On 28 September 2009, the FSA produced a consultation paper which outlined its proposals for the full sale and rent back (SARB) regime.
Under the new proposals, the major points highlighted were the banning of exploitive advertising and high pressure sales techniques. The proposals included consumer protection measures such as the introduction of a cooling-off period, tighter procedures to ensure that consumers have security of tenure and a requirement that in every sale firms check that the consumer can afford the deal and it is right for them.
The interim regime will end at midnight on 29 June 2010 and the full regime will begin on 30 June 2010. All firms will need to apply for authorisation in order to undertake SARB business in the full regime, even those that have been permitted to carry on SARB activities under the interim regime.
Firms authorised under the interim regime – who wish to continue to operate within the market – will be required to lodge a fresh application for the full regime. If a firm has been granted interim permission, it does not automatically mean that the firm will achieve
authorisation for the full regime.
Firms will have to obtain permission for each of the regulated SARB activities they undertake. It is a criminal offence for firms to undertake SARB business without being appropriately authorised. With this in mind, the FSA is monitoring the market for unauthorised business being undertaken under the interim regime and will continue to do so under the full regime.
The FSA has concerns about the lack of consumer protection in this situation,
as the SARB seller (the consumer) will not benefit from the majority of the consumer
protection put in place for the full regime. Several measures are being considered to
counter this risk. The regulator proposes to apply a number of requirements to SARB
firms who may be involved in arranging agreements with unauthorised providers.
The full regime will add full capital and authorisation requirements for firms and
the inclusion of the activities of advising on and arranging SARB products into
the Financial Services Compensation Scheme (FSCS). The FSA is also proposing
to include the SARB conduct of business requirements in an expanded MCOB
regulations. The proposed expanded regime is designed to ensure an SARB market where:
firms are fit and proper and appropriately resourced; firms’ staff are competent to carry out their role; consumers get clear, concise and consistent information about a firm’s
services and products so they can make informed choices; consumers have time to consider the nature of the product and possible alternatives and to seek advice to help them reach
a decision; consumers are sold suitable products that take account of their circumstances,
needs, and affordability; and if things go wrong, consumers have appropriate protection.
SARB products are complex, and as such are seen as a higher risk than standard
mortgages. The FSA’s paper outlines the risks from SARB that the regulator had
identified to its statutory objectives. In particular, risks were posed to the regulator’s
consumer protection objective and these risks still exist in the SARB market.
The regulator believes that risks to consumers persist in this market. These arise
from areas such as high pressure selling; inappropriate sales; and the sustainability
of firms’ business models, including inadequacy of financial resources.
The FSA believes that these risks would be most effectively addressed by the
application of more comprehensive rules to protect consumers. As a result, it intends to
apply further specific rules to SARB firms in areas such as financial promotions,
advice and selling, disclosure and capital requirements.
All regulated firms are required to provide the FSA with information about
the levels of business they undertake, financial resources and profitability, and
details concerning the volume or timing of specified events. The frequency of these
reports depends on the size and nature of the activities that firms undertake.
The regulator is currently developing its reporting requirements for SARB firms
and plans to consult on these in a quarterly consultation paper early next year. In the meantime the FSA proposes to continue the approach it adopted for the interim regime,
but it will also require all firms to submit a complaints return. Therefore, until
further notice, SARB firms will be required to submit the following: sales volumes;
management accounts; and details of funding arrangements.
For firms that were interim authorised, the FSA will require submission of this
information on a six-monthly basis according to their existing schedule. For
firms that are newly authorised for the full regime, the FSA will require this information
within three months of the beginning of the regime (30 June 2010) and on a
six-monthly basis thereafter. SARB is a complex area of the market and the FSA has quite rightly set its stall out regarding protecting consumers in this arena.
The prevention of high pressure and inappropriate sales is vital to raising standards and firms should be expected meet tough standards of business conduct in order to achieve full authorisation.
There is great potential in the market, but under the regulator’s glare, there are no
shortcuts and firms must be fully versed on all compliance requirements. However,
support is out there and a good quality compliance support package will go a long
way to gaining and maintaining these standards.