Clause 1 - Financial Services and Markets Act 2000: regulated activities

Regulation of Financial Services (Land Transactions) Bill – in a Public Bill Committee at 10:30 am on 5 July 2005.

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Photo of Mark Field Mark Field Shadow Financial Secretary 10:30, 5 July 2005

I beg to move amendment No. 2, in page 2, line 6, at end add—

'(4) The provisions of this paragraph apply only where the property (or the relevant part of it subject to a finance arrangement under this Act) is valued at no less than £50,000.'.  

It is a pleasure to lead on behalf of the Opposition on this legislation, which, as I have mentioned, enjoys widespread support in the House.

The hon. Member for Richmond Park may or may not be a great fan of songs of the 1960s, but I am. The Tremeloes were great; they sang ''Silence is golden''. Notwithstanding the fact that silence is golden, perhaps she will sing other songs that involve a few words. I hope that there will be songs with a few lyrics during our proceedings.

On a serious point, I am acutely aware that this outbreak of apparent unanimity across the political divide makes scrutiny of the Bill, however brief, all the more important. It is a remarkably short Bill. Strictly speaking, it is two clauses long, but as the Minister will be aware, a princely 50 per cent. of that two-clause total deals with the administrative matter of its short title and commencement. There has therefore been relatively little scope for tabling amendments—or so I thought. In fairness, the two in my name and those of my hon. Friends were tabled as probing amendments.

Although I should quite properly avoid covering similar ground to that addressed on Second Reading 12 days ago, I wanted to pick up on some of the points raised in my speech and in those of other Members on that occasion. Equity release may not be an issue to thrill the heart. I suspect that there are somewhat sexier issues to debate in the House, such as the Pharmaceutical Labelling (Warning of Cognitive Function Impairment) Bill to be debated under the ten-minute rule this afternoon. Nevertheless, like its not so distant cousin, personal pension reform, this issue—I mean equity release, rather than cognitive function impairment, Mr.Caton—will be of direct relevance to the lives of thousands and, in the decades ahead, to the lives of tens of thousands, in every one of our constituencies.

We rush ahead with this legislation at our peril. We have at this juncture the opportunity to step back, having agreed the matter in principle, to ensure that the Bill that we are putting on the statute book will satisfy three main tests: robustness, flexibility and innovation. By the end of 2003, there were 69,000 lifetime mortgages—or equity release schemes—which stood at a value of £2.85 billion, and a further £1.2 billion-worth of equity release schemes were taken out last year. Their growing popularity hinges on a number of reasons, including the massive increase in the value of residential property. The average price of a home in the UK was just £4,600 as recently as 1969, compared with £150,000 and rising today. In addition, inadequate pensions and returns from savings and investments mean that bricks and mortar are not only regarded as the best savings investment, but provide an opportunity to derive an income, particularly in later life.

I turn to amendment No. 2. Now is a perfect moment for us to analyse whether it would be sensible to introduce a de minimis provision. In essence we have two main concerns with the Bill. The first is that the sheer cost to consumers will result in relatively little financial gain if the aggregate equity released is less than £50,000 from the sale or part-sale. I accept   that we are plucking a figure from the sky, but it seems a sensible one to use.

Secondly, the overwhelming regulatory burden involved in releasing smaller sums might make this legislation unworkable as a practical proposition in relation to those small sums. In particular, many of the more reputable intermediaries in the mortgage and equity release field might be dissuaded from engaging in transactions releasing less than a given capital sum if the cost of regulation makes it uneconomic. If the effect of not having a de minimis provision such as the one proposed will be to diminish consumer choice, especially at that lower end of the market, and leave the market in the hands of less reputable intermediaries, it would surely be better to agree to a threshold and thereby enable a more cost-effective approach to smaller transactions.

We hope that increased consumer choice will drive up standards in that less lucrative corner of the market. That would also go some way to addressing a number of the concerns that were raised during consultation about Islamic mortgages. The Treasury recognised in its consultation paper that a murabaha arrangement fell within the definition of a regulated mortgage, but the proposal to bring ijara home finance arrangements under the definition was subject to more controversy. The vast majority of consultees believed that ijara products should be regulated in order to provide a level playing field in the market for that and other sharia-compliant home purchase products, which the FSA has already regulated. The de minimis provision is designed to enhance competition in that otherwise relatively less lucrative market.

