NEW REGULATORY BODY, IS IT A GOOD OR BAD THING?

The Government has recently issued their response to call for evidence entitled
“Protecting consumers in the letting and managing agent market”
This paper explores the proposals put forward in the response and whether what is
proposed is good or bad.
In summary the response makes the following suggestions

  1. Regulation of managing agents
  2. Code of practice for managing agents
  3. Nationally recognised qualification and CPD
  4. Independent regulator for managing agents
  5. Empower leaseholders to switch agents and to simplify RTM
    An independent body to regulate the industry can only be a good thing. The only body
    we currently have is ARMA which is a trade body. Whilst they have worked hard to
    improve standards, they are ultimately a body whose very survival depends on the
    membership of the agents they are trying to regulate.
    It is this conflict which enlightens us as to why ARMA does not expel any member, but
    therein lies the crux of the issue. ARMA are in a catch twenty-two situation, they can
    only enforce regulations and standards on their members by expelling those agents
    who do not uphold them. However, if they expel agents they lose revenue which is
    required to have the body and regulations in the first place. In addition there is also no
    requirement for any new agent entering the market to join ARMA.
    There is also the question of what accidental consequences are going to be created by
    not thinking through the proposals and instead having a knee jerk reaction. Ground
    Rent is a prime example.
    The proposal is to force the sale of all new leasehold flats and houses, at a peppercorn
    rent. The issue with this is, what happens to the pension funds and the developers exit
    strategy?
    Pension funds do not work against a ten or twenty-year business plan and instead plan
    hundreds of years in the future, which is to be expected given their service and the fact
    they don’t just want you but also your grandchildren as customers.
    If you take away their revenue then what happens to future pensions, especially given
    there is no longer a state pension?
    Further to this developers utilise the sale of Ground Rents to assist in funding future
    developments, future developments which the Government requires to provide social
    housing, but then cutting the revenue which assists the developer in building these
    homes.
    Of course, the reality is the developer will just increase the sales price to cover the lost
    Ground Rent. It may not be significant at first, but it will increase over time thus having
    a negative impact on the new homes market.

This raises the question of how the Government is going to create a Code of Conduct
when it has already been demonstrated they do not understand the industry, law and
current Code of Conduct.
One of the reasons the Government has decided to make the case of regulating the
industry is Consumer Protection from Unfair Trading Regulations 2008 (which
requires consumers to have all the information necessary to make a transactional
decision). They have stated these protections are insufficient due to the following
reason; “These regulations also have a six-year statute of limitations. Consumers may only
become aware of these issues after the time limits have elapsed. For example, there have
been recent cases concerning the doubling of Ground Rents in leasehold houses every ten
years, which were either not properly disclosed or fully understood. A leaseholder
discovering these arrangements after 10 years would find that it was too late to take
action under these Regulations.”
The above reason is technically incorrect. Regardless whether the statute of
limitations is six, ten or even twenty years; prior to the sale going through the lease is
provided to the prospective buyer to review.
Whilst I am not in agreement with the doubling of Ground Rent, this does not change
the fact that the details around the Ground Rent are not written in legal jargon but
plain English and openly states the Ground Rent will double every ten years. If the
leaseholder does not wish to enter into this agreement on that basis they do not have
to, and statute of limitations is not an issue as the concern over the ground is
highlighted prior to the six years even commencing.
What this does highlight is the lack of understanding of the sales process and what is
provided and the apathy of the leaseholders who do not take the time and effort to
understand the liabilities they have entered into
Whilst they can raise complaints after the fact, there is nothing stopping them from
raising questions prior to the commencement of the lease. Instead this concern is only
raised when payment becomes due.
CHAPTER 2: MINIMUM ENTRY REQUIREMENTS AND
STANDARDS IN ORDER TO OPERATE AS A
MANAGING OR LETTING AGENT
In this chapter the Government highlights the needs for a minimum requirement to be
met for someone to operate as an agent. The industry as a whole has been very
proactive with the training and need for qualifications.
The MIRPM have consistently upgraded their exams and study material to increase
the level of knowledge and competency required to become a full member.

The Government backs the need for a national qualification, however instead of
creating a new national qualification they should work with bodes such as MIRPM, CIH
and RICS to make it mandatory to take one of these exams.
These bodies have a breadth of knowledge and understanding of what is required to
become a competent property manager.
As part of these minimum requirements there is a proposal for a Code of Conduct to be
introduced which all agents would be required to adhere too.
Whilst there is no objection to this, the question raised is whether the Government is
the right party to draw up this code?
There is already a code produced by RICS which is signed off by the Secretary of State
and therefore able to be used in a court of law.
A Code of Conduct is required of this there is no doubt, what is in doubt is who is to
write it and how is it done? Should there be a new Code of Conduct written by the
Government and enshrined in law, or does RICS continue to write the code and
Government makes the adherence to this code as part of a new Act?
The latter of the two would be the most preferable given RICS has been producing it
for so many years they understand the needs and requirements of the code. By having
a different party come in and write a new code will only delay matters and potentially
confuse people as to which one to follow, thus undoing any progress on the regulation
of the industry itself.
CHAPTER 3: WHAT REGULATORY APPROACH AND
ENFORCEMENT SHOULD BE PUT IN PLACE?
How the new regulatory body should look and operate like is a question which has
various degrees of answers depending on who you ask.
There are many different approaches this can take but the one element which must
remain the same regardless what shape the regulatory body takes, is the element of
enforcement.
It is the enforcement of the trade body regulations which hinders the raising of the
standards and rogue agents currently within the industry.
There are already several different regulatory bodies across varying industry sectors
which the new regulatory body can take its cue from such as FCA, GMC which the
report highlights as well as looking overseas to countries such as Australia and New
Zealand which has Strata law which is like our Commonhold Law.
However, the paper has already provided warning signals of how this body could end
up not being a national consistency but have differential approaches within local
government.

