Regulation of Financial Services (Land Transactions) Bill

My Lords, I beg to move that this Bill be now read a second time. The aim of the Bill is to bring home reversion plans and Ijara financing arrangements into statutory regulation by the FSA. Noble Lords will be aware that the FSA assumed responsibility for the regulation of first charge mortgages secured on a purchaser’s primary residence from 31 October 2004. The decision to regulate in this area was announced in December 2001 and was broadly welcomed by both industry and consumer groups. Buying a home reversion plan is a huge financial decision involving the most important and sometimes only significant asset of elderly people. It can have significant implications for tax, benefits, inheritance and long-term financial planning, which need to be considered very carefully. Regulation is not designed to discourage people from purchasing these products, but to help them make informed choices, offer valuable consumer protection and ensure that there is a level playing field in the equity release market, most of which already falls within the scope of FSA mortgage regulation. Furthermore, and equally important, these provisions will ensure that Muslim consumers are able to access the growing market in Sharia-compliant home finance products while benefiting from the protections afforded by FSA regulation. The Bill has been introduced not only to meet the needs of consumers, but also at the behest of industry, which has welcomed the news that legislation is being brought forward to level the regulatory playing field in this area. Noble Lords may find it useful if I take a moment to clarity what home reversion plans actually do. In short they are a form of equity release scheme—financial products that allow homeowners to release the value of their property above any amount owed on a mortgage. In a home reversion plan, homeowners sell all or part of their house at a discounted rate in return for a lump sum and/or income and continue to live in the house rent-free or for a peppercorn rent for life. The amount paid to the homeowner is based on a number of factors, including the value of the property, the proportion of the property sold; life expectancy of the owner(s), long-term interest rates; and expected house-price inflation. However, these are not simple products to understand, hence the need to ensure that potential purchasers receive an appropriate level of advice. These plans are not currently regulated by the FSA and the Bill paves the way for this to happen. A home reversion plan should be distinguished from lifetime mortgage, another equity release scheme. In a mortgage-based scheme the householder retains ownership of the property, whereas in reversion plans the reversion provider becomes the owner of whatever proportion of the property is sold. For lifetime mortgages, homeowners take out a loan secured on their property, but with the interest on that loan becoming payable when the house is finally sold, typically on death or when the owners move into long-term care. These products are currently regulated by the FSA. The other products that this legislation is designed to bring within the scope of regulation are Ijara home finance products. As I am sure noble Lords are aware, interest charging loans do not comply with Sharia law. However, Islamic law can accommodate some types of contracts to facilitate house purchase, so alternative products have been developed. There are two main types of Islamic-compliant home finance products in the UK at the moment. The first is Murabaha, where a financial institution purchases the chosen property and then sells it immediately to the individual at a higher price. The higher price is then paid back on a monthly basis over a period of, say, 15 years. The repayment is secured by a first legal charge over the property and therefore these products are already covered by FSA regulation. The second type of Islamic-compliant product is Ijara, where a financial institution purchases the chosen property and the individual agrees to pay back the exact purchase price either over a period of up to, say, 25 years or at the end of the payment term. Ownership of the property remains with the financial institution until the payment term is up and the individual also pays rent to the financial institution over the payment term. The individual becomes the owner of the property once the purchase price paid by the financial institution is repaid. This is an arrangement not currently covered by FSA regulation. In addition, I should note at this point that the Bill will allow flexible tenure products to be brought into the scope of regulation if that becomes necessary in the future. By ““flexible tenure””, I mean an arrangement that would allow a homeowner to increase or decrease their equity stake in the property by transferring interest within the property to and from a financial provider. This allows homeowners to increase their ownership when personal finances are stable and to decrease ownership in the unfortunate event of financial difficulty. At present, the only providers of these products would in any event be exempted from FSA regulation, as they are registered social landlords or local authorities. However, in response to consultation, we have undertaken to keep the door open for regulation of these products if commercial providers enter this market in future. Any action to introduce regulation in this area would be subject to rigorous cost benefit analysis and would require secondary legislation. As I indicated, neither home reversion plans, nor Ijara home finance products are currently regulated, because activities relating to these products are not specified as regulated activities pursuant to the Financial Services and Markets Act 2000. The fact that activities relating to reversion plans are not currently specified as regulated activities does not mean that there is not still scope for abuse. Indeed, given that some of these products, by their very nature, are aimed at the elderly, one might argue that some consumers of these products are particularly vulnerable. Not only is there a risk of mis-selling, but at present there is a lack of redress if things go wrong. I would not wish to paint an unduly worrying picture, however. Consumers