Equity release providers have praised the Financial Services Authority for its proposals to regulate sale and rent back (SRB) schemes.
SRB schemes are usually taken up by home owners who are struggling with mortgage arrears or other debts, and involve them selling their home to at a discount price and renting it back for a set period – usually through an assured short hold tenancy of six months to a year.
However, unlike other schemes that allow home owners to release equity from their properties like equity release and home reversion schemes, SRB is currently not regulated.
And, according to an SRB study by the Office of Fair Trading last year, this lack of regulation means that many consumers are entering into sale and rent back transactions when it might not be the best option for them.
The OFT study found that many SRB companies were misleading their customers about the value of their home and tenancy, while others were imposing substantial rent increases or even evicting tenants after a short tenancy period.
It is in light of the OFT’s findings, that the FSA has published a consultation paper proposing and two staged regulation process for the SRB market.
"We believe the issues identified by the OFT warrant a fast response, which is why we are seeking to bring in an interim regime this summer designed to ensure fairer treatment of customers as soon as possible, including the right to redress. We will then develop a more comprehensive regime to come in from next year," explained Dan Waters, FSA director of retail policy.
The move has been welcomed by equity release providers who argue that equity release and SRB schemes are often confused by the public, which has in turn created an unwarranted negative press for equity release.
"To avoid confusion, there are two main clear differences between regulated equity release plans provided by SHIP members and sale and rent back schemes," explains Andrea Rozario, Director General, Safe Home Income Plans (SHIP).
"The two main differences consumers should take note of are security of tenure; all regulated equity release products provided by SHIP members give the customer the right to live in their homes for life, and no monthly rent; the plans provided by SHIP members do not require regular monthly payment from customers."
Ms Rozario says the concern held by SHIP members has always been the lack of information given to customers about the risks associated with sale and rent back and says regulation will address this issue as providers will be required to be clear about the risks involved.
"SHIP has publicly argued for Government adoption of regulation on sale and rent back schemes over the past year and whilst it is likely that there will be increasing numbers of customers who will want to tap into the equity in their home, for various reasons, it is essential that people are aware of all of their options and the risks associated with whichever path they choose," she said.
Dean Mirfin, director of equity release specialist Key Retirement Solutions has calls the requested regulation of the sale and rent back sector "welcome news for consumers" and reminds homeowners that sale and rent back is not the only answer for those looking to raise some extra cash.
While the newly formed Equity Release Solicitors' Alliance (ERSA) also applauds the FSA. Claire Barker, Chairman, ERSA commented: "We anticipate that this regulation paves the way for a bright future for consumers who are looking for ways to make the most of the equity in their home; this regulation could, if providers step up to the mark, provide them with a plethora of new and safe options."
Peter Tutton, Social policy officer at Citizens Advice – which has been calling for regulation of sale and rent back agreements for the last 18 months – says regulation will help increase consumer confidence.
"We continue to see cases of very severe problems connected to sale and rent back agreements. The consequences when things go wrong can mean people losing both their homes and substantial sums of money," he said.
"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."
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