Home equity release schemes in which homes are sold and rented back should be subject to regulation by the Financial Services Authority, the Office of Fair Trading has concluded after an investigation.
Misleading sales advice
The OFT found that some sale and rent back firms may have misled customers into believing they had a continuing right to live in their own homes, when in truth they become tenants with no more than six or 12 months' protection and may be evicted after this time. Rents can increase substantially after the initial period, while tenants also face eviction from their homes if their landlords fail to maintain their own mortgages on a property.
Some consumers may have entered into sale and rent back schemes when it is not in their best interests, the OFT found. Tenants may obtain less than the market value of their property and might over-estimate their ability to pay their rent.
More regulation required
A stronger system of regulation on sale and rent back is required, with more protection for consumers, the OFT concluded. The FSA should be the regulatory body, which would determine the detail of the regulation.
The OFT suggests that regulatory controls should include requirements for transparency about home valuations, sale price, the terms of tenancy and the amount of rent to be paid. Firms should be required to provide contract terms that match assurances provided to customers. There should be a legal duty on firms to tell consumers of the independent free advice available to them.
Vulnerable homeowners
John Fingleton, the OFT's chief executive, said: "Our research shows that sale and rent back deals have potential to cause serious and permanent harm to often vulnerable homeowners. The unfamiliar and highly pressurised situations that these people find themselves in may leave them particularly vulnerable to misleading statements or valuations from sale and rent back firms looking to make a deal.
"Even those customers for whom sale and rent back might be the best option could be unaware they are currently bearing almost all of the risks. Recommending statutory regulation is not something we do lightly or often, however in this case we consider it necessary to put a stop to the unacceptable behaviour of some sale and rent back operators and to ensure consumers are better protected."
Support
The OFT's proposals were supported by both Citizens Advice and the Council of Mortgage Lenders, which called for their urgent implementation. Citizens Advice chief executive David Harker, said: "We have seen cases of very severe problems arising from bad practices connected to sale and rent back agreements. These are long term agreements about people's homes, so when sale and rent back goes wrong people can suffer huge financial and emotional loss. While sale and rent back agreements might be the right thing for some people, consumers need the sort of robust and binding safeguards that only statutory regulation is likely to provide."
Michael Coogan, director general of the CML added: "It is a year ago that the CML, Shelter and Citizens' Advice first jointly called for the regulation of the sale and rent back sector. The OFT recommendation potentially brings regulation a step closer. In the meantime, there has been some progress towards improved transparency for consumers through voluntary measures, but a level playing field requires a regulatory approach to ensure appropriate protection from unscrupulous operators for consumers who may be in a vulnerable situation."
Widespread practice
The OFT believes that there are a 1,000 firms or more conducting sale and rent back operations, plus many more non-professional landlords entering into similar agreements. Together, about 50,000 transactions of this kind have been carried out, says the OFT.