of home reversion plans are not completely without protection at the moment. The home reversion market is subject to voluntary regulation through Safe Home Income Plans arrangements. Members of SHIP agree to comply with a code of practice and undertake to provide fair, simple and complete presentation of any plan that they offer. They also offer a guarantee that consumers will never owe a lender more than the value of their home—a ‘no negative equity guarantee’. However, these protections fall short of the sort of protections offered by statutory regulation and the FSA’s regime. The sort of rules that one would expect to see the FSA apply to home reversion schemes under the powers granted by this Bill would include: rules to ensure that providers must advise of risks as well as benefits when advertising reversion schemes; rules on advice to consumers which would ensure advisers considered implications for tax and benefits, as well as matching the consumer’s overall needs and circumstances to product features; and a requirement for firms to issue key product information to consumers in a clear and understandable format. Furthermore, FSA regulation will offer consumers access to the Financial Ombudsman Service in the event that they wish to make a complaint, and it would also provide cover under the Financial Services Compensation Scheme. Industry has been a keen proponent of regulation for reversion plans precisely in order to remove any consumer confusion and to boost consumer confidence in the equity release market as a whole. The market in home reversion products, though growing at 13 per cent in the first quarter of 2005, remains small at less than 3 per cent of the total value of lending in the equity release market. FSA regulation is seen by many industry participants as a prerequisite of further expansion of this market. By boosting consumer confidence it will ensure that potential demand is realised and by securing the reputational risk of reversion providers it will encourage more players to enter the market. There is a very similar story to tell in the Islamic home finance market. Here, a nascent market is developing to serve the needs of Muslim house buyers and to avoid distorting this market as it develops and ensure the same level of consumer protections across the board. Islamic home finance providers also welcome the prospect of regulation that this Bill holds out. Having set out clearly the benefits of extending FSA regulation in the way that this Bill proposes, I should stress that we have arrived at a balanced view of the overall benefit of regulation following extensive consultation. In line with the Government’s general commitment to better regulation, we have sought to ensure that the changes proposed by this Bill both are necessary and the costs justified. A consultation document seeking views about whether home reversion plans should be regulated was published in November 2003. Following points raised by respondents to the initial consultation which demonstrated strong support for the regulation, a further document was published in summer 2004 asking for views on whether Ijara products should be included within the scope of regulation. Again, the vast majority of responses agreed that Ijara products should be regulated The second consultation exercise also confirmed that flexible-tenure products, which allow people to buy and sell equity shares in their houses, should be brought within the scope of regulation. However, as at present the only providers of these products are currently outside FSA regulation, this will not be taken forward at this stage. The estimate of costs associated with the proposed regulation is set out in the RAA. Obviously, the precise nature of the regime will not be clear until the FSA has consulted on detailed rules and produced a detailed cost benefit analysis. The Bill is extremely short and simple, with only two clauses. The background to the Bill is that in order for an activity to be FSA regulated, it must be carried on by way of business and specified in an order made under Section 22 of the Financial Services and Markets Act 2000. Schedule 2 to that Act sets out in broad terms the kinds of activities and investments that can be specified in an order made under Section 22. Although it includes loans secured on land for standard mortgages, it does not cover other kinds of finance provided in connection with the acquisition or disposal of land. The Bill amends Schedule 2 of the FSMA to make it clear that financial arrangements in connection with the acquisition or disposal of land can be specified in the order under Section 22 of the Act. If the House sees fits to support this measure and the Bill is passed, secondary legislation would be brought before the House in the form of an affirmative resolution statutory instrument, which would define precisely the activities that would actually be regulated in future by the FSA. The content of that secondary legislation will be consulted on publicly to ensure that it is properly targeted and effectively focused. The FSA would also need to draw up and consult on the detailed rules that would apply to the activities relating to these products going forward. There is no reason to believe that any future regulation of home reversion plans and Ijara products would be very different from that already in place for lifetime mortgages or other products. However, it is important to note that the FSA is obliged to take account of the particular features of each activity that it regulates and to ensure that the rules it applies are proportionate to the risk posed. I hope that I have gone some way to convince noble Lords of the considerable merits of the Bill. It will open the door to important consumer protections to be extended to vulnerable and minority consumers, level the playing field in mortgage regulation, ensure that no artificial distortions go forward, bolster consumer confidence in those products and thus help to ensure that the markets continue to develop. The Bill has found strong support among consumer groups and industry alike, was widely supported in the other place, and I hope that it will garner support from all noble Lords today. Moved, That the Bill be now read a second time.—(Lord McKenzie of Luton.)