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Lord Newby: 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
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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.
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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 planthat is, before they are builtnow 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 legislationa mere few clausescould 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.
Baroness Noakes: My Lords, I thank the Minister for introducing this short but significant Bill. We on these Benches support the Bill. We have long been of the view that it was anomalous for the FSA to be able to regulate mortgage-based equity release schemes, but not home reversion plans. While we are generally suspicious of increased regulation, we are content that it is appropriate for home reversions to be subjected to the same regulatory regime as lifetime mortgages.
The lack of regulation of home reversion plans creates an undesirable incentive for providers to sell them. The safe home income plan trade body has mitigated some of the risks of unregulated home income plans, but nobody could seriously argue against the proper regulation of the whole of the equity withdrawal market on a consistent basis.
I do, however, have some issues for the Minister to address. The first is timing. We have been waiting a long time for the Government to act in relation to
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home reversion plans. The issue is not a new one. The Government's consultation on the regulation of home reversions was eventually published in November 2003, and the Government announced in May 2004 that legislation would be brought forward. But it then took over a year before the Bill we are considering today was introduced into another place. The Bill before us is, of course, not the end of the story, because the Government still need to bring forward secondary legislation under the Financial Services and Markets Act 2000 to define precisely what is to be covered.
The Government finished their consultation on that a year ago but, as I understand it, they have not yet issued a draft of the statutory instrument which will actually give effect to the Bill. Even when this Bill is an Act, and the Government have implemented it by way of statutory instrument, the FSA will then have to draft and consult upon the detailed rules.
This is a simple Bill. If the Government had been so minded, they could have implemented it by now. The only conclusion that can reasonably be drawn is that the Government are rather half-hearted about the issues. Will the Minister explain two things? First, why has it taken so long for the Government to get to where we are today? Secondlyand more importantly, given where we arehow long will it take for the combination of the Government and the FSA to complete the job? In other words, when will home reversions actually be within the FSA's regulatory scope on a fully implemented basis?
I have already said that we are content for the extension of regulations implicit in this Bill. That does not mean that we have no concerns about the additional regulation, particularly the costsa subject already raised by the noble Lord, Lord Newby. The Explanatory Notes say that the costs associated with ongoing regulation of home reversions will be £5.4 million, and that there will be one-off costs of £11 million. That is not an insignificant amount, especially in the context of the amount spent by the FSA on mortgage and general insurance regulation in the past financial year, which amounted to £27 million. The costs could be even higher than those set out in the regulatory impact assessment once the FSA has drawn up the detailed rules to implement the regulation.
The financial services industry has general concerns about the cost of the FSA and the regulatory burdens that it imposes. The Government rejected in another place an amendment proposed by my honourable friend Mr Mark Field, which would have increased Parliament's scrutiny of the final regulatory impact. The Minister in another place said that the existing processes to hold the FSA to account were sufficient, but we are far from convinced of that, and we have some sympathy with the view of the Prime Minister about the FSA's over-regulation. Are the Government content with the FSA's approach to regulation in general? Will the Treasury take any specific interest in the way that this Bill is implemented in terms of the regulatory burdens imposed? Or will they just ignore the issue once enactment has been got out of the way?
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We welcome the regulation of the equity release market, first by putting lifetime mortgages under the FSA and now by including home reversions. The regulation of the equity release market was necessary because of problems that occurred in the past. Indeed, even today consumers are vulnerable if they enter into a home reversion scheme before this Bill is enacted and fully implemented. I have already raised concerns about timing. The Minister will be aware of the instances where home income or shared appreciation mortgage products were sold in the 1980s and 1990s to individuals whose circumstances made those products unsuitable and who were not made aware of the risks. I am sure that he will also be aware of the many cases of genuine hardship that have resulted. We are not only talking about the role of financial advisers and mis-selling in this case; we are talking about some major institutions, including building societies, which actively marketed those products.
I know that the easy answer is that only the regulatory regime then in existence is relevant to those hard cases, and I can see a great temptation for the Government to hide behind that legalistic approach. I believe that the Government are hiding behind that legalistic approach. I have seen one recent letter in which the Economic Secretary said that the Government,
Does the Minister agree that that is a weak response? What have the Government specifically done to put pressure on the lenders who are still failing to give relief to the victims of those earlier schemes?
The Minister will know that the power of government goes beyond the power to legislate. They have enormous powers of persuasion or even of coercion. Will the Minister commit the Government to using all their de facto powers to achieve relief for those locked into those early schemes? If he will not do so, will he please explain in detail for the record, and for the benefit of all those who are desperate for the Government to help them, why they take that approach?
I have concentrated in this speech on home reversion schemes. The Minister also explained that the Government intend to use the Bill to bring Ijara mortgages within the scope of the FSA's regulation. I state for the record that on these Benches we welcome that. It makes good common sense that all transactions that are in substance lending should be regulated in the same way. Regulation should not be delineated by artificial legal boundaries.
In that light, I note that the Minister said that the Government do not intend to use the Bill to bring flexible tenure products within the scope of the FSA. The rationale, as I understand it, is that those products are provided only by local authorities or registered social landlords at present. I have two questions for the Minister arising from that. First, what remedies are available in respect of local authority or registered social landlord flexible tenure schemes at present? Are those remedies at least as strong as those available for borrowing regulated by the FSA? I have in mind in
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particular the role of the financial services ombudsman and the financial services compensation scheme. Is there anything equivalent for flexible tenure arrangements at present, and if not why not?
My second question relates to the issue of timing, which is similar to the question I raised earlier. It has taken a long time to get to where we have on equity withdrawal regulation. What procedures will the Government put in place to ensure that they can act swiftly if any other financial schemes related to people's homes need to be brought explicitly within the regulatory net? For example, if some form of flexible tenure scheme were devised and sold by a commercial company, would the Government act immediately to bring them within the FSA, or would they wait for more financial loss and more human misery to accumulate before acting? I look forward to the Minister's reply to the questions I have put to him and also to the remaining stages of this Bill.
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