Sale and rent back regulation - protecting the vulnerable

In the FSA’s recently released quarterly consultation paper, the authority revealed its plans to extend the scope of its regulation of sale and rent back (SRB) contracts.

Debt Management Today spoke to industry experts to find out the perception of SRB companies and how the additional regulation is likely to affect the debt sector in general.

In June 2010, the FSA introduced full regulation of SRB sector, in order to provide a ‘package of measures designed to meet our statutory objectives, including that of consumer protection. Under that regime, persons that entered into regulated SRB agreements by way of business (among other things) required FSA authorisation.’

The loophole in this regulation lay in the fact that firms were only regulated if rent-back was their main business. As a result, the FSA has now revealed it is “concerned that a considerable number of unregulated SRB transactions are happening, which means some homeowners are still exposed to the same potential detriment identified by the 2008 OFT report.”

So what exactly is SRB?

Sale and rent back agreements involve companies that offer to buy the homes of those struggling with debt, who need equity quickly. The companies, who buy the homes at significantly less than the market value, then pledge to rent the houses back to the original homeowner.

Lee Schofield, Broker Account Manager at Ashley Park Debt Solutions, explained: “Usually when a client contacts us for help after going down the sale and rent back route you find that whilst they have settled their secured debts out of the sale of the house they have not been able to settle their unsecured finances in full and as such are still struggling with their commitments each month.”

Whilst SRB can seem attractive due to the fact it lets a client access equity quickly, while ultimately allowing them to remain in their own home, the sector is in need of transparent regulation to ensure that people are not forced out of their homes within a few months of selling.

Matt Smith of Money Debt & Credit Limited highlighted industry fears. “Those people in debt should only consider SRB as a last resort solution. There are other options out there that may suit the debtor’s needs, so it is important that people do their research.

“Individuals have turned to other debt solutions after trying SRB and seeing negative consequences, which is why shopping around and doing the relevant research is so important. It is better to find the right solution the first time around,” he said.

Vance Parsons, Director of debt solution specialist and DEMSA member EuroDebt, commented: “Sale and rent back can be a viable alternative for homeowners facing repossession and struggling with other debt problems. EuroDebt does recommend some clients to see a properly authorised sale and rent back advisor where the circumstances look appropriate alongside a debt solution to deal with their unsecured debt.

“The sale and rent back advisor ensures all risks are clearly signposted to the customer, through FSA literature, during the sales process.

“It is, however, more common to find clients being referred to us where sale and rent back is not viable for the client or in their best interests, but the client has unmanageable debts and requires professional debt advice. As a DEMSA member we follow a strict code of conduct which has been approved by the OFT.”

Craig Bullock, regional debt solutions advisor for EuroDebt, highlighted his own experience with SRB clients. “Over the last few years we have seen increasing numbers of families in extreme debt levels – usually due to unforeseen circumstances, beyond their control, such as unemployment, ill health, loss of income.”

He suggested that in these situations, SRBs can sometimes be valid and useful debt solutions. “They are on the verge of being repossessed, losing their property due to arrears on their mortgage or loans secured against their property, and the perception within the debt solutions industry would be that in these circumstances an SRB is a viable, and often welcome, option to allow them to remain in their family home, regain control of their finances and provide peace of mind going forward,” he said.

Can SRB be used in conjunction with other debt solutions?

Craig Bullock continued: “Clients in this situation almost always have considerable levels of unsecured debt in addition to their secured debts, where they have utilised other forms of borrowing in order to try and keep their properties – and so usually we would provide advice on an appropriate debt solution for their unsecured creditors, allowing them to regain control of their finances, ensure they can maintain the rent payment on the property and their ongoing priority household expenditure.”

Lee Schofield explained that whilst there may be situations where “SRB is the best option for a client, our primary business model is to ensure a client’s assets are retained – the opposite occurs with SRB.

“If we are unable to offer a client assistance through a debt management plan or IVA/Protected Trust Deed and SRB would appear to provide some benefit to them we would always recommend they seek independent legal advice and deal only with regulated firms.”

So what do the new regulations propose?

The FSA believes that some firms are attempting to circumvent the current regulation by claiming they are not carrying out rent-back activities ‘by-way-of-business’.

The regulator has therefore consulted on changing its ‘by-way-of-business’ test – meaning that any firm which carries out even one sale and rent back transaction would need to be FSA authorised. The only exception arises when the individual providing the contract is related to the seller.

Vance Parsons welcomed the new proposals: “Since the FSA implemented the new rules in June 2010, which built on the interim regime from July 1 2009, it has provided clients with greater protection. We welcomed the confirmation of the rules to ensure consumers have a security of tenure for a minimum of five years and that an affordability and appropriateness check was introduced.”

Matt Smith agreed. “The recent news that the FSA is planning to extend the scope of its regulation regarding ‘sale and rent back’ is good news for those consumers who are in debt and may be considering the scheme. Losing a property is a serious matter and vulnerable people in a desperate situation should be protected as much as they can.”

Craig Bullock, commenting on the wider scope of regulation, said that new regulation could only be good news. “Anyone entering into an SRB contract will have the confidence that they are dealing with a reputable company and have assurances that the SRB provider has met the FSA requirements.

“After all, prior to the FSA’s previous regulatory involvement the SRB industry was widely criticised in the media and many unsuspecting individuals and families were left in extremely difficult situation, which the FSA appears to have largely remedied by introducing regulation.”

By Miranda Atty

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