I represent a central London seat, and it is important to bear in mind that house prices in London and the south-east are going through the roof. However, that is not the case in constituencies in the north-west of England and others perhaps not too far from the Minister's. There are still a considerable number of properties valued at less than £50,000. One must also remember that the legislation will apply not only to full sales, but to part sales, in terms of releasing equity. As a result, many ijara financing products might, for the want of a de minimis provision, fall outside the Bill, which would allow a broader range of intermediaries into the market who would not be forced to comply with an overly stringent and expensive set of regulations.

I hope that my remarks will induce a short debate. More importantly, even if the Government are disinclined to accept our amendment, I hope that there will at least be some thinking in the years ahead to ensure that that perhaps stickier part of the market will not be disadvantaged by the fact that far fewer intermediaries might be involved.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I congratulate the hon. Gentleman on the usual temperate way in which he presented the case for the amendment. As for The Tremeloes, my grandfather was a great fan. I always thought that there was something about the hon. Gentleman that I liked, and to hear that he is a Bury supporter is really good news. However, I am a little disappointed that he defines the north-west almost as a place where we still   wear clogs and cloth caps. He obviously needs to make more regular visits to Gigg Lane.

This is a reasonable debate to stimulate and the hon. Gentleman raised a number of substantive issues. The Bill is short and I should like to put it into context before dealing directly with the amendment. Buying a home reversion plan is a huge financial decision, often involving people's most important—and sometimes only—significant financial asset. Such schemes are generally sold to the over–60s and provide a valuable means for cash-poor pensioners to realise some of the value locked up in their homes and improve their standard of living.

Such products are not simple to understand, however. Realising a cash lump sum or income via equity release can have complex implications for a pensioner's tax and benefit situation. Hence there is a need—the Opposition have agreed—for regulation to ensure that potential purchasers of equity release schemes receive an appropriate level of advice. As the hon. Gentleman said, the Bill is designed to facilitate Financial Services Authority regulation of such plans, which will help people to make informed choices, offer valuable consumer protection and ensure a level playing field in the equity release market, most of which already falls within the scope of FSA mortgage regulation.

As the hon. Gentleman has said, another important element of the Bill is that it will ensure that Muslim consumers or others who are uncomfortable about taking out interest-bearing loans can access the growing market in sharia-compliant home finance products, while benefiting from the protections afforded by FSA regulations. In response to consultation, the Bill has also been drafted to allow for the possibility of future regulation of flexible tenure products. Those are products that allow people to buy and sell equity shares in their house, should that at some stage be thought necessary and desirable.

The Bill has been introduced to meet the needs of consumers. Interestingly, it has also been introduced at the behest of industry, which welcomes the news that the Government are to legislate to level the regulatory playing field in the area. Jon King, who is the chairman of Safe Home Income Plans—the membership of which covers much of the home reversion market—has gone on record as saying of the Bill:

''I'm delighted this has come so soon. People should now feel safe that these schemes are worth considering. Regulation means that people will be compensated if sold the wrong plan.''

He was quoted as saying that in the Financial Times on 17 May 2005. Therefore, there is agreement that the Bill is both useful and important and is worthy of support from Members of all parties.

In response to the hon. Gentleman's amendment, which, as he accepts, is a probing amendment, I will try to explain by offering him some assurances why we want him to feel able to withdraw it. The Government do not believe that it is appropriate to set a de minimis   threshold for the regulation of home reversion plans and ijara home finance products. The reason for that is, primarily, that there is a risk that less scrupulous providers might exploit that threshold by offering multiple loans to the same borrower, each at just under the de minimis threshold. The risk to the consumer of that cumulative borrowing would be no different from the risk attached to a single plan for more than £50,000. It would also, of course, create a potential distortion in the market.

