FSA Finds Poor Practice in Sale and Rent Back, Sees Market Temporarily Closed
The Financial Services Authority (FSA) has found that most sale and rent back (SRB) transactions were either unaffordable or unsuitable and never should have been sold.
Following a review of all regulated SRB firms, the FSA has referred one firm to its enforcement division while others have either stopped taking on new business or cancelled their permissions. Effectively, this means the entire SRB market is temporarily shut.
In August 2011 HM Treasury introduced new sale and rent back regulation requiring anybody purchasing a property under a SRB scheme to be authorised by the FSA, unless the buyers and sellers are family members.
Of the 22 firms reviewed, only nine had been active since the FSA began regulating SRB. Of this nine, five firms have now stopped doing SRB business, two have kept their regulatory permissions but decided not to use them in future, five have agreed to undertake past business reviews (which may result in consumer redress) and one will only purchase second-hand SRB contracts from other firms.
If customers with existing SRB agreements have concerns about their agreement they should in the first instance contact their SRB provider, or seek professional advice.
The FSA had previously identified and published areas of concern regarding financial promotions targeting vulnerable consumers. It had also received intelligence from a lender alleging that one firm was arranging SRB transactions as buy to let mortgages where the properties were purchased by the firm at below market value then inflating purchase prices to defraud the lender.
Additionally, a study by consumer group Which? in February 2011 found advice to SRB customers to be ‘woefully inadequate’.
In March 2011, the FSA commenced a review of the sales practices of the 22 authorised SRB firms. The FSA found that SRB firms did not correctly assess appropriateness and affordability, and customers were not given enough time to consider the agreement; disclosure of the key facts of an SRB agreement did not follow the correct order, was insufficient and not given at the right time; agreements contained incorrect information and did not meet the FSA’s requirements for tenancy agreements; sales processes were inadequate and did not allow firms to gather enough information to assess appropriateness; financial promotions breached FSA rules; and training and competence, compliance monitoring, and record keeping were all inadequate.
The FSA will now focus on working with firms conducting past business reviews to ensure any affected customers are treated fairly.
Nausicaa Delfas, the FSA’s head of mortgage and general insurance supervision, commented: “Sale and rent back is often the last resort for struggling homeowners so we expected to see firms treating their customers much better than this report suggests.
“The resulting temporary closure of this market could have been avoided if sale and rent back firms had taken the time to fully understand their regulatory responsibilities and customers’ needs. It seems most were more focussed on their own commercial success rather than the welfare of the customers, with one firm even resorting to fraud.
“This is an example of the type of action that the FSA, and in future the FCA, will increasingly be taking to protect consumers.”
The FSA was given regulatory oversight of SRB by HM Treasury in June 2009 and implemented an interim regime a month later. This was replaced by a full regime in June 2010.