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Regulation of Financial Services (Land Transactions) Bill

Indeed. There are two main elements to the Bill. As has been said, there is broad consensus among consumer groups such as the National Consumer Council, the Consumers Association, the Consumer Panel of the Financial Services Authority, as well as in the industry, on support for the broad principle of bringing home reversion schemes within FSA regulation. I have some questions, which partly reflect that asked by the hon. Member for Sevenoaks (Mr. Fallon). We all accept the principle of regulation but wonder why it is so costly. We are considering a small industry, comprising about 50 companies, many of which are small, especially in terms of the providers. An estimate—I believe that it is an NCC estimate—shows that even a small company will bear a cost of approximately £475,000 to implement the regulation. Has the FSA considered how the compliance costs could be reduced to more manageable proportions while achieving the Bill’s objectives? I also want to ask—I shall go into more detail later—why the Bill does not extend to to-let mortgages, which is the other major area in which people are trying to extract value from property appreciation. Much money in the markets is moving in that direction and there is a great deal of potential for mis-selling to consumers. Indeed, many of the same points apply, including the need for a level playing field for different sorts of lending. I should like to know why to-let mortgages were not included—whether through oversight or policy decision, or whether the technical nature of the measure prevents their inclusion. I also welcome the Bill’s second feature, which is the extension of FSA regulation to Islamic financing institutions and the coverage of ijara lending—the part of Islamic finance that the FSA does not regulate. It is a big issue. There are approximately 1.6 million Muslims in this country, of whom 250,000 are home owners. Many are anxious to comply with the requirements of their faith and we have a tradition in the House of trying to accommodate religious faith in financial legislation. In the previous Parliament, we held prolonged discussions with the Christian Brethren about annuities. It was an especially heroic act by the Treasury and hon. Members because the Christian Brethren made it perfectly clear that, whatever we did for them, they would not vote. The Muslim community is much larger and the problem much bigger. People in the Islamic community with whom I have discussed the matter assure me that they are pleased and grateful for the steps that the Government have taken in the Bill. However, they stress that big obstacles remain to Islamic finance being widely used in the market that we are considering and I shall describe a couple. The nature of the transaction involves a double switch of ownership—the property has to be transferred to the lender so that a rental stream can be set up and then transferred back. That means that Islamic households pay double stamp duty. Perhaps the Chief Secretary would reflect on whether it is possible to tackle that problem. Under the capital adequacy ratios, financial institutions are required to set aside 100 per cent. rather than 50 per cent. of the value of the loan in reserving, so a much tougher test of financial prudence is set for institutions that provide Islamic finance. That clearly deters the growth of the market. Those issues are technical. The Chief Secretary knows that there are people in the country who are expert in the matter and perhaps he will briefly say whether the Treasury is considering how it can expand its current initiative. It is right that we should do what we can to encourage the principle of equity release. Enormous numbers of people are asset-rich and income-poor. Anything that can be done to help them release an income from their assets should be welcomed, subject to regulation and prevention of mis-selling. British household wealth is approximately £3 trillion and household debt about £1 trillion. Much of the net £2 trillion is locked in property values. A rough estimate of the total asset valuation of an average household is £50,000. That could convert into a substantial stream of income if it was released. The problem is that, despite the discussions that we have held on equity release and the Bill, it is an underdeveloped market. There are different estimates of the equity release market but Safe Home Income Plans—SHIP—the private regulatory body, estimates that it grew from £228 million in 1998 to £1.2 billion in 2003. There are other estimates but, given the scale of the equity involved, that is small. None the less, there is considerable potential and one study by a consumer group estimated that equity release could realistically expand from six households in 100 to 40 households in 100 in 20 years. There is therefore much scope for expansion. That would take the market from around £1 billion to £4 billion. When trying to understand why the market is small and underdeveloped, one has to consider the history of regulation or its failure in the sector. I participated in a debate in January 2003, which the hon. Member for Tiverton and Honiton (Angela Browning) introduced. It covered some of the problems of equity release. The key point that emerged was that the sector was especially prone to serious mis-selling and abuse for several reasons. First, many customers are vulnerable because they are elderly. Of course, not all elderly people are vulnerable—many of them are extremely sharp and switched on. However, as people get older, their capacity for making complex financial calculations diminishes and the scope for mis-selling is