Watch out for this massive scam

The watchdog knows all about this massive scam, but it's still doing nothing about it. John Fitzsimons asks: why not?

The adverts are everywhere, from the classified sections of the tabloids to the commercial breaks of daytime television shows. "Are you in debt? Sell your home, but continue living there as long as you want!"

Sounds too good to be true doesn't it? That's because on the whole, it is.

Unfortunately, the vast majority of the firms offering these 'sale-and-rent-back' services are sharks, preying on extremely vulnerable people, making a fast buck out of them and then kicking them out onto the street. Read our undercover report into the industry to find out more.

Following on from reports like ours and lobbying by pressure groups like Shelter and Citizens Advice, the Financial Services Authority (FSA) has been instructed to step in to regulate the sector from today, 1 July.

How does sale-and-rent-back work?

First, let's have a look at how the schemes work - in theory anyway.

If you are in financial difficulty, and most likely facing the threat of repossession, then sale-and-rent-back firms will offer to help you. They'll buy your home (almost always at a massive discount), but allow you to stay in the property as a tenant, paying rent each month.

So you get to raise funds quickly to meet your debts, reduce your outgoings (as chances are the rent is less than your current mortgage payments) and yet have the security of staying in your property for a lengthy term.

All good so far....

Liars, con artists and thieves

The trouble is, many of the firms offer no such security at all.

A study last year by the Office of Fair Trading found a vast number of problems with the business practices employed by some sale and rent back providers.

The report accused firms of deliberately misleading customers about the value of their home, and of how secure they were as tenants. This typically involved telling customers they could stay in the property "as long as they want", when in reality the tenancy is guaranteed for no longer than a year (something we revealed back in January 2008).

The Office of Fair Trading also found examples of firms imposing 'substantial' rent increases on tenants after the deal, or even just evicting them.

Since the report was published, 16 sale and rent back firms have been ordered to explain and justify the claims made in their adverts by the Office of Fair Trading.

As we were one of the first media websites to expose the dishonesty many firms employ to entice customers, we are particularly happy to see the Office of Fair Trading and the FSA finally taking steps to crackdown on this awful practice.

Regulation the answer?

So now we can all relax, right? After all, the FSA has done such a marvellous job of regulating all the banks over the past couple of years, there's nothing to worry about.... is there?

Let's delve a little deeper into what exactly the FSA will be doing to regulate this industry.

Firstly, there's only going to be an 'interim' system of regulation at the moment. Full regulation will only begin in June 2010. Yes, you read that right. 2010. An entire year away.

The FSA has said that it will use the interim regulation period to 'deal with the most immediate problems for consumers'. What a cop-out. The whole reason the FSA was instructed to take sale-and-rent-back under its wing is because it's a big problem for homeowners NOW.

It's right now, today, that mortgage borrowers are struggling and looking for a solution, and therefore are vulnerable to one of the dodgy outfits operating in this market. Full regulation in a year is a year too late.

In the interim

But for now, interim regulation is all we have. So just what exactly does this mean for homeowners?

The FSA has published a policy statement (PDF) on its website, which you won't be surprised to hear is not the most useful document in the world, outlining what interim regulation means.

First up, it has promised to revise the content on its consumer website, Moneymadeclear, to improve the explanations of what sale and rent back is. Great.

It has also published a "near-final" list of rules, which are vagueness personified.

Here's an example, rule 2.6A.8: "A firm must pay due regard to the interests of its customer and treat him fairly when drafting, amending the terms of, or imposing obligations or exercising rights or discretions under, a home purchase plan, or home reversion plan or regulated sale and rent back agreement."

So the rule is that the customer must be treated fairly. But what constitutes fairness?

Well, according to the policy document, when dealing with a policy termination a firm is 'unlikely' to be treating the customer fairly if "the grounds on which it may terminate all or part of a plan or agreement are unduly wide, or on which a customer may terminate are unduly narrow".

Well, that's put my mind at rest.

In fairness to the FSA, there are some slightly more sensible inclusions in the rules, which demand complete openness from the providers.

But rather than explicitly prohibiting some of the shadier practices employed by these firms, it merely requires them to be open about them, which is a funny sort of progress in my view.

Steer well clear

As a result of the FSA completely fudging the issue, my advice would still be to avoid entering a sale-and-rent-back agreement, whatever your circumstances. You will be leaving yourself wide open to be ripped off if you do. Look at other options such as moving to an interest-only mortgage, to reduce your monthly outgoings, taking a repayment holiday, contacting a free debt charity advisor, seeking Government help or selling at auction.

Unfortunately, there are still a number of cowboys and sharks operating in the sale-and-rent-back market, and chances are - in its current toothless form - it will take the FSA a while to properly weed them out.

Here's hoping they get their act together sooner rather than later!

More: How to buy a repossessed property | A Dangerous Way To Get Out Of Debt