Regulation of Estate Agents in the UK Property Market - Coursework Example

Trading Standards, current license-free business operation by property agents in the UK Introduction The UK property market is still under the control of traditional estate agents. According to BIS (September 2012), in 2007 there were 1.6 million housing property transactions in the UK with an aggregate value of £361 billion. The economic recession has caused a huge downfall in the sale and purchase of housing properties. Till 2009, the graph of transactions was high on the reducing and marginally got upward to 884,000 in 2011. There are nearly 14,000 traditional housing estate agent offices in the UK. The traditional UK estate agency market was worth nearly £4.2 billion in 2007, excluding fees for ancillary services, which got reduced to £2.1 billion in 2008, primarily because of the huge reduction in transactions. Almost all estate agents represent themselves online and most of them advertise their property details through one of the leading property marketing portals. These portals facilitate buyers to find properties by communicating with the related estate agents. The regulation of private sector letting and managing agents As per the Standard Note: SN/SP/6000, the control of private sector letting has a case for and against additional regulation. Standards are lacking in the private rented sector, as revealed in research. For example, the Resolution Foundation issued ‘Renting in the dark: creating a lettings market that works for tenants’ in December 2011. It was revealed that there was “a lack of consumer confidence and professionalism in parts of the market” which has caused “numerous calls from the industry, tenant and landlord groups for regulation”. Industry, landlords and tenants are important stakeholders (Wilson, 2014, p. 5). In November 2012 a consumer organisation, Renting Roulette, published research into the customer experience of the lettings market, which pin-pointed the following “widespread” issues: Tenants are not empowered and satisfied, as three quarters of tenants (73%) search for a property, not the agent yet lettings agents are ranked second from the bottom in comparison of markets and one in five tenants are dissatisfied with their agent. Undue and unfair fees are charged from tenants by the agents. Only a little less than a third of tenants (29%) stated that agents briefed information about fees prior to their request, 41% of tenants considered upfront fees charged by agents were not justified and none of the 32 lettings agents reviewed had provided information on tenant fees on their website. Bad practices are common. Agents indulge in aggressive selling tactics, poor customer service, delayed meetings and misguiding tenants through irrelevant advertisements. Agents are causing loss of money rightfully of tenants and landlords by not passing on rent, unfairly managing holding deposits or not utilising deposits by investing in protection schemes, as stipulated by law (Wilson, 2014). Therefore, it is a call for better consumer protection in the lettings market by availing of the legal security by people into purchase and sale of property to those renting. This would imply lettings agents would be governed by the same legislation as estate agents, which would also necessitate their signing up to an ombudsman scheme. By changing the legislation, the Office of Fair Trading (OFT) would also get empowered to blacklist lettings agents who do not follow the rules (Wilson, 2014). It should also compulsory in the interests of stakeholders to increase the degree of transparency with lettings agents, including fees in the headline price and made visible at the point of sale, in advertisements and on agent websites. It must be obligatory on the agents to provide complete details of the terms and conditions of the agreement before they receive any upfront fees (Wilson, 2014). A study into the average lettings fee was initiated by the online lettings agency, Rentify, which indicates that average fees charged by letting agents are extra-ordinarily high. The charges just for renting a one-bedroom apartment in London could fetch as high a fee to an agent as £600 (an agent in East Ham) while the average charged fee for the capital comes out at £220. Things are not much different elsewhere in the UK: Bristol tops the list with the highest average fees of £251 and Liverpool ranks the lowest with £137, which is equivalent to 6 weeks food purchase bill for the average person (Wilson, 2014). Comprehensive findings of Rentify reveal that the figures are particularly abnormal based on the opaqueness of the agents’ marketing tactics. Agents are mostly very shrewd about what the fees are being paid for. Any extra fees taken other than the standard deposit and one month’s advance rent are charged for preparing the tenancy agreement, credit and reference verifications. Rentify experts are unable to explain and justify the charges for this job. Their own actual computations put the average hourly rates of such letting agents in London