The worsening economic climate has seen a rapid increase in sale and rent back arrangements (SRB) under which individual homeowners sell their property at a discount in return for the option of remaining in the property as a tenant. Further to an Office of Fair Trading market study conducted in the course of last year, the Government has now taken steps to bring SRBs within the scope of Financial Services Authority regulation. The new regulation will pose challenges to both the FSA in establishing an efficient regulatory regime, and to SRB providers in establishing a constructive relationship with the FSA.
The OFT's Market Study
The OFT's market study, further to a Government request, stemmed from growing concerns that vulnerable homeowners were entering into SRBs in the mistaken belief that they had secure tenure for the medium to long term. The OFT’s study echoed this concern, finding that the reality was that the typical (in the main short assured) rental agreement was for an initial fixed period of 6 or 12 months further to which the landlord under the SRB arrangement could recover possession at their own initiative. The OFT also had further concerns, not least that customers were being misled about the market value of their home and the level of market rent. While recognising that current consumer protection legislation and self regulation did offer some protection, more was needed, and the OFT made a number of recommendations to the Government, including FSA regulation of the sector.
Response to the Market Study
Further to a public consultation, the Government agreed that extending the scope of FSA regulation to include SRBs was the most appropriate way of ensuring consumer protection. Under the envisaged legislation, regulation will be introduced in two stages:
- an interim regime will be brought in as soon as any statutory changes come into force (expected on 1 July) in order to address the most immediate problems for consumers, followed by
- a more comprehensive regime that will start on 30 June 2010.
While the FSA is still to finalise the details of the full regime, under the interim regime firms will need to obtain FSA authorisation (by 1 August). This will involve meeting the FSA’s threshold conditions that include the requirements to have adequate resources and to be run by fit and proper people. Firms will also have to comply with the FSA’s Principles for Businesses, which includes a broad obligation on providers of SRBs to ensure that potential customers are in receipt of clear, fair and non-misleading information and are made aware of the availability and importance of independent legal or professional advice. In particular, the rules envisage that valuations are carried out by a competent independent valuer, and providers of SRBs pre-disclose, amongst other things, the type and period of the tenancy. The full regulatory regime, which is to follow a consultation process expected to start in September, is likely to be implemented in the second quarter of 2010.
FSA regulation is not to be taken lightly, particularly as the FSA has wide enforcement powers including the ability to levy substantial fines where regulatory rules are not complied with. While the FSA already regulates analogous areas such as home reversion plans, the new regime is likely to impact on a wide range of businesses with little experience of the rigours of FSA regulation. Moreover, given the Government intends that where a third party acquires an interest in land acquired under a SRB it in turn should be regulated under the regime, the potential applicability of the regime will be an important part of due diligence exercises.