Background and Policy Objectives
3.The Financial Services and Markets Act 2000 (“FSMA”) provides consumer protection by, amongst other things, allowing only authorised or exempt persons (as those terms are defined in FSMA) to carry on a “regulated activity” in the United Kingdom. In order for an activity to be regulated under FSMA, it must be carried on by way of business and be specified in an order made under section 22 of FSMA. Schedule 2 to FSMA sets out in broad terms the kinds of activities and investments which can be specified in an order under section 22. Whilst it covers contractual rights in respect of loans secured on land, it does not cover such rights in respect of other types of finance provided in connection with the acquisition or disposal of land.
4.On 12 December 2001 it was announced that the Financial Services Authority (“FSA”) would regulate activities relating to mortgages. Regulation of mortgage activities commenced on 31 October 2004(1).
5.The Government announced it would look at regulation of activities relating to home reversion schemes(2) in its Green Paper “Simplicity, security and choice: working and saving for retirement” published on 17 December 2002. On 5 June 2003 the Chief Secretary to the Treasury announced that the Government would carry out an open consultation on whether activities relating to home reversion schemes should be regulated by the FSA.
6.The consultation document “Regulating home reversion plans” was published on 11 November 2003. On 10 May 2004 the Financial Secretary to the Treasury announced the Government’s intention to bring home reversion schemes into the scope of FSA regulation.
7.During the process described above, it was recognised that Ijara products(3) and flexible tenure products(4) share many features of home reversion schemes and are also unregulated. A further consultation document ‘Defining Home Reversions’ was published on 26 July 2004 and consulted on the content of the definition, including whether Ijara products and flexible tenure products should be included.
8.A consultation response document was published on 16 December 2004 which announced that both Ijara products and flexible tenure products would be brought within the scope of FSA regulation, to create a level playing field between these products and mortgages and to increase consumer protection. However as flexible tenure products are currently only provided by local authorities and registered social landlords and the intention is to exempt these entities from FSA regulation in the same way as for regulated mortgage contracts, it is not intended to make an order under section 22 in relation to flexible tenure products for the time being. The Act is wide enough to ensure that flexible tenure products can be regulated in the future as this market develops.
Under a typical scheme, an arrangement whereby a homeowner sells all or part of his house at a discounted rate to a reversion provider in return for a lump sum and/or income and continues to live in the house rent-free for life.
There are two main types of Islamic compliant products: Murabaha and Ijara. A typical Murabaha contract is an arrangement whereby a scheme provider buys a house and then sells it to a customer at a higher price to be repaid over time. The house is registered in the customer’s name and a charge given over it in favour of the scheme provider. Murabaha is already covered by FSA mortgage regulation since it meets the requirements of a “regulated mortgage contract”. A typical Ijara contract is an arrangement whereby the scheme provider buys a property and rents it to the customer over a term. The customer also pays the original purchase price over the same term and acquires ownership at the end of that term.
An arrangement whereby a homeowner can increase or decrease equity ownership by transferring interests in a property to and from a finance provider, such as a local authority.