at £146. Agents charge on an average a fee of £50 for a credit check. A comparison of agents’ fees with that of Rentify reveals that it charges just £15 for a credit check and reference check. One can imagine how high the average fees are charged by estate agents relatively to Rentify (Wilson, 2014). Among many suggestions for better standards in renting procedures for private renters and to secure people from wrong practices of the agents, the housing charity, Shelter has been very proactive in supporting the local governments for operating landlord accreditation schemes. Shelter is presently running an “evict rogue landlords” initiative. In June 2013, it published Letting Agencies: The Price You Pay in which Shelter raises its voice for: ...new legislation to ensure that renters cannot be charged for the costs of setting up a tenancy. This is part of the core service provided by agencies for landlords and should be factored into their pricing accordingly (Wilson, 2014, p. 7). Shadow has been at the front for leading this campaign. As such, at Public Bill Committee level of the Localism Act 2011, Alison Seabeck, Shadow Minister for Communities and Local Government, preferred to include a new clause which would have made it obligatory to the local government to introduce a voluntary accreditation scheme for private landlords. Her point was that there was opinion in favour of regulation to heighten the industry parameters over control and “drive out cowboys”. The Committee was not unanimous on the introduction of new clause which was disapproved by 14 votes to 7. Further detail over the housing provisions in the Localism Act is provided in two Library research papers, Localism Bill: Committee Stage Report and Localism Bill: Planning and Housing. OFT’s Lettings Market report (February 2013) underscores the increasing number of complaints obtained by the Property Ombudsman: In 2011, the Property Ombudsman tackled with 7,641 letting queries, a rise of 26% on 2010 figures. The Intelligence Report based on Consumer Direct complaint analysis found out that 'fees and charges' were the key field of concern for landlords and tenants as nearly a third (30%) of all complaints belong to this type. Agents charge fees to both landlords and tenants for their services. 'Agents providing poor service' was the next prominent field, with 23% of complaints were related about this (Wilson, 2014). The market stakeholders, as per OFT estimation, “should have access to an adequate redress mechanism so that any problems that may arise are dealt with quickly and easily (Wilson, 2014, p. 7)”. In a nutshell, OFT firm belief is that to work more impressively, the market needs: better on-request information availability – especially related to fees and charges; measures to assist in the assessment of quality and relating it with letting agency services; a general redress framework; more relativity within the industry (e.g. in the way a tenant’s suitability is assessed); designs to safeguard money; and a unanimous implementation strategy (Wilson, 2014). The Regulations The two regulations, CPRs and BPRs are in place in since May 2008. They are applicable to businesses. The Consumer Protection from Unfair Trading Regulations 2008 (CPRs) is applicable over all sectors, not just businesses involved in the sale of property and land. The CPRs disallow property agents from involving in unfair business functions in their transactions with clients. There are various significant notions in the CPRs, enlisting wider rules for wrong business functions, stated to come in five leading types, as below: 1. Providing wrong information to clients, such as making false statements or through cheating advertisements. 2. Failure in providing required information to clients, for example not sharing critical information. 3. Behaving aggressively, for example via sales tactics that harass, coerce or put undesired impact. 4. Not coming up to the reasonable expectations of agreed business practice. 5. Indulging in any of 31 particular practices that are disallowed by the CPRs outright (OFT, 2012). The Business Protection from Misleading Marketing Regulations 2008 (BPRs) The BPRs disallow engaging in misguiding activities in transactions with other businesses. Advertisements under BPR include not only broadcast, billboard and print marketing but also other kinds of marketing and promotional functions like verbal promises and descriptions in catalogues or websites. It needs to be proved that an advertisement is misguiding. For that it requires who is cheating or is going to cheat the businesses that it caters to or and that the advertisement may result in: (a) likely affecting the economic pattern, or (b) cause physical harm or is likely to cause physical harm to a competitor (OFT, 2012). The BPRs also lay down the terms under which traders are allowed to compare with genuine or implied competitors, when marketing to businesses or clients or both. If the ditto relative marketing misguides or has the potential to misguide the average consumer, then it may be counted