It is also important to say something that I have mentioned to the hon. Gentleman privately. During the comprehensive consultation exercise, one of the issues considered was whether a de minimis threshold was appropriate. In fact, those who responded to the consultation were unanimous in saying that there should not be such a threshold on the value of the reversions carried out. So, the unanimous view of those who responded to the consultation was that, although such a provision was worthy of consideration, on balance the outcome was not desirable.

I hope that I have gone some way to reassuring the hon. Gentleman that we seriously considered the proposal that he and his hon. Friends made. I also hope that I have explained why, at this stage, the amendment would be neither a desirable nor an appropriate outcome. On that basis, I ask the hon. Gentleman to withdraw the amendment.

Photo of Mark Field Mark Field Shadow Financial Secretary 10:45, 5 July 2005

It is important to stress that not only pensioners but middle-aged folk are looking to release some of the equity in their home, in order to allow their children to get a foothold on the otherwise increasingly elusive property ladder, and will therefore benefit from home reversion and equity release plans. As I mentioned on Second Reading, that is a positive development. I suspect that, in the years and perhaps decades ahead, that area will grow.

I am happy to withdraw our amendment. I am reassured by what the Minister said. I accept that there was a comprehensive consultation exercise throughout the industry. I must confess that it is a matter of some concern that unscrupulous lenders might utilise the cumulative borrowing arrangements, but that is almost an inevitable part of any de minimis provision. However, there could be serious implications; let us see how the area develops in the years ahead.

My concern is that the increasing burden of regulation, and its sheer cost, may dissuade some of the bigger operators from entering the market at anything below a particular level and that there may, in a sense, be a de facto de minimis provision, which would be regrettable. Let us see how that goes. I am reassured by the Minister's words. On that basis, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Mark Field Mark Field Shadow Financial Secretary

I beg to move amendment No. 3, in page 2, line 6, at end add

'(2) In Part 2 of Schedule 2 to that Act, after paragraph 26 there is inserted—

''Parliamentary monitoring  

26A On the second anniversary of the coming into force of paragraph 23A and annually thereafter the Chancellor of the Exchequer shall lay before Parliament a regulatory impact assessment of the operation of the provisions of that paragraph.''.'.

The amendment would secure more adequate parliamentary scrutiny of the Bill and, once in place, of the Act. We expressed concerns on Second Reading as to the overall role of the Financial Services Authority. The Prime Minister's unexpectedly candid, off-the-cuff comments in the immediate aftermath of the general election have, of course, raised the temperature on the issue. In his words, the FSA is a potential ''inhibitor to business''. That view contrasts with the Chancellor of the Exchequer's more complacent attitude that this super-regulator, the brainchild of his own time at the Treasury, is a beacon of financial services to the world beyond these shores.

Although it would be wrong, albeit a little tempting. for me to intrude on that private Government grief, it is sensible to analyse the role of the FSA. I shall not go into great detail, but I hope to tease from the Government today what role the FSA is likely to continue to play in equity release. These products are innovative by nature, but they will also need to be flexible in a fast-changing market. That will be a classic test of the FSA's role in a modern, global, financial world.

We believe that the regulatory framework must give legitimate protection to the consumer, and that there should be a fundamental objective of regulation in the UK. In short, we are determined comprehensively to protect investors, savers and homeowners from the mis-selling of financial services and products. As I mentioned on Second Reading, however, it is of key importance that competition and competitiveness take their place at the heart of the FSA's remit. We have made it clear that institutional business—professional to professional—should require only prudential oversight. Similarly, high-net worth individual private client business in general should be regulated with a lighter touch. That could apply at the margins to some of the equity release schemes that are being envisaged today.

In that context, I shall discuss the concerns expressed on Second Reading on the Floor of the House about the sheer costs of this procedure. Even the Treasury's regulatory impact assessment calculates that the measure will cost £11 million immediately, and will have an ongoing annual cost of £5 million to the taxpayer. That might seem to be an unwarrantedly expensive price to pay, and we would be grateful for some guidance as to how those figures were arrived at. Perhaps that is what the Prime Minister had in mind when he issued his broadside against the FSA.

The amendment would simply place on the Treasury a commitment to review the operation of the legislation. We firmly believe that an extension in the power of the regulator must go hand in hand with proper scrutiny of any unintended consequences. The very lightest touch in consumer protection and market regulation must be maintained, if at all possible.

