The Financial Services Authority (FSA) has proposed an interim regulatory system for SARB followed by a final system at a later date to be confirmed. The interim system is due to commence on the 1 July 2009. Firms operating SARB will be required to hold interim permission. The regulation will also apply to situations where a vendor retains a share in the property.

Some of the main proposals for the interim system are bullet pointed below and we have also added our thoughts as to how they may affect Landlords. We have contacted the FSA with some questions to try and strike a fair balance for Landlords.

Firms to be fit and proper

FSA Proposal:  SARB providers will need to show through their business and management plan that they have, and will continue to hold, adequate capital (current and ongoing) and demonstrate adequate funding (availability and terms).

Affect on Landlord: Landlords are currently disadvantaged as the relevant thresholds are unknown and a turbulent lending environment makes it problematic to satisfy these requirements with lenders reluctant to make either short or long term lending commitments to customers.

Question to the FSA: How can ongoing funding availability be demonstrated where SARB providers apply for finance as each case arises and in a turbulent lending environment? Therefore, it is our view, that the interim regulatory regime should contain concession to Landlords during the current economic climate.

Adopt the FSA principles of business

FSA Proposal: All Landlords will need a good knowledge of how relevant products work and their potential risks. Landlords must also be aware of alternative options in order to adequately assess the needs and circumstances of a vendor.

How it affects a Landlord:  This is the end of simply ‘doing a deal’. Landlords have to be aware of all alternatives available (whether or not these alternatives are offered by them). It will also require knowledge of the consequences that entering into a transaction will have on the vendor i.e. / for example how it may affect housing benefit entitlement.

Our question to the FSA: Is it fair and proper to pass this function (and liability) onto Landlords? Other organisations such as the Citizens Advice Bureau are better placed, truly independent and have the training and ongoing support to perform this function best. The scope of alternatives and consequences is unreasonably wide to place upon a Landlord.

Adopt code of conduct rules

FSA Proposal 1: A property valuer independent of the Landlord may be required which will mean a vendor choosing and instructing the valuer to ensure that the valuer owes the vendor a duty of care.

How it affects a Landlord: This may mean the valuer being instructed by the vendor.

Our question to the FSA:  How will a situation be resolved where the lending bank also need a valuation in order to lend?  It is unlikely whether two surveyors – one by vendor and one for lender- would give exactly the same valuation.

(This is particularly so as many of our clients tell us valuers are currently driving them to distraction!)

FSA Proposal 2: Vendor to be informed pre exchange of: the market value of the property, price to be paid for the property, the minimum period that the customer has a contractual right to remain in the property, the risks to the customer, rent due and circumstances under which any of the above may change.

How it affects a Landlord: Landlords are the best judges of this from their previous experience.

Reporting

FSA Proposal: All regulated firms will need to inform the FSA about the levels of business they do, financial resources and profitability.  Reporting is proposed within three months of obtaining interim permission and 6 monthly thereafter.

How it may affect a Landlord: Business transparency required and onerous reporting and accounting requirements which will attract a cost to meet.

Our question to FSA: These requirements should be revised as they may discourage Landlords from operating in this sector, reduce competition and deprive a vendor of a SARB solution. There is a danger of the regulation being counter productive.

Fees

FSA Proposal: Application, notification and vetting fees for new firms requiring FSA regulation.

How it may affect a Landlord: Application fee is a one off fee of £3000 for SARB providers and £1000 for SARB advisers and arrangers. When a further regulatory system is introduced, yes- you guessed it, a further application will be needed and a further fee payable. The granting of interim permission is no guarantee of obtaining full permission when the final regulatory regime is established and implemented.

Final Tip: The Office of Fair Trading are currently looking at the advertising of SARB providers so ensure your advertising is accurate.

A Silver Lining

The advantages of FSA regulation are that switched on Landlords may see an opportunity to grow their business in this sector. FSA regulation may result in the withdrawal of some Landlords from the sector thus reducing competition and enhancing opportunities for others. It may also reassure vendors and distinguish those Landlords who are regulated by the FSA. If you are an existing SARB provider or wish to enter the sector, we will be happy to guide and advise you through the process and with the preparation of your application to the FSA.

If you would like a copy of our letter to the FSA or to register for further updates should events change please email info@ms-law.co.uk

The FSA Consultation paper can be found at:
www.fsa.gov.uk/pages/Library/Policy/CP/2009/09_06.shtml.

Article written by Paul Gelder and Shimon Rudich.
Email:info@ms-law.co.uk
Telephone: 0161 772 4500
Paul and Shimon are both Partners at M S LAW LLP – the investor’s choice of law firm.