According to the Office of Fair Trading, some sale-and-rent-back firms cause "serious and permanent harm" to vulnerable homeowners.
"Misleading". "Harmful". And finally: "Unacceptable".
This is how The Office of Fair Trading (OFT) described at least some sale-and-rent-back schemes in a damning report published today.
The report recommends that there should be statutory regulation of the sale-and-rent-back sector by the Financial Services Authority (FSA) - a measure that, here at The Fool, we have been calling for since January.
Back then, I conducted an undercover investigation to reveal how vulnerable homeowners facing repossession are often misled into selling their homes and renting them back. They are told by sale-and-rent-back firms they will be able to stay in the property for "as long as [they] want to", but in fact are only offered 12-month tenancy agreements or less.
The OFT's investigation echoes The Fool's, confirming that:
- Some sale-and-rent back firms mislead customers about the security they have as tenants, claiming they will be able to stay in the property for years -when in reality the tenancy is typically only guaranteed for six to 12 months.
- Some sale-and-rent back firms may also mislead customers about the value of their property (as The Fool identified in Two Myths Your Shouldn't Believe)
The OFT also found that:
- Some firms impose substantial rent increases or even evict tenant after a short tenancy period.
- Some tenants are evicted because they cannot afford the agreed rent, which suggests staying in their property was not sustainable in the first place.
- Firms have the potential to cause "serious and permanent harm" to vulnerable homeowners. "The unfamiliar and highly pressurised situations that these people find themselves in may leave them particularly vulnerable to misleading statements or valuations from sale-and-rent-back firms looking to make a deal," the report said.
Recommendations
To try to address these problems and clean up the industry, the OFT wants the FSA to begin regulating sale-and-rent-back firms. Specifically, it recommends that:
1) There should be an obligation on sale-and-rent-back firms to be more transparent about the initial valuation and sale price, the terms of the tenancy and the amount of rent to paid.
2) In particular, firms must offer forms of tenancy that match the assurances they give to customers.
3) There should be a requirement on firms to tell customers about the free, independent advice available to them before they decide to sell.
The OFT also suggests regulation may also require firms who fail to honour their commitments to offer redress to consumers. It adds that "recommending statutory regulation is not something we do lightly or often, however in this case we consider it necessary to put a stop to the unacceptable behaviour of some sale-and-rent-back operators and to ensure consumers are better protected".
Reaction to the report
For the past 10 months, here at The Fool, we have been writing about the dangers of these schemes. Upon request, we gave the OFT details of our investigation on this.
So I am very pleased to see that the OFT has agreed that these schemes need to be regulated, and that - in particular - firms must be more transparent and honest about the length of the tenancy agreements that tenants are offered. Hats off to the OFT for recommending this, hopefully it will help a lot of people.
Similarly, the crackdown on valuations of properties and the requirement that firms should tell customers about the independent legal advice they can get is crucial. Most homeowners do not receive an independent valuation of their property - indeed, sometimes the firms do not even bother to send surveyors round, and simply base their offer on information you give them over the phone.
Transparency is also definitely a step in the right direction. Tenants typically lose the right to live in their home if the landlord defaults on the mortgage, but this is something I have rarely seen explained in the literature from sale-and-rent-back firms. Homeowners need to be fully aware of the risks that they are taking, before they sign on the bottom line.
Similarly, I wholeheartedly support the OFT's suggestion that firms who renege on their promises should pay compensation. This is long overdue.
The next step?
Of course, none of these recommendations mean anything until they are put into law. I would like to see the Government announce legislation on this as soon as possible.
I should add that, at the end of the day, there is nothing inherently wrong with the concept of a sale-and-rent-back scheme. It is the way that at least some operators of these schemes lie to and mislead their customers that I deeply object to. I just hope that no more people suffer before the Government decides to step in.
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