We want to encourage both flexibility for intermediary and consumer alike and product   innovation in what I suspect will be a very fast developing area. Ideally, we want the Treasury to produce a written regulatory assessment within two years of the Bill coming into force, and annually thereafter.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

The last person to ask me about my view of the FSA was a gentleman with whom members of the Committee will be familiar. I met him on my first visit to the City to give a speech; he was Mr. Howard Flight. He asked me my view of the FSA, I offered to assist him with his unfair dismissal claim, and he responded appropriately.

It is important to get the balance right. The first thing to say about the FSA is that it is recognised globally as an excellent regulator of its kind, and as one of the best regulators in the world both in its establishment and in the principles that guide it. In many ways, it helps to make this country one of the best places in which to do business with the financial services sector. Having said that, we expect it to play its full part in fulfilling the requirements of the Government's better regulation agenda. By implication, the FSA is not perfect, but then no regulator is, and it should constantly review the appropriate balance of regulation that it seeks to introduce by continuing a dialogue with those who are regulated. I know for a fact that the chairman of the FSA is committed to ensuring that the better regulation agenda applies fully to it.

I see no contradiction in saying both that we can be proud of the fact that we have created possibly the best regulatory framework of its type in the world, and in the context of the better regulation agenda that no organisation is immune from the need constantly to examine its practices. Organisations should do so to make sure that they introduce and impose regulation in a way that is appropriate, balanced, equitable and does not inappropriately get in the way of companies doing perfectly acceptable and desirable business. Striking that balance is always exceptionally important.

Photo of David Gauke David Gauke Conservative, South West Hertfordshire

Does the Minister accept the Prime Minister's description of the FSA as being perceived as inhibiting innovation in the financial services sector?

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

There are some in the financial services sector who undoubtedly perceive the FSA in that light, but sectors that are regulated rarely have a love-in with the organisation established to regulate them. That is the nature of a dynamic relationship. Of course, the Prime Minister did not make a blanket judgment about the FSA; he said that there is a perception in the financial services sector that, on occasions, the FSA behaves in the way that the hon. Gentleman mentioned. That perception is undeniable, but the question is whether that view is fair and proportionate.

Undoubtedly, there will be occasions when the industry feels that the FSA has behaved in a way that is undesirable and not acceptable. In those circumstances, the FSA chairman, the FSA chief executive officer and the board need to examine seriously the grievances articulated by those in the financial services sector. If those grievances have   validity, they should respond sensitively and appropriately. Equally, as we know from our deliberations on the Finance Bill, when we close loopholes to do with tax evasion, for example, many people complain that we are stifling growth and innovation, when actually we are putting a stop to bad practice.

Some will always try to portray regulation as a negative thing, but we know that the FSA was established for a purpose. Frankly, we had a history in this country of mis-selling products and leaving consumers in awful circumstances. When we came into government, it was absolutely essential that we put in place a regulatory framework that had credibility, and that we sought to ensure that, in future, we minimised the risk of some of the scandals that had occurred happening again. We can never totally eliminate risk, and doing so should not be the aim of good regulation, but the Government and the regulators that we establish certainly have a responsibility to minimise risk wherever possible, to protect the integrity of—in this case—the financial services market, and to look after and protect the interests of consumers who enter into transactions on the basis that they are receiving the best possible advice.

We should have a mature debate about appropriate regulation in this country. Unfortunately, one can always use extremes to justify an extreme position, although most regulation—and certainly that emanating from the Financial Services Authority—is sensible and proportionate. However, there will be occasions when the industry has justifiable grievances, and my message, which I relayed recently to the FSA board, is not to be defensive and insecure about that. If the industry is telling the board that, in certain circumstances, there are genuine issues and problems, the FSA should respond appropriately. We must have balance when we talk about regulation generally and the FSA and its willingness to engage positively in our better regulation agenda. The Chancellor championed that agenda, and made it clear that he expects it to be an important part of our third term.

