FAQs: Home Purchase Plans (HPPs)

HPP regulation will begin on 6 April 2007.

On or after 6 April 2007, you will need to have permission to enter into, administer, arrange, or advise on a regulated HPP.

Further information about each of these activities can be found in the guidance on home reversion and HPP activities, in the Perimeter Guidance manual (PERG 14.4). Firms may also find helpful the guidance on regulated activities connected with mortgages in PERG 4.

If you intend to carry on any of the new regulated activities on or after 6 April 2007, you will need to apply for permission from us to do so. See applying for authorisation for further information.

There are some general exemptions from HPP regulation contained in the legislation. The key bodies that are exempt are appointed representatives, exempt professional firms (such as solicitors, accountants and actuaries), local authorities and registered social landlords. There are also some specific exclusions from the regulated activities. One of the most important is that introducers are excluded from the arranging activity, subject to certain conditions.
For further information about the available exclusions see PERG 14.4.

HPPs on the market currently all share the following characteristics:

• a financial institution buys a property chosen by a consumer and becomes the owner;
• the consumer enters into an agreement to buy the property from the financial institution at the original purchase price either by paying in full at the end of, or paying by instalments during the course of, a specified period;
• the provider and consumer enter into a rental agreement, giving the consumer the right to occupy the property throughout the specified period; and
• once all payments have been made at the end of the specified period, the financial institution transfers ownership of the property to the consumer.
  

On 6 April 2007, we will become responsible for regulating those new HPPs which meet the statutory definition. That is, those HPPs under which, when they are entered into:

• the provider buys land in the UK;
• the purchaser (an individual or trustees) is under an obligation to buy that land from the provider over or at the end of a specified period; and
• the purchaser (or a related person) is entitled to and intends to occupy at least 40% of that land as or in connection with a dwelling during that period.

See PERG 14.4 for further details about the statutory definition. This means that we will not regulate the following HPPs:

• those entered into before 6 April 2007;
• those for properties overseas;
• those where the home purchaser is a company;
• those where the property is primarily used for a business purpose; and
• most 'buy to let' arrangements.
  

HPPs are also known as Islamic 'mortgages'. They serve the same purpose as a conventional mortgage – they provide consumers with a means of buying a home – but they are structured in a way that makes them aceptable under Islamic law.

In a conventional mortgage, a financial institution lends money to a consumer to help them purchase a property and the financial institution makes its money by charging interest on the sums lent. In a HPP, the financial institution buys the property for the consumer and makes its profit from renting the property to the consumer. It charges the consumer for physically using the property rather than charging for using the money, which is interest and forbidden under Islamic law.

There is nothing in the statutory definition of a HPP to suggest that it has to be Islamic. It is clear, however, from comments made by HM Treasury when it introduced the legislative changes necessary to bring HPPs within our scope that the definition is primarily directed at 'Ijara' and 'Diminishing Mushraka' products. Both these arrangements fall within the definition of a regulated HPP.

We already regulate the Murabaha method of buying a home, which is the other way of buying a home acceptable under Islamic law. Under this method, the provider buys the property and immediately sells it on to the consumer for the original price plus an agreed profit margin. The consumer pays the higher price on a deferred payment basis in line with a fixed repayment schedule and to secure repayments, the provider takes a first charge over the property. This method falls within the definition of a regulated mortgage contract and so has been regulated by us since October 2004.

No. For a product to be deemed to be compliant with Islamic law, qualified Scholars of Islamic law must issue a religious ruling (a fatwa) declaring that it is compliant. The credibility of a firm's services and products rests on the standing of a particular Scholar and this religious ruling. There is a new conduct of business rule for HPP firms that requires those firms holding themselves out as offering Islamic services and products to set out the names of its scholars in its initial disclosure document. This is to provide consumers with an opportunity to consider the credibility of the services and products on offer.

