the sector

Claire Wilkinson
Retail director

Compliancy Services

Regulation will improve rent-back professionalism and standards

The Financial Services Authority recently published a consultation paper setting out its proposals for extending its approved persons regime to cover all brokers as well as those who arrange non-advised sales. If these changes come into effect they would influence those who arrange regulated mortgage contracts as well as regulated sale-and-rent-back.

This is not a bolt from the blue as it has been debated for some time because individual brokers have never been approved persons, but investment advisers have to be. The proposals are in keeping with the regulator’s remit on cracking down on financial crime and poor advice.

With rent-back coming under the FSA’s regime standards are inevitably increasing and through the banning of exploitative advertising, high-pressure sales techniques and the introduction of a 14-day cooling off period, the professionalism of this arena is growing.

But it is evident that the regulator will be keeping a close eye on this sector to ensure it is appropriately policed. Of course for those brokers with detailed record-keeping procedures in place these proposals shouldn’t be of much concern. But the contentious issue remains over whether this could be viewed as over-regulation and who will bear the costs.

In essence the FSA is proposing that all firms involved in home finance will need to have a senior manager as a CF10, but also it is proposing that all advisers and arrangers of non-advised sales in the home finance sector will have to be approved persons under a new CF31.

From an overall perspective the FSA expects an approved person performing a significant influence function to take reasonable steps both to ensure firms comply with the relevant requirements and standards of the regulatory system and to ensure that all staff are aware of the need for compliance.

An approved person performing a significant influence function may not always manage the business on a day-to-day basis themselves. The extent to which they do will depend on a number of factors, including the scale, complexity and nature of the individual business and their position within it.

The larger and more complex the business, then it is fair to say that the greater the need will be for clear and effective delegation and reporting lines.

The FSA will look to approved persons performing significant influence functions to take reasonable steps to ensure that systems are in place which will result in issues being addressed at the appropriate level. It is also outlined that when issues come to their attention, they should deal with them in an appropriate way.

Regulation Timeline

OCTOBER 15 2008
The Office of Fair Trading publishes its market study of the sale-and-rent-back sector looking at the characteristics of the product, the circumstances in which it is sold and whether consumer protection legislation is sufficient.

It concludes that statutory regulation of the rent-back sector was necessary with better protection for consumers. Specifically it found that:

– Some consumers enter into rent-back transactions when this is not the best option for them.

– Some rent-back firms may mislead customers on the value of their property or the security they have as tenants. This includes telling people they will be able to stay in their home for years, when in reality the tenancy may only be guaranteed for six to 12 months.

– Some firms impose substantial rent increases or even evict tenants after a short tenancy period. It is also possible that tenants may lose their homes if the landlord defaults on the mortgage.

Some consumers are evicted because they cannot afford the agreed rent, which suggests staying in their property was not sustainable in the first place.

The OFT says that although the details of regulation were up to the regulator to decide, the OFT believes regulation should include:

– An obligation on rent-back firms to be more transparent about the initial valuation and sale price, the terms of the tenancy and the amount of rent to be paid. In particular, firms must offer forms of tenancy that match the assurances they give to customers.

– A requirement on firms to tell consumers about the free, independent advice available to them before they decide to sell.

FEBRUARY 3 2009
The government accepts the OFT’s recommendations and publishes a consultation on regulating the rent-back market. The consultation lasts 12 weeks and closes on May 1 2009. The FSA also publishes a separate consultation on a potential interim regulatory regime that closes on April 30 2009.

JUNE 3 2009
The FSA decides to take a two-stage approach – an interim regime to brought in on July 1 to address immediate problems for consumers, followed by a more comprehensive regime starting on June 30 2010. As part of the interim regulation firms have to apply for permission from the FSA. Firms have to evidence where their funding is coming from and prove it will continue.

JANUARY 29 2010
The FSA introduces rules to protect vulnerable rent-back consumers, including:

– A ban on exploitative advertising and high-pressure sales techniques.

– A 14 day cooling-off period to give consumers more time to make decisions on rent-back.

JUNE 30 2010
The FSA to implement its full regulatory rent-back regime.