also a breach of the CPRs (OFT, 2012). Red tape issues Issues relating to red tape involving letting agents are on the high at local and national level, as is evident from the news reporting in the Telegraph. According to the Residential Landlords Association, there are at present more than 100 rules and regulations for ensuring smooth and satisfactory procedures over letting a property in the private rental sector. New changes to the list of rules are welcoming but not all new rules are going to encourage good letting practices by letting agents, as they wouldn’t be adhered to by one and all. The problem becomes acute, as local authorities are not in a position due to lack of resources to check miscreant landlords, punish them through legal recourse. So, just by making rules, the authorities are not going to succeed in controlling mischief of the landlords (Faulkner, July 2013). One positive change that has been confirmed to be enforced by April 2014 is concerned with letting agents becoming a member of an ombudsman scheme. Landlords could make a complaint under this scheme against the agents for not resolving any of their issues. The property ombudsman would play the role of third party between the property agent and the complainant for reviewing the complaint (Faulkner, July 2013). Another issue faced by tenants is related to charging of various fees. The new changes when implemented would expect the letting agents to be transparent on the charging of fees from the tenants so that later on they do not feel cheated when revealed new fees to be paid. Fees of the letting agents need to be reasonable for the landlords and the tenants. Regulations need not be enforced equally on all regions; problem areas should be selected to take action as resources are limited. Earlier, the onus of checking the legal status of residing around England remained on the landlord before letting out their properties, as was hinted by the Queen in one speech (Faulkner, July 2013). Lack of resources, therefore, is an issue that no regulation can help the local government to implement. At the local level, at many places, enforcement agencies are either enforcing or planning selective licensing – Oxford, Salford and Gateshead are the three regions where licensing is in force. This facilitates the authorities in controlling the property market via the Housing Health and Rating System; landlords being the important stakeholders of the property market are charged for not licensing, and defaulting landlords are subject to legal action for this deficiency on their part (Faulkner, July 2013). Irrespective of the estate agents licensing issues, licensing is an issue that affects landowners also, as they are expected according to the rules to get a license to let out their properties because of the cost factor involved. Each property licensing requires many hundreds of Pounds. It increases the concurrent maintenance costs. On the other hand, rogue landlords flourish by offering cheap rents that are too low to let out their premises by duty-bound landlords, adhering to licensing procedures. This selective practice of licensing has been fought by some landlords successfully in their area and the Residential Landlords Association has offered some useful hints to questioning the local authority’s procedures, adding inputs to the consultation process (Faulkner, July 2013). The Property Ombudsman (2013) has stipulated in the Consumer Guide the rules that a registered agent must follow in the interests of consumers. Estate agents are expected to fulfil all their legal responsibilities while operating in their line of business. Property agents’ various duties include: Conducting financial checks – The onus of checking the proof of identity of the seller and the buyer remains with the property agent, as necessitated by the Money Laundering Regulations 2007. An estate agent needs to ensure that records are accurate and particularly so if a buyer is additionally taking the agent services for mortgage as well. Obligation of care – Proper care needs to be given to the transaction details by an estate agent in the best interests of the customer, mostly the seller. Not only the seller but all concerned parties need to be given due treatment and shown courtesy by the estate agent. Any personal or business interest of the agent or staff of the agent should be brought to the knowledge of the buyer or seller as soon as possible in writing. Unbiased advice – Right advice needs to be given to one and all by the property agent irrespective of one’s age, race, religious bend, gender, sexuality, ethnicity, or disability. Conditions of business – It is obligatory on the part of an agent to provide the clients the written Terms of Business with a detail of conditions used. All fees and charges need to be described, especially if any fee becomes due to the agent in case the seller drops the idea of selling the property. Fees and charges – All fees and charges should be made available to the client in writing by the agent, before the client takes a decision to use the