SALE AND RENT BACK SCHEMES

  When we gave evidence to the Committee on 22 January this year, we agreed to offer some general comments on new developments in the sale and rent back (SRB) market.

  SRB schemes are not a new phenomenon. In the past, typical SRB providers were local authorities and housing associations, the schemes being a means for indebted homeowners to avoid repossession.

  We understand that the concern expressed by bodies such as CML, Shelter and Citizens Advice relates to a new breed of SRB companies. These companies appear to target homeowners in financial difficulty, offering to buy their properties at lower-than-market-value prices (anecdotally it can be as low as 40%) in exchange for an assured shorthold tenancy. At the end of the tenancy, however, homeowners may find themselves evicted from the property.

  These SRB arrangements may be attractive to some homeowners facing arrears and repossession because they would allow them to remain in their homes. Some of these homeowners will have regulated mortgages and would otherwise have the safeguards of our requirements on mortgage lenders to treat their customers fairly. However, as we explained in our oral evidence to the Committee, Government has not given the FSA responsibility for regulating SRB transactions.

  In 2006, when making the legal changes to allow us to regulate home reversions, Treasury specifically considered whether our regime should extend to other forms of flexible tenure schemes (which would include SRBs). Their conclusion was that our scope should focus narrowly on home reversions (and home purchase plans)—to ensure a level playing field with mortgage products we began regulating in 2004. To do this, and to distinguish home reversions from SRB schemes, the legislation only applies to contracts which provide for the right to occupy to end only after:

—  entry into a care home;

—  the consumer's death; or

—  a specified period of at least 20 years. It is this condition that makes it highly unlikely that existing SRB schemes will fall within the scope. Some homeowners may be under the impression that they may continue to live in their homes indefinitely if granted a tenancy by the SRB company. However, market practice is to offer an assured shorthold tenancy of only six to 12 months duration, after which the company has the right to evict.

  Decisions on the FSA's scope are a matter for the Government. If the Government were to give us responsibility for this market, we would expect the decision to be informed by evidence of market failure and the appropriateness of statutory regulation as a response to this evidence.

  Although sale and rent back is outside our scope, we understand the concerns about the market. We have contributed to some preliminary Whitehall thinking. As announced by the Chancellor in Budget on 12 March, the Office of Fair Trading will lead a study of the market this year, focusing on consumers' experience of these arrangements, and consider options where appropriate to strengthen consumer protections. The study will draw on contributions from the FSA.

  Consumers targeted by SRB companies may well not fully appreciate the options available to them. Even though we do not regulate SRB transactions, we recognise that we have several materials the SRB target audience may read:

—  for mortgage borrowers newly entering arrears we require lenders to send out an FSA booklet setting out their options, and encouraging them to contact their lender; and

—  for consumers more generally, our "Moneymadeclear" webpages cover debt and affordability topics.

  Last summer we decided to add information about SRB schemes to both the arrears booklet and our webpages. This information emphasises that such schemes are unregulated and that consumers need to consider both the reduced price they will get for their home and the limited protection the lease provides against rent rises or eviction. Similarly, we included information about SRB schemes in the budgeting guide that we launched for consumers early in the New Year.

Financial Services Authority

14 March 2008