April 23, 2017

Law Commission: you will create an investment asset class, not protections for pensioners

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Martin Boyd replies to Stephen Lewis, of the Law Commission, on his report into retirement housing event fees

We are a tiny charity that you kindly credit as being one of the key drivers in initiating your work with event fee project.

Unlike others we were not part of your advisory panel, but we have done all we can throughout the project to provide you and your team with a broad range of evidence on all aspects of the issues that you have considered.

As you are fully aware, this is a market where the consumer base is often extremely fragile.

In reading your report, it is therefore disappointing that you seem to have given little weight to the differential abilities of consumers to provide their input, against the weight of the strong lobby from the providers in the sector; and you find mainly in their favour.

I was proposing to provide a detailed response, but I have reached the view that there is no purpose in me spending yet more of my time, money and effort in doing work that others are paid to do.

Instead, I say as clearly as I can that your report has many flaws. It makes a number of assertions based on little or no evidence. It often chooses not to consider the counter evidence that supports an alternative approach.

A number of the conclusions run counter to the, already cautious, findings in Office of Fair Trading 2013 report and your code of practice has errors.

In short, I see little to recommend the report other than that you repeat the OFT’s already made argument that the sector should behave transparently.

That it takes 65 pages to describe your supposedly easy-to-use Code of Practice says much, given that the Code has errors.

You state at the front of your website when introducing this report:

“The recommended reforms are also intended to reduce the uncertainty currently surrounding the legal status of event fee terms.

“With these reforms stakeholders have told us that private investment of £3.2bn is likely to be forthcoming in the next decade, and the supply of specialist retirement housing expanded significantly.”

As far as I can tell, this claim is unsupported by any evidence other than undisclosed letters from developers (footnote 74).

We, and others, were not given the chance to counter this claim that did not appear in your September draft (or if it did, I missed it).

I suggest this report, if introduced, will give many opportunities for further opacity, rather than increased transparency.

It will give rise to future distress, rather than fairness, and give rise to many higher fees on new build sites.

The real uncertainty removed is not one for the consumer, but one for the developer, who will be more than happy at being able to guarantee these fees as future income streams – fees that you propose do not, of course, have to be for the consumers benefit.

Much like the OFT report in 2013, your submission bibliography shows that you have taken extensive input from providers in the sector and their lobby group.

Part of this lobby is recorded being on your advisory panel.

It would appear that you have accepted many of its views in the belief that by obliging the seller to declare and describe the fee this will somehow result in rational economic behaviour and a more effective market.

I do not even understand how your evidence allows you to reach such a conclusion.

Your own secret shopper tests, the OFT findings and the economic texts that you quote (footnote 19 and 20) point to the fact that encouraging rational economic behaviour is extremely difficult.

Despite this evidence you seem to conclude that somehow, by having disclosure and explanation of the fees, the consumer returns to making a rational economic decision and thereby presumably remove the risk of unfairness.

The fact that there are strong economic drivers leading suppliers to encourage these fees, and even unfair fees, seems not considered as a factor.

I accept that you have set out a section on unfair terms if the fees are not disclosed, and the potential of action in the court.

However, you do not make clear that there is a large evidence base to show that in this part of the market consumers find it very difficult to take any issue to court.

As your team is aware, despite the OFT findings on collusive tendering for retirement door entry systems across the country, and the OFT finding that exit fees are likely to be unfair, there has only been one action and not be a single successful prosecution, even though the OFT were convinced action would be a simple process.

Your report seems to take limited account of the fact that once the initial developer sale is completed, and the exit fee introduced, it is the successive leaseholders who face the burden in future sales.

Much like the leasehold house purchasers who now face the risk that the market sees their ground rent as onerous, your proposals seem to be exposing yet another group of consumers to the risk they may find their homes difficult to sell and the values impacted.

Had your draft report made it more clear that you needed further evidence on what drives these fees, we could have given input on why these fees are wanted.

It is to be hoped the Minister and his officials will understand that much like ground rents, some but not all, of these exit fees are now seen as financial instruments, not as a means to make pensioners lives easier, but as a way of creating income streams to be traded, sold and made profits from much like ground rents.

Had you asked, we could also have pointed to evidence from the sector predicting an increase in housing supply greater than that you claim as attributable to these fees was already being suggested by the market.

Turning to your point in response to Sebastian [O’Kelly: who expressed disappointment that Carlex’s Land Registry figures on resale prices were described in the Law Commission report as “anecdotal”] … arguing that you somehow needed evidence that all retirement sites with events fees were impacted before you could accept that the resale price issues as evidence of a potential problem …

Sorry, but this is not the methodology you apply at any other point in your report.