To respond to the comments and amendment of the hon. Member for Cities of London and Westminster, I have said that I have sympathy with the importance of regulation remaining proportionate. However, to demand annual impact assessments along the lines implied by the amendment would create additional burdens for the businesses that would ultimately have to supply figures on costs. Without adding any protections in respect of the proportionality of costs above and beyond those that already exist under the Financial Services and Markets Act 2000, it is important to clarify the FSA's accountability in respect of the objectives of the amendment.

The FSA is obliged under the 2000 Act to ensure that regulation for which it is responsible is proportionate and takes into account the effects on competition, innovation and international competitiveness. Therefore, should the Bill pass successfully through the House, the FSA will be   obliged to consult publicly on the detailed rules that it intends to apply to home reversion plans and ijara home finance products. The consultation would automatically include a full cost-benefit analysis.

The hon. Gentleman might argue that the amendment is important in order to hold the FSA to account, and to ensure that it continues to keep proportionality in mind over time. I would respond by reminding him of the clear and transparent ways in which the Financial Services Authority is already accountable. By law, its rules must be scrutinised by practitioner consumer and small practitioner panels and by the Office of Fair Trading, in addition to being subject to public consultation and cost-benefit analysis. Furthermore the FSA's annual report is subject to parliamentary scrutiny and must set out how the FSA has met its statutory objectives and principles of good regulation throughout each year.

Those principles include the requirement to ensure—always—that the costs of regulation are proportionate. As I said in my remarks about the general role of the FSA, it constantly reviews and reassesses the burden that regulation places on industry and, where appropriate, it should and will take action to streamline costs. It is important to understand that regulation by the FSA is not static, but a dynamic process that involves ongoing dialogue with industry and consumer stakeholders to ensure that regulation is doing the job that it was designed to do, at proportionate cost.

Having explained what I believe to be central to the FSA's raison d'être, the tying-in of a requirement for a regular full regulatory impact assessment would seem unintentionally to impose yet more burdens and administration on industry and would not, in the long term, achieve the hon. Gentleman's objective of protecting it from the impact of regulation. To take the Bill in isolation—out of the context of the FSA and the fact that it is obliged by law constantly to review the impact of regulation—would be a retrograde step. Ironically, I do not believe that it would be welcomed by the companies involved in selling the products. Having heard my explanation of the legal responsibilities of the FSA and the way in which it has to conduct itself in circumstances such as these, I hope that the hon. Gentleman will consider withdrawing the amendment.

Photo of Susan Kramer Susan Kramer Shadow Minister, Treasury, Shadow Spokesperson (Business, Innovation and Skills), Liberal Democrat Spokesperson (Business, Innovation and Skills) 11:00, 5 July 2005

I hope that the Minister will send the excellent advice that he gave about mature debate to the Prime Minister before the Prime Minister makes any further remarks about the FSA and regulation. It was sound, if lengthy, advice.

The Bill is very much welcomed by my party. When I consider the circumstances of my constituents, I realise that equity reversion is going to be one of the mechanisms that will allow older people to continue to live in the constituency, where the rising cost of living and of house prices is pressurising people to downsize even if they do not really wish to do so. Otherwise, we would be left with a poorer, more ghettoised community.

We also have a growing Islamic population—and a younger one—that is looking for the kind of   regulation on ijara financing that they would expect to find on any other kind of financial product. There is the potential for shared equity schemes and for those to go beyond local authorities and registered social landlords, and therefore the need for regulation. There is the opportunity for shared equity to become a much more developed approach in an area of high housing prices such as ours. Again, that would expand the range of people so that we can continue to look at our community as a place to live and thrive. For us as a community, the issue is exceedingly important.

The questions that have been raised—in a sense, the amendment begins to probe these issues, which is why I am on my feet—were not adequately answered on Second Reading and this might be an opportunity for the Minister to respond to them. When my hon. Friend the Member for Twickenham asked when the new regulation would come into effect, the response from the Chief Secretary to the Treasury was ''with appropriate haste.'' I am afraid that, to some of us, that means either, ''Don't know,'' or, ''very slowly''. This seems to be an opportunity to respond to that or else to ensure that a review, within one or two years, creates pressure on the timetable.