agent’s service -- the fee (including VAT) payable and the due date of payment of fee. Fee basis should also be clarified to the client, whether it is a fixed price basis, irrespective of the acquired selling price or whether it is computed as a percentage of the settled selling price. Marketing of the property – While marketing the property, its details must be stated and not misguiding. Reach – Keys of the property for visit purpose should not be given to the client; a staff member of the agent should accompany the customer or the accomplice of the customer to show the property. This rule must be followed unless the seller gives it in writing to give the keys to the prospective buyer. Viewings – The seller instructions should be followed on viewings of the property. Offers – All prospective buyers’ interests should be arranged and delivered in writing to the seller by the agent at the earliest. Nothing should be hidden or misrepresented regarding offers to both the parties, sellers and buyers. Services to buyers -- Any services offered to the buyer should be disclosed to the seller in writing by the agent (The Property Ombudsman, 2013). Legal implications of non-compliance with regulations It may initiate action from consumer enforcement organisations like Local Authority Trading Standards Services (TSS), as enforcement of regulations is the duty of TSS. Action need not be formal and automatic on all non-compliances. It is just one choice of taking action out of many others. Any enforcement action needs to analyse the relevance and weight of proof. Action should be balanced and relevant and depending on the randomness of wrong practice (OFT, 2012). Penalties to the agents Penalties under CPRs or BPRs on summary conviction in the Magistrates Court include a fine below the statutory maximum, which at present is £5,000. In the Sheriff Court, fine could exceed any amount or jail up to 2 years, or both. A repeat of the breach in civil court can put the culprit to two years jail term and/or fine to any limit. An employee is also subject to conviction, fine or civil court order. Additionally, under the Estate Agents Act 1979, an agent can be banned from business practices of related estate agency work. Under the Consumer Credit Act 1974, an agent’s credit licence can be cancelled or suspended. Under the Financial Services and Markets Act 2000, permission to broker mortgages can be revoked (OFT, 2012). A consumer’s course of action Consumers can seek private legal redress through the civil courts. Enforcement action by an enforcement organisation can also occur simultaneously. In the case of complaint being upheld, an agent has to either seek apology from the consumer and/or pay a fine of up to £25,000. A serious disregard of legislation and/or an agreed standard could also cause a dismissal of an agent from the agreed redress scheme. As it is legally binding to be a member of such a scheme, an agent would nullify the right to practice as a property agent (OFT, 2012). Conclusion Considering the above discussion on various property agent issues faced by sellers and buyers, the role of government organisations, various regulations, and other stakeholders, it seems that so far letting the residential estate agents free from licensing needs has served the purpose of different stakeholders. But all cannot be assumed and taken for granted. The OFT review of the property market has been positive that no licensing is required for fair and neutral property transactions but incessant attempts should be made by all stakeholder organisations to cover the loopholes and ensure that unscrupulous business practices are severally punished. The related regulations, CPRs and BPRs are quite stringent and are serving the purpose well, as in other business sector practices. Agents are also representative members of their associations. Any illegal and harmful practices by them can bar them from their own organisations. Also, it is in their own personal and business interests in the long run to behave in the best interest of their customers to remain in business. References BIS., September 2012. The regulatory framework for home buying and selling. Department for Business Innovation and Skills. Available from: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/43393/12-1006-response-estate-agents-and-property-misdescriptions.pdf Faulkner, K., July 2013. ‘Landlords and letting agents face more legal requirements’. The Telegraph. Available from: http://www.telegraph.co.uk/property/property-club/10169481/landlords-letting-agents-legal-requirements.html OFT., September 2012. OFT guidance on property sales. Office of Fair Trading. Available from: http://www.oft.gov.uk/shared_oft/estate-agents/OFT1364.pdf The Property Ombudsman, 25 March 2013. Consumer guide. The Property Ombudsman. Available from: http://www.tpos.co.uk/consumer_guide_sales.htm#three Wilson, W., 2014. The regulation of private sector letting and managing agents (England). Standard Note: SN/SP/6000. Available from: http://www.parliament.uk/briefing-papers/SN06000.pdf Read More