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Sale and rent back review uncovers eye-watering fees
A regulatory review has found sale and rent back firms charged up to £40,000 in fees to clients.
by Michelle McGagh on Aug 01, 2012 at 10:58
The City regulator has revealed more findings from its review into the sale and rent back market, in which it found ‘widespread poor practice’, including high-pressure selling and homeowners being charged fees of up to £40,000.
Under sale and rent back (SRB) agreements homeowners sold their home to a company at a discounted price. It was then rented back to them at a market rate. For many people struggling with debt this seemed like a way to pay off arrears and overdrafts, even if they received thousands of pounds less than the going rate for their property, while remaining in their property.
However, following a review by the Financial Services Authority (FSA) which 'temporarily halted' the SRB market, it has published a report showing the majority of the sales made by SRB firms were either ‘unaffordable or inappropriate’ and would lead to detrimental outcomes for consumers now and in the future.
It reviewed 22 authorised SRB firms, of which nine are still active. Following the review five firms have now stopped doing business and a number are undertaking reviews of past business, which has already seen one firm deferred to enforcement.
SRB firms used ‘high-pressure selling techniques’ to push unsuitable products on customers. The FSA found when assess whether customers could afford SRBs, some firms used ‘what appeared to be unreasonable figures for income and expenditure without supporting evidence’.
‘Firms assessed affordability using only short-term income. For example, one SRB provider did not take into consideration a possible future reduction in income (for example in retirement) and entered into SRB contracts where they knew the contract would be unaffordable at some point during the tenancy,’ said the report.
‘In some cases there was no affordability assessment carried out at all.’
One of the biggest consumer failing of SRBs was the level of charges that were levied for taking out SRB contracts, with some advisers charging ‘thousands of pounds’ in fees. Some charged no fees at all, but this does not mean the contract was free as they were paid by the provider of the SRB.
‘The advising/arranging firms that do not charge fees generally receive commission from the provider. The average commission paid by the providers is 5% of the purchase price, which in most cases is over £4,000,’ said the FSA.
‘Although one firm reported a maximum fee of 5% of the purchase price, there was evidence on file to suggest they had charged clients up to £40,000.’
High charges and poor assessment of people’s needs were only some of the failings the FSA found in the SRB market, it also found:
- Appropriateness and affordability were not assessed properly
- Disclosure of product details was insufficient and not given at the right time
- Record-keeping was inadequate
- SRB agreements contained incorrect information and did not meet the regulator’s requirements for tenancy agreements
- The promotion of SRB was not compliant with the FSA’s rules
- Sales processes did not follow the structure set out in the FSA’s rules
- Customers were not given enough time to consider the SRB
- Training, competence and compliance monitoring were inadequate
One key problem with the sales of SRBs was that no other options were considered for consumers, such as negotiating with mortgage lenders to reduce the debt burden, debt restructuring, open market sale of the property, government benefits, or not selling the property.
SRB firms also omitted to tell customers aged 55 or over about equity release, which shouldn’t be confused with SRB. With equity release the homeowner takes out a loan using their home as collateral which is repaid on their death – with equity release the property remains in the possession of the homeowner.
More about this:
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- Sale and rent back market shut for serious failings
- Watchdog needs to get tough with sale and rentback
- Will new rules stop the sale-and-rent-back cowboys?
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- Mortgage borrowers given protection from ‘unscrupulous’ lenders
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