Legislative outlook: Clear consumer protection focus
Today’s housebuilders and developers are operating in increasingly consumer-focused times. A recent raft of consumer rights legislation and associated regulatory guidance and publicity means that, perhaps more than ever, laws are in place to put consumer protection first – and consumers know it. Responsible real estate businesses need not be concerned that recent legislative changes will necessarily be overly onerous, but they do need to be aware and to be compliant.
Walker Morris partner, Louise Power, has developed a particular emphasis throughout her practice on assisting housebuilders and developers with their regulatory obligations. Here, Louise highlights new consumer protection legislation and headline issues affecting property developers.
Mortgage Credit Directive
As from 21 March 2016 the EU Mortgage Credit Directive (the MCD) will be implemented into UK law and will mean that all lending secured on a consumer’s home will be subject to Financial Conduct Authority (FCA) mortgage regulation. This will affect housebuilders and developers who offer shared equity loans and other incentives of a similar nature, which result in second charges being taken over the customer’s property.
Although full government schemes (such as Help to Buy equity loans) will be exempt, the majority of schemes (for example, HomeBuy Direct, FirstBuy and so on) are provided jointly by the government and a developer, and the developer-portion of the scheme will be affected. This means that existing and new regulated second charge loans will become subject to the FCA’s Handbook Rules for Mortgage Conduct of Business (MCOB) , which provide enhanced consumer protection both pre-contract and during the life of the loan. In particular, the MCOB rules involve detailed affordability checks; a 5 year-focused ‘interest stress test’; specific requirements for disclosure of product information; in-life loan annual statements; rules governing contract variations; and key limits to charges levied on payment shortfalls and repossessions.
Housebuilders and developers who offer or administer shared equity or second charge loans will have to assess the means by which they offer assistance and incentives to their customers. In many cases, developers will have to consider becoming FCA-authorised or, in some limited circumstances, they may be able to outsource the administration of existing back book loans to a third party.
Consumer Rights Act
The Consumer Rights Act 2015 (CRA) The Consumer Rights Act 2015 represents the single biggest shake up to consumer rights law in decades and seeks to simplify and strengthen consumer protection in the UK. The CRA replaces the Sale of Goods Act, the Unfair Terms in Consumer Contracts Regulations and the Supply of Goods and Services Act, all of which affected housebuilders and developers and their contractual arrangements with customers.
The CRA covers all terms in a contract and applies to both negotiated and non-negotiated consumer terms and contracts, and provides that any term which is unfair is not binding on the consumer. The CRA introduces a new, wider definition of “consumer” to include individuals “acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession”, so this now encompasses individuals who enter contracts for a mix of business and personal reasons.
The new CRA “fairness test” provides that any term is unfair if it causes a significant imbalance in the positions of the parties to the detriment of the consumer in a way which is contrary to the requirement of good faith; and the “transparency and prominence test” means that a business/seller must use plain and intelligible language in its written terms and terms must be brought to the consumer’s attention in such a way that the average consumer would be aware of them.
The CRA effectively renders ineffective any contractual attempts to exclude or restrict liability to consumers for breach of implied terms as to fitness for purpose and satisfactory quality of goods and as to the supply of services with reasonable skill and care; and it provides additional and extended remedies (including rights to reject, repair, replacement and price reductions/refund) where businesses fall short.
Housebuilders and developers should ensure that their terms and conditions, any marketing materials and the manner in which their staff deal with customers in person or in correspondence, are compliant with this new, enhanced consumer legislation.
Consumer Protection Regulations
Following the repeal of the industry-specific Property Misdescriptions Act 1991 in 2013, the provision of information to consumers in the context of property sales and other such transactions has been governed by the wider-reaching Consumer Protection from Unfair Trading Regulations 2008 (the CPRs).
The CPRs prohibit property businesses from engaging in unfair commercial practices in their dealings with consumers, which includes giving false or misleading information (including information which is given verbally, in writing or visually); failing to give material information; exerting undue pressure on consumers; and engaging in any of the 31 specific banned practices listed at Schedule 1 . Crucially, in the context of this legislation, consumers are not only those people who actually buy from or pay a property business - they also include anyone who is a prospective customer.
The CPRs require businesses to be proactive. They impose a duty to disclose information that a consumer needs to make an informed transactional decision and a common trap for the unwary is that liability for misleading by omission cannot be avoided if you do not know the material information, but have taken no reasonable steps to find it out. The CPRs also prohibit commercial practices which intimidate or exploit consumers or which restrict or are likely to restrict how they act or make choices. The CPRs also place a general prohibition on commercial practices where a business fails to act in a professionally diligent manner.
Enhanced consumer protection and increased due diligence on the part of the housebuilder or developer underpin the CPRs. To ensure that property businesses are familiar with their responsibilities and obligations, Walker Morris has created an industry-specific eLearning training module, which can be undertaken at the desk of individual members of staff, so that businesses can reach across their organisation without the costs associated with classroom-based training .
Consumer Code for Home Builders
Finally, housebuilders and developers will no doubt already be aware of the Consumer Code for Home Builders (the Code) , which ensures that new home buyers are treated fairly, given reliable information about their purchase and know what service levels to expect. The Code also provides access for new purchasers to a dispute resolution scheme, which can assist where problems do arise. In September 2015 the Code’s management board launched a review and it is anticipated that changes to the Code will be implemented next year. Walker Morris will monitor and report on any key developments.
Understanding and adhering to consumer protection legislation is going to be essential for property businesses going forward, not only in the interests of compliance and avoiding litigation but also, commercially, to keep up with the competition. To ensure that your business stands out to its customers for all the right reasons, please contact Louise Power, who will be pleased to review your consumer protection strategy, and to provide training and advice where appropriate.