The need for regulatory intervention by the FSA in this sector has been recommended by the Office of Fair Trading in its recent report which has found substantial risks in the sale-and-rent-back market to consumers experiencing considerable financial difficulties, often facing repossession, a situation exacerbated by the current economic downturn.
Sale-and-rent-back agreements involve individuals selling their homes at discounted rates – with providers paying up to 70 to 80% of the property value – in exchange for tenancy arrangements, typically for a period of six to 12 months.
The main area of consumer risk identified by the OFT relates to the lack of long-term security of tenure, even though the security associated with the renting back of the property to the seller is marketed and perceived to be the most attractive feature of the arrangement.
The urgency with which the regulatory framework is being introduced is unique in itself, driven by the concerns voiced by the OFT with regard to consumer detriment in this market segment.
The FSA is rolling out, for the first time, a two-stage approach to sale-and-rent-back regulation, with the interim regime proposed to commence on July 1 2009 after a shorter than the usual 90-day consultation period, to be followed by a full regime expected to begin in the second quarter of next year.
The FSA is proposing a bespoke compliance regime for SRB due to the considerable risk of consumer detriment reported by the OFT in its report.
The regulatory framework will be built on the enhanced systems and controls requirements for firms – which the FSA has extended to all firms effective from April 2009, specific mortgage conduct of business rules and the industry best practices to ensure fair treatment to customers, especially those facing financial hardship.
The regulations should deliver sustainable value to the sale-and-rent-back market by bringing in an appropriate degree of protection for consumers and ensuring a level playing field for the providers.
But the proposed implementation timetable for the interim regime will require firms to act swiftly to meet the authorisation deadline of July 2009, after which no applications for interim permissions will be accepted.
Firms will be well advised to take early action to be ready for authorisation by the first week of May, when the details of the tailored authorisation framework are expected to be published by the FSA for those already undertaking sale-and-rent-back activities.
Preparing for authorisation and carrying on of the regulated activities will involve putting in place robust governance and compliance policies, including appropriate supervision and monitoring arrangements, as needed.
Many firms currently operating in a largely unregulated environment may have to think of commissioning specialist support to ensure they meet with the specific regulatory conditions and requirements.