With the FSA taking on the regulation of home reversion plans, Dan Waters looks at how solicitors will be affected




The Financial Services Authority (FSA) takes on regulation of home reversion plans from 6 April. How will this affect solicitors?



Home reversion plans have been around since the 1960s. They are essentially sale and lease arrangements that enable older homeowners to release equity from their property, either as a cash lump sum, or less often, as a regular income.



Under the rules coming into effect on 6 April, all non-exempt firms whose business involves administering, advising, arranging or providing home reversion plans will need to be authorised for these regulated activities. Furthermore, private individuals who regularly invest in home reversion plans may also need to seek authorisation.



If an unauthorised individual or firm, who should be authorised, invests in a home reversion plan after 6 April, then they will be operating illegally. The FSA refers to firms or persons that enter into home reversion plans with customers as 'reversion providers'.



New rules also stipulate independent legal advice for consumers. The FSA will expect reversion providers to confirm to solicitors that the client instructed the lawyer to ensure his legal rights are protected to a reasonable standard, and that the lawyer has explained to the client consumers' legal rights and obligations under a home reversion agreement.



Solicitors who are not regulated by the FSA should be able to rely on the part XX exemption in the Financial Services and Markets Act to carry on many of the regulated activities.



Home reversion plans are distinct from lifetime mortgages (already regulated by the FSA) because the plan holder no longer owns the property and becomes a tenant, typically for a nominal 'peppercorn' rent. As the transaction involves the grant of a lease, as well as sale and purchase, a legal adviser will need to be aware and advise the client of any potential restrictions.



The homeowner may sell all (full reversion) or a proportion (partial reversion) of their interest in the property. Clearly, the amount received will depend on the value of the property, and it is essential that an independent valuation is carried out to protect consumers' interests. This requirement is set out in FSA rules. Usually, the consumer receives a discounted price of between 35% to 60% of the house value, depending on their age and state of health.



Broadly speaking, older or less healthy clients will receive a higher proportion of the market value of the property. Home reversion providers cannot recoup the investment until the property is sold, usually when the consumer dies or goes into long-term care. Home reversion plans are also available on a joint basis for a couple, in which case the asset is sold when both homeowners have left the property.



The regulation of such plans is designed to mitigate potential risks for consumers and will result in greater protection for them. These plans are aimed at homeowners older than 60 years of age, who can be more financially vulnerable as they are less able to make up any lost capital through the remainder of their life. Entering into a reversion contract may also restrict their future options, such as their ability to move home. Regulation will mean that the majority of consumers who sell all or part of their property via a home reversion plan will receive a level of protection that is consistent with that already available to lifetime and standard mortgage holders.



What should legal advisers consider? First, from April 2007, the majority of home reversion providers and advisers will have to be authorised by the FSA. However, there are exceptions to this and providers will not require authorisation where they are not acting 'by way of business'.



Consumers who enter into a home reversion agreement with unauthorised providers will not benefit from the protection available if they were to use an authorised provider. In particular, they will not be covered by the financial services compensation scheme, and they will not be able to take their complaint to the financial ombudsman service. Although legal considerations such as terms and conditions of lease are the same in both cases, legal advisers acting for a home reversion customer may wish to make enquiries into the provider's status and inform the client accordingly.



Also, it is important to bear in mind that if an unauthorised individual or firm, who should be authorised, invests directly in a home reversion plan, they will be committing a criminal offence. The FSA encourages solicitors to bring to its attention any requests that they act for such individuals or firms, and suggests that they should apply for authorisation.



In addition, principle 7 of FSA's principles for business requires authorised firms to provide 'clear, fair and not misleading information' to consumers. To protect homeowners' interests, the FSA is introducing a new 'key facts' document for home reversions, and making changes to the initial disclosure document. It will be in the best interest of solicitors' clients to read and understand all relevant information, particularly if they are buying a plan on a non-advised basis. Conversely, if your client is a reversion provider, it will be under an obligation to supply these documents to consumers.



The FSA differentiates between legal advice and regulated financial advice. Legal advice is not advice on the suitability of a particular product for a client; any specific recommendation is the responsibility of the individual's financial adviser. Solicitors taking the view that a product is obviously inappropriate for a client's circumstances may wish to tell that client to seek further information or clarification from a regulated adviser or firm.



Solicitors wishing to advise a client against a particular transaction and who are not authorised under the Financial Services and Markets Act 2000 to give investment advice, will need to check whether the exemption for professionals (including solicitors) under that Act allows them to do this. The FSA has given guidance on this in the professional firms part of the FSA handbook (see website: fsahandbook.info/FSA/html/handbook/PROF).



If that exemption does not apply, then other exemptions may &150; they are discussed in the FSA's guidance on home reversion and home purchase activities. This can be found in chapter 14 of the Perimeter Guidance Manual, which is part of the FSA handbook.



Furthermore, there may be ancillary issues arising from purchasing a home reversion plan. In some cases, it will impact on an individual's entitlement to state benefits. There may also be implications for inheritance and tax planning. If you become aware of such issues affecting your client's case, specialist advice may be appropriate.



For more information about home reversion plans and other types of equity release, see the FSA's Raising money from your home consumer factsheet, at: www.moneymadeclear.fsa.gov.uk/pdfs/raise_home.pdf.



The FSA keeps a register that is a public record of all financial services firms, individuals and other bodies that are currently authorised or had been in the past under FSA jurisdiction. It is a free service available at: www.fsa.gov.uk/Pages/register.



Guidance for solicitors on financial services and the part XX exemption is available at: www.lawsociety.org.uk.



Dan Waters is the director of retail policy at the Financial Services Authority