Last month's publication of an FSA Consultation Paper on the regulation of Sale and Rentback (SRB) schemes was a major step in the right direction for cleaning up a sector which has been severely tarnished. Indeed, the regulator itself is so concerned about the possible detriment to consumers who may be opting for SRB it has effectively fast-tracked regulation. Moving to full statutory regulation often takes a considerable amount of time but following the Office of Fair Trading's (OFT) report and recommendations the FSA is planning to establish an interim regime from July this year, subject to Treasury legislation change dates, followed by the full regulatory nine yards from most likely Quarter 2 next year.
SRB schemes, and the companies that offer them, have hogged both the financial and regulatory headlines in recent times because of their potential to prey on vulnerable customers. The economic situation we currently find ourselves in suggests the risks are now even greater and both the FSA's consultation and the OFT report acknowledge this.
Rising unemployment, the growing cost of mortgages for those needing to remortgage, the fundamental difficulties in getting credit and falling property prices have led to a well-publicised increase in evictions. It is commonly those facing this situation that consider these schemes as a last resort and therefore need protection.
Protection
So, what exactly is the FSA proposing and what protections is it affording consumers within its 'two-regime' process? Firstly, the interim regulation planned to commence in July will bring in skeleton regulations in order to speed up the process towards full regulation. As an interesting side-point, this is the first time the FSA has ever attempted a two-stage regime, so it will be interesting to see how this works. Overall, the interim requirements are pretty robust and they in themselves will probably be enough to put off those providers who are less than committed to the market. The requirements for regulated SRB providers include: management/annual accounts; business and financial plans; details of IT systems; business continuity and disaster recovery plans; sales procedures, and source of funding and compliance plans, to name but a few. Quite an undertaking for any firm especially for those small firms operating in a small market.
Applications for authorisation will need to be submitted within a one-month 'time window' so the applicants will certainly need to be organised. Once this window is shut no new entrants will be allowed until full regulation comes into effect next year, except those who are applying for a variation of permission.
Bug-bears
One of the major bug-bears with the SRB providers has been their tendency to badge their offerings as a form of 'equity release'. This is a key reason why the industry was particularly vocal in calling for SRB regulation as without it consumers were being mis-led about the products themselves and what exactly they were signing up for. Many have opted for SRB schemes thinking they had significant 'long-term' tenancy rights only to find this was not the case. With interim regulation comes rules surrounding financial promotions and companies providing SRB products will have to run their businesses by the rules – this again should knock out of the market the misleading websites and adverts that currently exist.
With regard to short-term tenancy agreements, a problem for those consumers who were led to expect lifelong tenancy with their scheme, the Treasury definition of SRB does allow them. One might wonder whether the problem might therefore remain under regulation. The FSA is attempting to address this within its financial promotions and pre-disclosure rules which should ensure that full information is given to the consumer to make them aware they will only have a short-term agreement; they must also be provided with full transparent information with regard to when and how the rental charges may change. Although there is no requirement for a Key Facts Illustration at this stage, the pre-sale disclosure requirements do include the need to inform the customer about the minimum period of their contractual right to stay in the property.
Consumers
Protection for consumers is of course vital and the FSA consultation addresses a number of issues which unregulated SRB schemes have thrown up. Firstly, consumers will have access to the Financial Ombudsman Scheme under the interim regulation, providing the rights to redress that other regulated sectors provide. Also, in the past, sale and rent back agreements could be put in place with lightning speed, offering the consumer little time to actually consider what they were signing up to; the requirement for an independent valuation on the property will probably put a stop to the '48 hour' SRB.
Interestingly, there is no requirement for the customer to have an independent solicitor even though the FSA do recognise that the OFT report found evidence of high-pressured sales tactics. In this instance, the FSA seem to be relying on the Principle that firms must act reasonably in their dealings with customers – regulated firms will need to pay due regard to the interests of their customers and treat them fairly.
Competance
Finally, for advisers looking to provide advice on SRB schemes there will be no examination requirement, probably because at this time there is no specific exam related to the product and the short timescales associated with interim regulation. However, in order to be able to discount the possible alternatives to an SRB such as a mortgage, equity release plan or other debt management tool, for example, government support, an SRB adviser will need to be able to demonstrate competence and therefore knowledge of all the alternative options.
All in all, the interim regulation coupled with the ever-apparent tighter supply of funding means that the consumer will soon have access to safer SRB schemes provided by committed ethical providers. Regulation will also afford consumers much greater protection and the horror stories that have accompanied the sale of these products will hopefully be a thing of the past.
SHIP has published the following list of Do's and Don't for any of your clients considering Sale and Rentback
ESSENTIAL AND NON-COSTLY ACTIVITIES
Do:
• If you have an existing loan, speak with your lender if you are having problems meeting your monthly repayment.
• If you are having trouble with debt speak with an organisation such as the Citizens Advice Bureau (CAB), Payplan or the National Debt Helpline before you do anything else.
• If feasible do consult your family about your intentions.
• Check out the company you are thinking of using. Are they regulated by the Financial Services Authority (FSA)? If not, you may not have rights to redress if things go wrong and you could end up evicted if the company goes bust.
• Check the type of tenancy agreement you are being offered. Many sale and rent back schemes offer very little security. You are better off with a lifetime lease (or a minimum of 21 years) as opposed to an assured short hold tenancy agreement which will offer no security of tenure and may result in a higher rent being charged at the end of the initial 6 months, or worse eviction.
Don't:
• Forget to think about your future financial, family and life plans along with any ongoing commitments.
• Don't be pressurised - if in difficulty with debt, speak with the companies you owe money to sooner rather than later.
• Don't forget that the monthly rent is a commitment you may not be able to keep up, and that the amount of rent is likely to increase in the future. There is no guarantee you will get housing benefit to cover this rental cost, no matter what the Sale and Rentback company tells you.
• Don't forget to check if you are eligible for any state benefits or grants from the Department of Work and Pensions and your local council.
• Don't assume everything you are being told is correct, get it checked out and don't rush into any agreements.
COSTLY BUT IMPORTANT ACTIVITIES
• Speak with a qualified financial adviser who will discuss your options with you.
• Get independent legal advice.
• Get an independent valuation of your property arranged by you – the valuation of the Sale and Rentback company may not be accurate.
EXPLORE THE ALTERNATIVES
• Consider other alternatives such as trading down, family help, renting a room or any savings or policies you could use first.
• If you are aged over 55 and looking to release equity from your property then consider the safer option of regulated plans offered by SHIP members. All SHIP members are regulated by the FSA and have extra safeguards above the regulatory requirements to give you additional protection.