For example, at 2.37 where you claim that people are reluctant to move into retirement homes based on recent negative publicity: your footnote refers to your own consultation document in the points 2.49 and 13.5.

It is clear you do not provide a single piece of evidence, but instead you seem to speculate in a way that the sector’s well trodden PR claims that its the messenger not the product which is at fault.

Carlex and LKP has, of course, been the only messenger over many years, so what you actually do is point the finger at us.

As we have explained to your team on many occasions, even a cursory look at the data will show that poor resale values existed long before we even existed, and should our influence be so all-encompassing it would come as surprise to us.

So, I reject your assertion on the resale issue on three grounds.

First, you chose not to ask us what other information we have or could supply or on what basis we had looked at the figures.

By contrast it would appear that the trade body member of your advisory panel provided their evidence after your initial report last September using “unpublished” contradictory data.

You certainly did not approach us to ask if the ARCO evidence was likely to be flawed or partial, and we have not seen that data.

I am sure you are fully aware that under all normal conventions of report-writing, you do not place important and contradictory arguments in footnotes, and you certainly do not reference one piece of evidence, then seek to gainsay that evidence with a counter view, especially when that second piece of evidence is “unpublished”.

It also seems very wrong that you place the whole issue in Chapter 4 “Code of Practice on event fees – when an event fee may be charged” rather than the main body of your evidence in chapter 2 “The case for reform”.

The fact that these fees are potentially one of the key drivers on resale values should have been a key part of your considerations.

I do not accept your argument that fees for no service should be allowed (2.40- 2.45).

This was an issue the OFT specifically felt likely to be unfair. Your argument these fees should now be allowed on the basis they would somehow be difficult to stop (2.43) seems illogical and unsupported by evidence.

Fake watches are difficult to stop, but that does not mean they are allowed.

In summary, your proposals seem to have accepted the case for fees for a service, a fee for a service provided over time, a fee for a one-time specific period of service and a fee for absolutely no service at all.

You do not propose to limit the quantum of these fees, but instead appear to sanction what may be more onerous levels of fees in the future assuming they will not arise because somehow market forces will apply.

I assume you are aware in at least one existing case there is the potential of a fee of over £500,000 (five hundred thousand pounds) for no provision of service. This already exists subject to the leaseholder owning the lease on this apartment for just three years.

Controls to stop unfair practices from be offered in the market are common in many areas of consumer law. If you believe this is what is best for the market I would have to say I do not agree.

I ask rhetorically, or rather leave you and the MPs, with one final question.

Your report relies on evidence that these fees are somehow needed so as to make retirement living affordable.

Why does your report not point to the counter evidence that suggests that on average those in retirement, at least at the moment, have more disposable income than those in the young working population?

The Law Commission report can be read here:

LawCommissionSummary

Comments

  1. Michael Hollands says:

    It’s ridiculous for the Law Commission to state that Exit Fees make retirement living more affordable.
    We have just seen the case where a property purchased in 2003 for £520000 has sold for only £560000 in 2016 (less than 3% annual increase.) And the Exit Fee on selling was £48000, and the Management Fees during the selling period were £27000.
    Some years ago I was notified by Faihold that Exit Fees are charged just because they are in the Lease and cover no service whatsoever.
    The fact that Fairhold are the Freeholders of the majority of Peverel/First Port managed properties, I am sure does not make those properties more affordable. We all know that those leaseholders are milked for every possible penny.
    So the Law Commission Inquiry comes to a weaker conclusion than the old OFT one which was ignored by the Government anyway.

  2. Michael,

    You say:-

    Law Commission states Exit Fees make retirement living more affordable?

    How ridicules is this statement???

    My relative purchased a One Bed McCarthy & Stone Flat in 2005 for £135k. Now 12 years later it is worth between £80k to £109k. The cost included the use of the lounge, lift, kitchen, laundry, car park, gardens and stairs.

    What was not explained was when they were selling, sale prices would not include the lounge etc. as these are part of the development.

    Many leases do not state the Exit Fee on selling, as this is a separate document. Exit Fees are charged just because they can, they cover no service whatsoever?

    Fairhold purchased ex M&S developments within two years as the Freehold was not available during this period to the residents.

    The building and sale of developments was a clear long term plan, giving the developer a period when these developments were not for sale and open to being milked for every possible penny.

    The Law Commission is like another Government QUANGO. Its purpose is to ensure the Government is not affected by public opinion. The OFT was such a phoney, its purpose was to represent Fair Trading?

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