A second question, which was raised by my hon. Friend and mentioned again by the hon. Member for Cities of London and Westminster, relates to the cost of the project. The figures of £11 million initially and £5 million on an ongoing basis were included in the discussion, but the Chief Secretary to the Treasury used the phrase,

''it is extremely difficult to gauge ongoing costs''.

That would seem to make the requirement to set up a review and a detailed assessment of the whole project both timely and essential.

Lastly, my hon. Friend asked whether it was the intention to build into consumer protection the provision of independent legal advice. That is important to ensure that consumers can appropriately take advantage of the products that are now being offered and that will be regulated by the FSA. The Chief Secretary to the Treasury replied that that

''is a matter for the FSA.''—[Official Report, 23 June 2005; Vol. 435, c. 998–992.]

He could give no comfort on that issue. That is another response that suggests that ongoing scrutiny will be crucial.

Photo of Ivan Lewis Ivan Lewis The Economic Secretary to the Treasury

I will not take the hon. Lady's advice about sending the Prime Minister a memo advising him on his future speeches. That would not be a particularly good career move. I suggest that she should not send her leader those kind of memos either.

To be serious, the hon. Lady raises a number of points. The first is about timing. Hon. Members cannot have it both ways. In debates such as this, they quite rightly say, ''You need to ensure that you get this right.'' That must be the priority, but once the legislation is passed, there will be an appropriate and proper consultation process, and when that process has arrived at a final conclusion—obviously, as quickly as possible—the regulations will be issued.   So, I do not make any apologies for ensuring that the consultation process is handled properly.

The hon. Lady also asked about legal advice. The Chief Secretary's response was right. The FSA will determine the advice rules that govern measures in relation to these products. It is not for Ministers on their feet in a Committee such as this to establish those rules; Parliament has set up the FSA to make such judgments.

The hon. Lady also raises the question of cost and I will help her with that inquiry. The costings in the published RIA remain estimates. The reason for that is that they are derived from figures published by the FSA in relation to the existing mortgage regime. They are based on future projections of market size, which have left considerable room for dynamic market growth. The precise nature of the regime that will apply to home reversion plans and ijara products will not be finalised until the FSA has consulted on the detailed rules. That is the reason why the calculations are basically estimates.

I say again to the hon. Lady that the Financial Services Authority is obliged as a matter of course to keep all such measures under constant review with regard to proportionality. That is central to the responsibilities that Parliament laid on the FSA. Therefore, it would make little sense to isolate individual measures, such as the ones in the Bill, and insist that they are subject to annual parliamentary scrutiny. As I said in response to the hon. Member for Cities of London and Westminster, ironically, the prohibitive cost of the sort of approach that seeks to minimise the cost of regulation would have a perverse effect. On that basis, I ask the hon. Gentleman to withdraw the amendment.

Photo of Mark Field Mark Field Shadow Financial Secretary

No one would dispute the fact that the role of any regulator should be to put a stop to that practice, as the Minister said. He is also right to say that we cannot eliminate risk, and in a fast-changing world that should not be a goal of the FSA. Elimination as opposed to minimisation of risk would obviously be prohibitively expensive and wrap a lot of red tape around anyone in that field. However, it is right that, increasingly, and particularly in this area, competition, innovation and international competitiveness are at the heart of the FSA's remit. The Minister mentions that the FSA has an annual report. I hope that there may be an opportunity to include a specific paragraph on the workings of this issue, and other new legislation may provide an opportunity to achieve much of what we sought to achieve through this probing amendment. Whereas the FSA may be the best regulator of its type, there is a sense that we need to have an eye on what is a fast-changing world.

I have been reassured by the debate that we can move forward. As the Minister rightly says, rarely can there be a love-in with regulators. I shall return to the musical analogy for a final moment or two, if I may, because the Minister was born in 1967, the year that the Tremeloes went to No. 1 with ''Silence is Golden''. I perhaps ought to say that the title of their follow-up single ought to be a motto for my party; it was called   ''Even The Bad Times Are Good''. On that cheery note, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 1 ordered to stand part of the Bill.  

Clause 2 ordered to stand part of the Bill.

Bill to be reported, without amendment.

Committee rose at thirteen minutes past Eleven o'clock.