great. Secondly, some tricky issues surround the valuation of property and that of the discount that applies in the course of a home reversion scheme. The discount is normally 40 per cent. to 60 per cent. and it depends on a complex calculation, which involves age and life expectancy. There is much scope for fixing a number that is disadvantageous to the borrower. Thirdly, there is scope for large fees, because carrying out a home reversion scheme properly requires independent valuation advice and independent legal advice as well as advice on the products. In many cases, those fees can be considerable. The scope for abuse is great. When we held the debate two years ago, hon. Members of all parties gave moving accounts about the difficulties that the previous boom in home reversion lending in the 1980s caused. A group of building societies, led by the Chelsea, West Bromwich and Staffordshire building societies, was undoubtedly guilty of perpetrating serious mis-selling of lending, leading to a great deal of hardship that continues to this day for about 10,000 families. Households were encouraged to take on variable loan mortgages and, in return, received bonds. The mortgage interest rates shot up in the financial crisis of the early 1990s, bond yields fell and many people were greatly impoverished. As the Chief Secretary said in his opening speech, since then the industry has produced a form of voluntary regulation in the SHIP scheme, which has some undoubted advantages. It not only prevents negative equity, as the Chief Secretary suggested, but undertakes that participants continue to live in their home and provides for independent legal advice. There are considerable regulatory gains for the people who participate in it. However, the scheme is fundamentally weak in many ways. As I understand it, the scheme applies to only 18 of the 50 companies that operate in the industry. It does not involve any form of compliance. The amount of compensation that can be awarded is £25,000, whereas one can get £100,000 from the financial ombudsman and it does not cover cases where the lender becomes insolvent. The scheme therefore has considerable limitations. Moreover, the FSA has conducted some mystery shopping that suggests that financial advisers routinely fail to give proper advice—routinely, not only occasionally. In 60 per cent. of cases that were monitored through mystery shopping, no attempt was made to explain the risks to participants. All those factors make the case for regulation through the FSA of the sort that the Government are introducing. The essential arguments for it are consumer protection, a level playing field between different products and the restoration or creation of confidence in an important market. I want to conclude by asking some questions. First, when do the Government envisage that this new regulation will come into effect? I participated in all stages of the financial services legislation that was introduced two Parliaments ago, and mortgage regulation was first raised six years ago. However, such regulation is only just coming into effect for mortgage-type products. When will this extension of the legislation come into effect? My second question relates to a point that I made at the outset. Can the Minister explain why the regulatory costs, which are set out in detail in the regulatory impact assessment, so high, given the relatively small number of companies involved in the industry? I welcome the detail and openness of the assessment. Has the FSA made a serious attempt to tailor its regulatory processes to make such costs affordable and sensible? Thirdly, when the FSA rules and the secondary legislation are introduced, is the intention to build into consumer protection the provision of independent legal advice? Doing so is crucial to ensuring that consumers are protected. Will there be an obligation to ensure that such advice be obtained? My final set of questions relates to an issue that I raised in my introductory remarks: why is the Bill not being extended to the buy-to-let market, which is much bigger than the home reversion market and has many of the same problems? At the moment, many very unsophisticated investors are being lured into a highly sophisticated market. Very complex calculations have to be made in buy-to-let, such as likely occupancy rates and the cost of maintaining let property. Many people entering the market have been told by the promoters of the various schemes that they can become millionaires simply by acquiring property. Simple marketing techniques are being employed disingenuously. The Department of Trade and Industry has already carried out an investigation into rogue syndicates in the buy-to-let market, which suggests that the Government are already aware of the serious potential for abuse. Would it not be appropriate, in view of the information that the Government already have, to bring this market within a regulatory framework at the same time and in the same way? There is potential for disaster here. A great many people are investing in property on the basis of the simple notion that property markets go up for ever. On lending, the traditional prudent criterion for buy-to-let was that the rental to income ratio should be at least 130 per cent. In some cases, that has been reduced to 100 per cent.—in other words, there is massive downside risk from a deterioration in the property market. For all those reasons, it is important that buy-to-let, like other aspects of the industry, be brought within a regulatory framework. With those qualifications in mind, I support the legislation. It is largely uncontroversial and welcome and we shall play a constructive role in ensuring that it proceeds through this House as quickly as possible.