Property Regulation in the UK
This article looks at property regulation in the UK and asks whether more needs to be done to bring it in line with other industries.
Who regulates property in the UK?
Until recently there has been very limited regulation for the UK property market. However, due to several high profile property scams, there have been some initiatives to change this. The Consumers, Estate Agents and Redress Act 2007 has now made it compulsory for estate agents to be governed by a property redress scheme.
There are two separate redress schemes in the UK. They are:
Both schemes do the same job. They act as an arbitrator between you and the estate agent. If you feel the service you receive is inadequate they will raise your complaint to the company and seek a suitable outcome. Both redress schemes will ask you to liaise with the company first. Should you not find a suitable outcome then they will intervene.
When will the redress schemes act?
Failure for an estate agent or a property investment company to register with a scheme could result in a £5,000 fine and expulsion from the industry.
Assuming the property company is covered by a scheme, the scheme under which the company is governed will investigate to see whether the estate agent has broken the law or breached their code of practice. If this is the case, then the redress scheme will raise your complaint free of charge.
The Property Redress scheme states they will take on a case when “A breach of the Agent Member’s obligations under the law; b. Where legal rights have been impinged or breached; c. Where an Agent Member has not acted in accordance with a Code of Practice it has signed up to, or any internal rules, procedures or statements of practice; d. Unfair treatment of the complainant by the Member; including, but not limited to: i. rudeness or discourtesy ii. not explaining matters iii. poor or incompetent service iv. avoidable delays e. Where an Agent Member has not administered a transaction as efficiently as would be expected. f. The Agent’s actions must have resulted in the complainant suffering a financial loss, or unnecessary aggravation, distress and/or inconvenience.”
What powers do they have?
The Property Redress Scheme has the power, In settlement of the complaint, the Ombudsman may make an award to the complainant ranging from an apology, or explanation to reimbursement of financial loss or a compensation sum for inconvenience and distress up to a maximum of £25,000. Any compensation payment will be calculated based on demonstrable loss or costs and will take into account any degree to which the complainant has contributed to the failure or loss suffered.
The Property Ombudsman has the power “If we support your complaint against one of our member agents, we can make them take action to put things right. For example, by giving a formal apology, changing their procedures or paying you compensation up to £25,000”.
How does property differ from other industries?
When you buy an investment in the UK, the investment is usually regulated by the Financial Conduct Authority FCA. The FCA governs all collective investment schemes as well as bonds, equities and a range of other investment products such as life insurance and mortgages. The only exception is when an investor decides to waive away their regulatory protection as a self-certified high-net-worth or sophisticated investor.
To advise under the FCA you need to have passed financial exams and demonstrate a thorough understanding of how investments and risk work. Furthermore, each appointed advisor must undergo a stringent suitability check to confirm that they are deemed fit and proper as a person.
The FCA has a far higher level of power to punish investment firms which administer bad investment advice. Furthermore, investment firms are required to keep a record of any advice that they have given for six years. This is so the FCA can come and check random files to see whether the advice given was correct and acted in a client’s interest irrespective of there being a complaint.
Property risk
However, many people buy property as an investment and not just for a home. Whilst some investors just buy a property for investment purposes as they have no plan to live in the property.
Either way, buying a property represents a huge financial commitment. Yet property consultants do not have to pass regulatory exams to sell a property or give advice on this asset class. Because of this, there is a lack of protection for the consumers when dealing with property.
Buying property off-plan represents a significant risk. There have been many developers which have received the majority of clients’ funds only to fold and leave the investor hundreds of thousands of pounds out of pocket. In Liverpool, the problem is rife, with over 39 stalled developments and many collapsing. The Liverpool Echo estimates that up to £200 million of investors’ money could have been lost.
Many of these investors have received bad advice about the development that they bought. Furthermore, the advisor has not given a written report backing up the advice that they have given.
New Regulation
The government is making some changes to combat the lack of regulation in the property market. Later this year they plan to set up a new home ombudsman to give more protection to customers and investors when buying newly constructed homes.
However, this process falls way short of what is needed. This is why some companies are implementing practices to better protect their clients. Esper Wealth a Manchester based investment company adopts the best practices of FCA regulated firms.
They offer a financial review to understand a prospective client’s investment needs. Esper Wealth does a full fact find to understand a person’s financial goals and their attitude to risk. This fact find is formally recorded and presented in a document called a summary of needs. Should an investor buy property as a result of any advice given they will send out a suitability report. This report will explain why any recommendation was given. This report is designed to add a higher degree of culpability to any advice given. The Suitable Advice Institute recommends using this approach. The diagram below shows how advice should be administered. Esper Wealth is not alone. Solomon Investment Partners also offer an investment review to all prospective clients. Both companies also recommend that their clients see an FCA regulated investment advisor, and they work closely with their respective advisors to ensure their clients receive the best advice.
Regulatory Exams
Whilst estate agents are not regulated there are several exams which estate agents can take to improve the level of service that they give to their clients. Propertymark has been campaigning for the regulation of agents to bring in minimum standards for property agents. Propertymark offers some courses to raise the professionalism of the industry.
RoPA stands for the Regulation of Property Agents and in July 2019, the Ministry of Housing, Communities and Local Government (MHCLG) released RoPA’s report proposing a new regulatory framework for property agents in the UK. The government is considering introducing regulations for property agents. Hopefully, this comes soon.