Regulation of Financial Services (Land Transactions) Bill

My Lords, we on these Benches welcome the Bill. It is an example of how the remit of the FSA needs to evolve and expand to deal with new financial products as they evolve and expand. At the end of my speech I shall suggest that it might be expanded a little further. The Bill is also a rare example, in my experience, of the felicitous drafting of a mere couple of clauses killing two fairly disparate birds with one stone, and the parliamentary draftsmen are to be congratulated on that. The Bill covers two different kinds of product, the first of which is home reversion plans. As the Minister has pointed out, as people live longer and, as he has not pointed out but is the case, normal pension provisions are found to be increasingly inadequate, the demand for home reversion plans is bound to grow. In 2004 new plans amounted to £1.2 billion and new lifetime mortgages to £4 billion. Although only one of those two products is being covered today, they are broadly in the same field. Yet household wealth net of mortgages amounts to approximately £2 trillion. Therefore, there is a great deal of scope for the development of this market in the years ahead. Despite the impressive SHIP scheme, the history of this sector is that there has been cause for concern about mis-selling. One of the reasons is that these products are typically sold to the elderly, who, although they can be extremely astute on financial matters, in some cases, as with the not so elderly, are easily bamboozled by the way in which financial advisers attempt to sell products. That has been borne out by the mystery shopping that the FSA did in this area when it found that about 60 per cent of the financial advisers whom it contacted failed to explain the risk involved in the products when attempting to sell them. Secondly, there has been scope for mis-selling as regards the valuation of a property, particularly at times of market volatility. Thirdly, there has been scope for mis-selling as regards the fees that have been charged for valuing properties and legal fees. Therefore, there is a series of good reasons why these plans should be covered by the regulation. The second area covered by the Bill concerns Islamic home finance products, which is a relatively new market. However, I understand that it is growing extremely rapidly by about 70 per cent per annum. It is estimated that it could be worth some £1.6 billion within the next three or four years. As the noble Lord pointed out, the principal products within that market are the Murabaha product and the Ijara product and, I understand, the splendidly named Diminishing Musharaka product. I am extremely grateful to officials in the Treasury who produced an excellent briefing note. Before that I was completely ignorant of those products. Treasury officials produced a very clear note and briefed me personally, for which I am grateful. At a time when we are all looking for ways to encourage the Muslim community to feel that they have a stake in British society, the ability to gain greater access to housing finance on a basis which complies with their religious beliefs is doubly welcome. While I welcome the Bill, I have a question and a proposal. My question relates to cost. In another place my honourable friend Vince Cable pointed out that on the Treasury figures the cost per company which becomes regulated under the Bill will be £475,000 in the first instance. That seems to me a very high figure. I have had recent discussions with the FSA about compliance costs. I was impressed by the steps that it is taking to reduce the length of the rule book and reduce compliance costs where it can. It is not always helped by the industry. Sometimes when the FSA goes out to consultation, the industry is not very good at coming forward with specific areas of compliance which it wishes to be rid of. Therefore, the FSA does not necessarily get the positive response that it wishes. However, will the Treasury look again at those figures and satisfy itself absolutely that a compliance regime at that cost is strictly necessary? My proposal is that the Bill should be extended to cover property investment clubs. Property investment clubs through which investors typically purchase flats off plan—that is, before they are built—now account for up to half of all new flats purchased in the UK. Typically they offer investors the prospect of large capital gains, not least by claiming that they are selling the flats at a discount. There are, however, a number of serious pitfalls for the unwary investor. As with all financial services products, there is no shortage of unwary investors. First, the so-called ““discounts”” are often found in reality not to exist. One can imagine that in a property market where prices are falling that could be an increasing problem. Secondly, very large fees are often charged by the clubs for alleged training and advice which is merely passing on information that any investor could obtain by reading the financial pages, or possibly looking up the FSA website. Thirdly, the risks of purchasing the properties are often understated. At present there is no protection against mis-selling in this area. The FSA has recognised that there is a problem and has issued a discussion document in which it suggests that those PICs which do not exercise day-to-day control over the management of a property should be classified as collective investment schemes. Those which exercise such control would remain unregulated. That appears to be an unsatisfactory distinction. It excludes from regulation many PICs which simply should be covered. The FSA argues that to include all PICs would require primary legislation. However, such legislation—a mere few clauses—could be justifiably and logically added to this Bill and, in doing so, an area of current mis-selling cleaned up. I understand that the Council of Mortgage Lenders would support such a move. I therefore invite the Minister to use this opportunity to agree to amend the Bill accordingly.