FSA PUBLISHES NEW RULES ON HOME REVERSION AND HOME PURCHASE PLANS

01.01.07

The mortgage regulation regime introduced in 2004 left home reversion plans (HRs) and Ijara home financing arrangements outwith the FSA's regulatory scope. This created potential anomalies in the levels of consumer protection between regulated standard mortgages and lifetime mortgages (LTMs), and unregulated HRs and Ijara home financing arrangements. Like LTMs, HRs are a type of equity release product. Unlike LTMs, they are sale and lease transactions with ownership of the property being transferred at least in part to the lender. Ijara home financing arrangements are one of two Sharia'a compliant methods of buying a home and are also sale and lease arrangements. The other Sharia'a compliant method is the Murabaha, which is already regulated under the Mortgage: Conduct of Business rules ("MCOB").


Following consultation on how these two activities ought to be regulated, the FSA recently published the final form Rules and Guidance which will apply to the sale of HRs and Ijara home financing arrangements from April next year. The Ijara home financing arrangements that are to be regulated are referred to in the new rules as home purchase plans (HPPs). The new rules, which principally involve changes to MCOB, will nevertheless also affect firms active in the standard mortgage or LTM markets. Existing terminology, relevant to firms carrying on standard mortgage business, is changed and some of the new rules for HRs impact on the LTM rules.

Disclosure is viewed as a key method of mitigating at least some of the risks attaching to HRs and HPPs. This note sets out some of the new disclosure requirements. The devil is inevitably in the detail and firms should carefully consider the changes to MCOB.

Home Reversion Plans


To a large extent, the existing LTM Conduct of Business Rules will, where appropriate, apply to HRs.


Financial Promotions

Financial promotions of HRs must be fair, clear and not misleading, should be balanced and must advise the recipient to request a personalised illustration. As with LTMs, cold calling will be forbidden and a home reversion plan must be described as such in any financial promotion.


Initial Disclosure Document (IDD)


A new single equity release IDD covering both HRs and LTMs is created. Firms selling HRs must provide an IDD in this format and firms already providing LTMs - even those who do not offer HRs - will need to change their existing IDDs.


Key Facts Illustration (KFI)


The content requirements of the HR KFI are broadly based on the equivalent LTM requirements, amended to reflect the different nature of the product. Firms providing HRs will need to include in the HR KFI brief statements and warnings on the material risks involving HRs, including a prominent recommendation that the customer seek legal advice on the implications of the product, the effect of the customer wanting or needing to move home, a warning that taking out the HR may affect the customer's tax and welfare benefits, and the repair and maintenance obligations befalling the customer.
In addition to the requirement to include wording regarding the importance of obtaining legal advice in the KFI, before its customer enters into a HR a firm must obtain confirmation of certain matters from the customer's legal adviser. The confirmation must state that the legal adviser he has been instructed to ensure that the customer's rights are protected to a reasonable standard under the plan and that the aspects of the customer's legal rights and obligations under the HR that he needs to understand have been explained to him. A provider will only be able to proceed without such confirmation if it can show that this is not necessary, based on the customer's knowledge, expertise and experience.

Home Purchase Plans


Financial Promotions


A high level principles-based approach is taken to financial promotions. In line with Principle 7 (Communications with clients) a firm approving a financial promotion of an HPP must take reasonable steps to ensure that the financial promotion is clear, fair and not misleading.


Initial Disclosure Document (IDD)


The IDD required for a HPP contains information as to whether the firm provides Islamic law compliant services and includes a warning at the end of the IDD asking the customer to consider carefully the product and services he needs. Firms may only state in the HPP IDD that they provide Islamic services if these have been checked by named Islamic scholars.


Risks and Features Statement (RFS) and Financial Information Statement (FIS)


Given the disproportionate costs for HPP firms to develop a KFI taking into account the size of the HPP market, instead, firms are required to provide customers with both a non-personalised Risks and Features Statement (RFS) and a personalised Financial Information Statement (FIS).
The RFS must set out the features of the product, the risks associated with the HPP and the importance of obtaining independent legal advice.
Before the customer submits an application the firm must provide him with a FIS setting out broadly the same key pieces of financial information as the KFI. An APR need not be quoted but a "pound for pound" comparator must be included. An updated FIS must be included as part of the HPP offer documentation.


Post Sale Disclosure


As part of its post sale confirmation of the HPP arrangement, firms must include a reminder to the customer to check that their interest in the property has been registered. An annual statement of account must also be provided to the customer.

Next Steps


The authorisation process is the next key stage. Unauthorised firms intending to carry on any of the new regulated activities after 6 April 2007 must apply for authorisation. Currently authorised firms must obtain a Variation of Permission. The deadline for interim applications by firms which have been undertaking HR or HPP business on or before 5 November 2006 is 23 March 2007.