It has stated “However, we note that similar enforcement responsibilities, such as the
requirement for agents to belong to a redress scheme, tend to sit with local authorities, and
that a regulator may by definition struggle to identify those agents who have evaded it. We
do believe that close cooperation between the regulator and local authorities will be
central to effective enforcement.”
When in fact the requirement for agents to be part of a redress scheme should be
made part of the new regulations and a list of these agents to be made public. That way
not only can local authorities make the regulatory body aware of any agent not part of
the body, but so can the public.
If it local authorities are to deal with infringements such as this, the powers of the
regulatory body will diminish over time as more and more of its powers will be diluted
to local authorities creating confusion for not only the agents but the very people it
was created to protect.
This will also cause issues when it comes to enforcement. The property sector is
unfortunately one which suffers from a lot of fly by night companies as they know they
can set up one company and if anything goes wrong, shut it down and set up another.
The enforcement part of the regulations needs to be robust whereby it is not just the
company which is banned from practicing but the people responsible for those
practices. This will be only achieved by having one national data base of companies and
people.
Without this the regulatory body becomes another department which has no teeth. It
will become an impossible task to raise standards and protect leaseholders without a
robust enforceable regime.
The empowerment of the public to act is the key to any successful regulatory body.
Any body is staffed by a number of people, but in the case of the leasehold sector it is
not staffed by 4.2 million people.
The regulatory body, regardless how rigid its regulations and enforcement powers are,
will be unable to check every agent all the times. By empowering the leaseholders, this
provides the regulatory body with invaluable resource as they will be able to assist
enforcing these regulations.
CHAPTER 4: EMPOWERING CONSUMERS THROUGH
RIGHTS TO CHOOSE AND SWITCH AGENTS AND TO
CHALLENGE SERVICE CHARGES
There needs to be an understanding on what powers the current leaseholders have.
Leaseholder have the right, for example, to understand how major works are
calculated which is something the paper highlights is a requirement, yet this is already
in place.

The main issue with empowering the leaseholder is that they are not currently aware
of what their existing powers are let alone educating them on any new ones.
There is talk of an independent redress body and making the FTT simpler as it is seen
as confusing and complex when it is not. To apply is one document and a lot of guidance
is provided by the tribunal to leaseholders, so they understand the process, so the
question is how much simpler can you make it? Or is it another case of respondents
replying to the Government on the basis they have never been through the actual
process on the belief it is too complex without really knowing?
There needs to be a balance to ensure it is not made so simple any minor complaint
against an agent is not passed through the tribunal, which could have been dealt with
by the agents inhouse complaints procedure, thus clogging up the system and delaying
much larger, complex cases which could ultimately have an impact on the industry.
The one point which should be taken up which impacts on all buildings is the
suggestion that there should be a mandatory sinking fund. The lack of a sinking fund or
an artificially low one is a common issue within the sector.
There are also calls for the leaseholders to veto the landlord’s choice of managing
agent. This is not a bad thing as unfortunately there are still landlords who use agents
they have a close relationship with to further achieve their own agenda to the
detriment of the leaseholders.
To provide the leaseholders this option gives them the power to ensure a truly
independent agent is instructed who has the buildings best interest at heart.
CONCLUSION
There has been a calling by the industry for it to be regulated for several years and
there was a close possibility of this around 2012 until the plug was pulled by the then
government.
As such there is not going to be any resistance to this as the majority of the industry
wants it as self-regulation breeds mis-trust with the public.
However, the Government should not act like they are the knight in shining armour
coming to the rescue of the hard done by leaseholder, when it is they who are the ones
who have taken so long to listen to the industry itself.
Whilst regulation is a good thing, the Government’s response only goes to remind us of
the importance of education. It should not be relied on third parties alone to inform
people of what they are entering and there should be an onus of responsibility on them
to understand this, whether this is through the developers, solicitors or managing
agents.
We cannot have a regulatory body which only serves to wrap the leaseholder in cotton
wool, as this will only make the job of management harder. Any regulatory body needs
to ensure they have the right apportionment of regulations and enforcement whilst at

the same time reminding the leaseholder of their obligations and the management of a
block is a two-way street.
Currently with the Government response, it seems this is only a one-way street with all
the blame been levied at the agents door step, when in reality we are in an age where
any information we require is only a click away and so if it is your door step then you
should be taking responsibility to understand what that door step is costing you, as
they say ignorance is no defence.
There is a strong case for change within the industry it is just unfortunate the
Government has not made it in this paper, instead only highlighting the high need of
educating the buyers.
The biggest hurdle however is how do you get the leaseholders to listen?

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