Financial Services and Markets Act 2000 (Regulated Activities) (Amendment)(No. 2) Order 2006

rose to move, That the draft order laid before the House on 13 September be approved [35th Report from the Joint Committee]. The noble Lord said: My Lords, I welcome this opportunity to commend to your Lordships the measures the Government have introduced to ensure that consumers of home reversion plans and Ijara home financing arrangements will be protected by FSA regulation. These changes are to be achieved through the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) (No.2) Order 2006. They take effect from April next year. For completeness, I should also mention two negative procedure orders also before Parliament: the Proceeds of Crime Act 2002 (Business in the Regulated Sector) Order 2006 and the Terrorism Act 2000 (Business in the Regulated Sector) Order 2006, both of which make consequential changes. They align the money laundering treatment of arranging or advising on the products that the main order deals with, and they reduce burdens on firms. These changes follow the Regulation of Financial Services (Land Transactions) Act 2005, which was widely supported by industry and consumer groups. That measure was also widely welcomed by your Lordships. It received Royal Assent last year. Noble Lords will be pleased to hear that there is equally widespread support for the secondary legislation on which the Government consulted earlier this year. The actuarial profession, Safe Home Income Plans—the self regulatory body—the Association of British Insurers and the Financial Services Consumer Panel were united in support. Respondents to the home reversion proposals were generally strongly supportive of regulation and endorsed the approaches the Government had taken. They raised a number of points of detail, and the Government’s published response to the consultation analyses those. Nine respondents commented on the home purchase plan proposals. Generally, respondents supported the detailed proposals for defining and regulating these products. I want to put on record that the Government are extremely grateful to all those who took part in the consultation. I shall set out briefly what we mean by these different products. Equity release schemes allow some elderly homeowners to release the value of their property in return for all, or a share, of their interest in the home. With home reversion plans, the consumer sells all or part of their home but retains the right to live there. These are not yet regulated by the FSA. The second main issue is to extend regulation to what we describe in the order as home purchase plans. Sharia-compliant home financing arrangements have been developed to meet the same purpose as a conventional mortgage product while complying with Islamic principles. There are two main types. First, in Murabaha structures, an institution buys and re-sells the home to the consumer, accepting payment of the price over a lengthy period. These are already regulated by the FSA. Secondly, Ijara products relate to where the institution combines a sale with renting the un-owned share of the property to the consumer. These are not yet regulated by the FSA. Our aim is to remove the current regulatory imbalance between Murabaha and Ijara products. All consumers who choose to use these non-interest bearing products will benefit from FSA protection. This is basically a question of fairness and of a level regulatory playing field. Consumers of home reversion plans are not completely without protection at the moment. The market is subject to voluntary protection through the industry group Safe Home Income Plans (SHIP). SHIP members agree to comply with a code of practice and undertake to provide a 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. These protections stop short of the protections offered by statutory regulation and the FSA’s regime. Such a regime would extend to consumers the FSA protections and would ensure a level regulatory playing field in the equity release market, removing any artificial regulatory distortions. We are also committed to tackling regulatory barriers that may hinder the development of a Sharia-compliant financial product. Purchasing your own home is potentially the largest financial transaction people may make during their lifetime and all consumers deserve suitable protection. Regulation has an important role in protecting consumers of these products, building market confidence and facilitating innovation. I have also been asked by the Merits Committee briefly to address in my remarks the Government’s approach to Islamic finance. London is already leading the West in Islamic finance. It has more banks supplying services in accordance with Islamic principles than any other western financial centre, and British professional services firms are leading the way in the development of Islamic business services. It is the Government’s ambition to ensure that, through London’s international markets, Britain strengthens its position as the world’s leading centre for international finance. The Government will continue to work with the Financial Services Authority to modernise the regulatory and tax framework to ensure that it keeps pace with opportunities in matters of traditional UK strengths, along with new and innovative areas such as Islamic finance. For example, there is a nascent market for Sharia-compliant home financing products. The changes that we are making in this order are to avoid market distortion, ensuring a level regulatory playing field within the market and that all consumers who choose to use these non-interest-bearing products will benefit from FSA protections. However, I am sure that it will be understood that wider issues of Islamic finance go beyond the scope of this order. The FSA has had responsibility for regulating first charge residential mortgages since October 2004 and, following consultations in 2003 and 2004, we decided to bring home reversion plans and Ijara home financing arrangements within the scope of FSA regulation. Because these types of transactions are based on sale and purchase arrangements in land, and are not loans secured on land which are specified in the Financial Services and Markets Act 2000, primary legislation was required. The Regulation of Financial Services (Land Transactions) Act 2005 amended the Financial Services and Markets Act 2000 to add an appropriate reference to these transactions. This order is needed to complete this process by defining in detail the new activities to be regulated. In addition, the FSA has published its own cost-benefit analysis and draft rules and guidance. It proposes a range of rules tailored to deal with the specific risks inherent in the home reversion and Ijara home purchase markets. We anticipate that, subject to this measure completing its passage through Parliament, the FSA will make the final announcement of its rules next week. This order amends the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001. It specifies as regulated activities entering into, administering, arranging and advising on regulated home reversion plans and regulated home purchase plans. This means that the FSA will be able to require firms undertaking these activities by way of business to be authorised unless they benefit from an exemption. The order also clarifies an existing provision relating to high net worth ““business angel”” companies and amends the overseas person exception to replace the reference to a ““non-resident individual”” with a reference to a person who is not resident, in order to catch corporate trustees who are resident overseas. The order extends the existing exclusions from regulation for activities such as giving general advice in newspapers to bring them into line with the treatment of other mortgage-related activities. The order defines home reversion plans and home purchase plans in detail and the activities to be regulated in relation to these products. These differ from the equivalent regulated activities for mortgages in two important respects. First, intermediaries for home reversion providers—““the lender””—and for reversion sellers will be regulated. Secondly, the acquisition of an existing home reversion by a new provider, including from a provider who is not the original provider, will be regulated. These differences were consulted on and received support. Part 3 of the order makes consequential amendments to the Consumer Credit Act and other primary legislation. Part 4 also makes consequential amendments to secondary legislation, so that the newly regulated activities are dealt with elsewhere in the body of financial services and other secondary legislation. Part 5 establishes a transitional regime to provide a degree of continuity for firms which have submitted an application to the FSA for permission or variation of permission or an application for approval which has not been dealt with by 6 April next year, and which meet the other conditions. Finally, the schedule to the order sets out further details of the regime that will apply to persons who are subject to the transitional provisions. In conclusion, I believe that this measure rightly commands wide support and I commend it to your Lordships. I beg to move. Moved, That the draft order laid before the House on 13 September be approved [35th Report from the Joint Committee].—(Lord McKenzie of Luton.)