Rent schemes are leaving people homeless

'Sale and rent back' targets the vulnerable, claims a housing charity.

Unregulated firms offering sale-and-rent -back deals which exploit vulnerable homeowners are operating illegally, the housing charity Shelter has warned.

It says new regulations aimed at banishing the rogue firms have failed to curb their activities. The warning comes at a time when increasing numbers of borrowers in arrears are desperately looking for any way possible to stay in their homes.

Sale-and-rent-back schemes are usually taken out by people in financial difficulties who are looking to raise significant amounts of money quickly, often to stave off repossession. Under the schemes, they sell their home, often at a large discount to the market value, but stay in the property as a tenant.

However, many people have then been left homeless by unscrupulous firms who have evicted them or increased the rent sharply without warning.

In addition, many sale- and-rent-back firms have historically only acted as agents, and if the eventual owner of the property possibly a buy-to-let landlord goes bust, the tenants face eviction.

After campaigns from a number of charities and pressure groups, the government last year called on the Office of Fair Trading (OFT) to investigate the worrying growth of this activity. The OFT's scathing report persuaded the government that the market should be regulated by the Financial Services Authority.

In the face of rapidly increasing repossessions 65,000 are predicted this year alone the City watchdog quickly ushered in an interim regulatory regime for the sale-and- rent-back market on 1 July this year; more comprehensive regulations will come into force on 20 June 2010. The new regime closed the door on new applications for authorisation on 1 August, forcing any firm which missed the deadline to wait until the introduction of full regulation next year.

Since then, housing charity Shelter has been investigating whether sale-and-rent-back firms advertising in the local and national press are currently authorised by the FSA.

It found that out of the 18 main companies that have been advertising regularly since 1 July, four are not on the FSA's register of authorised firms.

Kay Boycott, the charity's director of policy and campaigns, believes there are many other firms also operating illegally, both in the printed media and on the internet.

She says: "We are shocked to discover some rogue and unregulated companies have the nerve to advertise in national newspapers when they are operating completely outside of the law.

"If almost a quarter of the big firms who are advertising in national newspapers are unregulated, then it is highly likely that many more of the smaller companies are operating completely under the radar."

The FSA will not comment on whether it is taking any action against unauthorised firms, but a spokesperson told The Independent that it was taking its regulatory responsibilities seriously.

She said: "The message is: we are watching, we are keeping an eye on this sector. We had concerns about the market, which is why we are addressing them with the interim regime."

The FSA gave itself three months to approve or reject an application for interim sale-and-rent- back authorisation. The end of October marks the end of that period. While 68 firms had been granted interim authorisation by 1 August, around 15 per cent of these have subsequently either withdrawn their applications or had them refused by the FSA.

The regulator steadfastly refuses to talk about individual firms and why they may have been removed from the interim register. It would also not be drawn on how many firms would still be listed come the end of the three-month application period, but it is expected that at least 30 per cent of the original 68 will have fallen off by next week.

The FSA has recently given an indication of what a fully regulated sale-and- rent-back environment could look like. Last month it published proposals to ban "exploitative" advertising and "high-pressure sales techniques".

The new proposals include a cooling-off period to allow consumers more time to make decisions, as well as a prohibition on cold-calling and the dropping of promotional leaflets through letter boxes.

The regulator is also seeking to ban the use of emotive terms like "fast sale", "mortgage rescue" and "cash quickly" in promotional literature. However, a quick glance of the interim register shows a number of firms using such terms in their trading names.

The FSA has conceded that it was unlikely that such firms would be asked to change their names if such a ban came into force next June.

The proposals are open to industry consultation until the end of November, but the FSA intends to ensure that consumers have "security of tenure" and that firms check that every sale treats the customer fairly, in that that they can afford the deal and it is right for them.

Unsurprisingly, the sale-and-rent-back industry wants to ensure that it is not regulated out of existence, and so is keen to be part of the consultation over full regulation.

Julian Sampson, a partner at law firm Wright & Wright, has assisted a number of firms with the applications for interim permissions and agrees that a strong regulatory framework is best for all parties.

He says: "The sale-and- rent-back industry has suffered from a terrible lack of transparency which inevitably led to consumer detriment, but regulation by the FSA has and will, amongst other measures, ensure that the consumer has choice and confidence in providers they select."

He insists that there is a valid interest in the market for sale-and-rent-back: "It is one of a number of viable options for a consumer in certain restricted circumstances and the benefits of a regulated industry is that professional advisers can assess consumer needs against providers' offerings, and come to a genuine best advice proposal for them."

He predicts there will be a drop in the number of authorised firms but an increase in larger firms possibly those from other sectors such as equity release, who may have been adopting a wait-and- see policy. Unlike some other charities, Shelter accepts that there is a demand for sale-and-rent-back, although it views it more as a measure of last resort.

Caroline Davey, deputy director of policy and campaigns at the charity, says: "Shelter thinks there is definitely a place for sale-and-rent- back and it can be appropriate for some people.

"The scheme we are most in favour of is the Government's Mortgage Rescue Scheme, which is effectively the same but run through housing associations. It's on a not-for-profit basis and we think it offers the best model for people.

"We accept that there may be scope for private sale-and-rent-back firms as well. Our concern has always been the unscrupulous nature of a lot of firms that have been operating over the past few years and the way that they have been exploiting consumers."

The Government's Mortgage Rescue Scheme has been much criticised for achieving too little too late, especially after it was revealed in July that after being in existence six months the 235m initiative had only directly helped one family.

However, Caroline Davey believes the scheme also has a positive effect in encouraging those who have difficulties paying their mortgage to come forward and seek help.

Repossessed New owner didn't pay the mortgage

Jean Turner and her husband entered into a sale-and-rent-back agreement three years ago after getting into financial difficulties. They were in arrears on their mortgage and sub-prime lender, Southern Pacific Mortgage Limited, had begun repossession proceedings.

In desperation, the couple answered an advert in a Sunday tabloid from Home Assured, offering them the chance to sell their house and remain in it by renting it back.

Jean recalls that they were visited at their home in Norwich, presented with forms, but given no time to read them through before signing.

Eighteen months ago, Jean phoned the Shelter helpline regarding central heating issues. It soon became apparent to the charity that she had never been given a tenancy agreement. While the property had been sold well below the market price but above the value of the previous mortgage, she had not seen any of the shared equity left after the sale.

A Shelter solicitor took on the case and managed to get equity back from Home Assured.

But, in February 2008, Jean opened a letter and found a repossession order from the new mortgage firm. It transpired that despite paying 500 in rent every month, the landlord had not been paying the mortgage.

She is now living in local authority housing and the stress caused by the financial and housing difficulties caused a breakdown in her marriage.

Caroline Davey, deputy director of policy and research at Shelter, says the charity has seen many other similar cases: "Jean's case is unfortunately not an uncommon one. We would hope with the regulation in place now this wouldn't happen again, but it is something we'll be monitoring through our advice services, ensuing that the customers we see haven't suffered in the same way."