FSA regulation of home reversion rules
Have you read the FSA’s consultation paper on the regulation of home reversion schemes yet? If not – and if you have anything to do with the equity release market – you almost certainly should. Home reversion plans are being brought within the scope of FSA regulation for the first time. So this is an opportunity for those with an interest in this market to influence the shape of the new regime.
In one of the biggest changes to affect the home reversion market for many years, the government has decided that, like lifetime mortgages, which have been subject to FSA regulation since October 2004, home reversions should also be regulated to create a level playing field for equity release products.
The government’s decision follows extensive consultation within the industry and with consumers over the past few years, including three consultation papers. These have revealed a keen appetite for regulation. However, bringing these products into the FSA’s scope is more complex than usual, as they involve the sale and leaseback of property. This needed primary legislation to expand the Financial Services and Markets Act of 2000, the main law under which the FSA operates, to bring home reversion plans within the definition of ‘financial services’.
The necessary legislation went through Parliament last year, with the Regulation of Financial Services (Land Transactions) Act 2005 receiving Royal Assent just before Christmas. The Treasury is now consulting in the usual way on the necessary amendments to the secondary legislation.
The Treasury’s consultation paper – ‘Secondary legislation for the regulation of home reversion and home purchase plans: a consultation’ – was published at the end of March and runs until 23 June. This defines regulated home reversion plans and sets out the activities that it proposes should be regulated. These include entering into a home reversion as a provider, as well as arranging, advising and administering within the market.
The FSA published its own consultation paper, ‘Regulation of Home Reversion and Home Purchase Plans’ (CP06/8) at the end of April. This complements the Treasury’s consultation on the broader legislative framework by explaining how the FSA intends to set about regulating firms that carry on these activities and contains specific proposals on what the new regime will look like in practice. The FSA’s consultation on this subject runs until 21 July.
Nuts and bolts
The proposed regime centres on the FSA’s responsibility to protect consumers, which is one of four statutory obligations the FSA has. As a result, there is much attention to disclosure, advice standards, competence and redress. However, there are also significant proposals on other areas, such as prudential requirements and some new bespoke provisions, which address the specific risks posed by home reversions.
The nuts and bolts of the regulation is contained in an expanded MCOB sourcebook, though the proposals also affect other parts of the FSA’s handbook. In drafting the rules, the FSA took as a starting point the existing regime for lifetime mortgages and where the risks are essentially the same a similar approach is proposed. However, some of the unique features of home reversions, notably the fact that they are sale and leaseback arrangements, mean that the FSA has proposed some new provisions to protect the interests of consumers, including the ability to ensure their security of tenure.
As with lifetime mortgages, there is a strong emphasis on disclosure, to help consumers reach informed decisions. The FSA is proposing new Key Features Illustrations (KFIs) for home reversions, together with a new single Initial Disclosure Document (IDD) for those selling both lifetime mortgages and home reversions. The FSA is also, unsurprisingly, attaching a great deal of importance to quality of advice. For example, any home reversion recommended must be suitable both in itself and when compared to lifetime mortgages or other ways of achieving the consumer’s declared financial aims, such as trading down. So in making a recommendation, advisers will need to carefully consider all of a customer’s needs and preferences, including their appetite for risk.
Advisers must also be competent to advise on home reversions. The FSA is proposing that the existing lifetime mortgage examination be expanded into a wider ‘equity release’ examination and the Financial Services Skills Council (FSSC) will be working with the industry to develop appropriate standards for the home reversion component. For those already competent to advise on lifetime mortgages, the FSA is proposing that there should be a top up examination on home reversions schemes.
The FSA will be revising and expanding its leaflet Raising money from your home in readiness for the proposed changes to the equity release and home reversion market. In the meantime, you have until 21 July to make your voice heard.