The small size of the HPP market did not justify creating a separate sourcebook. Although HPPs and mortgages are different in structure, because they are designed to achieve the same purpose we decided that there were a number of features of the existing MCOB regime that we could usefully build on for regulating HPPs. So we have created bespoke conduct of business requirements for HPP firms, set out at the end of each relevant chapter within MCOB.

We have changed the name of MCOB from 'Mortgages: Conduct of Business soucebook' to 'Mortgages and Home Finance: Conduct of Business sourcebook'. This reflects the fact that its application now goes beyond mortgages to cover home finance in general, including home reversion plans and HPPs. Given the number of references to MCOB throughout the Handbook and the fact that MCOB is now in common useage in the mortgage market, we decided to retain 'mortgages' in the title and so retain the existing acronym.

In many ways, yes. The overarching requirements on firms are the same and there is a similar approach, for example, to initial disclosure, to advising and selling standards, to responsible financing, to charges and arrears policies and procedures. But there are a number of important differences:

• A key difference is that the new regime has been designed to be consistent with the move towards a more principles-based approach to regulation, reinforcing the importance we attach to senior management responsibility. This new approach focuses on the outcomes we want firms to achieve and provides them with the flexibility to decide what business processes and controls they need to achieve these desired outcomes. So, for example, for financial promotions, the only requirement on HPP firms is to take reasonable steps to communicate information to a consumer in a way that is clear, fair and not misleading: the detailed rules in MCOB 3 do not apply. Similarly, there are no detailed record-keeping requirements for HPP firms: the high-level record-keeping requirements in SYSC apply instead. This means it is up to each firm to decide which records to keep and for how long.
• There are also some key differences to pre-application disclosure. As we noted in CP 06/8, our cost-benefit analysis revealed that it would be disproportionately costly for HPP firms to develop a mortgage style Key Facts Illustration (KFI) given the very small size of the market. So in its place, we require firms to provide consumers with a non-personalised Risks and Features statement (which draws a consumer's attention to the key risks associated with an HPP) and a personalised Financial Information statement. This sets out broadly the same key pieces of financial information as in a standard mortgage KFI. Samples of both documents have been published on our website on the disclosure pages. These documents have been designed in a way that will enable consumers to use them to shop around, not only between HPP firms but also between HPP and mortgage firms, if they so choose.

There are several legal risks that consumers may not readily appreciate which we have set out in some detail in CP 06/8 at paragraph 7.22. To help mitigate against these risks, there are additional new conduct of business requirements in MCOB 2 that apply to HPP firms only (see MCOB 2.6A).

No. Our rules do not require firms to communicate with customers in languages other than English. This is a matter for firms to decide.

Consumers will benefit generally from:

• Firms offering these products will need to be fit and proper and appropriately resourced with staff competent to undertake this business. This is something that we check not only at the time of authorisation but also on an ongoing basis.
• Consumers will get clear, concise and consistent information about a firm's services and the products on offer (including appropriate risk warnings) so they can make informed choices. This is particularly important given the structure of HPPs and the fact that the product literature and contractual documentation is complex. As noted above, we want to reduce the risk that consumers may not have a clear and sufficient understanding of the risks inherent in these products. To do this we require HPP firms to give consumers, before they apply, a Risks and Features statement, which is a clear and comprehensive statement of the risks and features of this product.
• Consumers will get good quality advice and be sold suitable products which take account of their circumstances and needs. This is also particularly important in this market because discussions with key stakeholder groups have indicated that there is currently relatively little use of formal advice channels. Sales are generally non-advised, with the consumer typically asking a provider for a specific product, based on a recommendation from family and friends, rather than seeking professional information or advice on the products available. Consumers will be given documentation when they first contact a firm which will tell them about the services on offer and enable them to shop around for professional sources of advice.
• If things go wrong, consumers may have access to compensation through the Financial Ombudsman Service (FOS) and the Financial Services Compensation Scheme (FSCS).

We recognise the importance of ensuring that consumers know what products are available to meet their needs. We shall continue to take every opportunity to work closely with key statekeholder groups, community representatives and firms to help raise awareness of these products. We are preparing a factsheet for consumers about the products and the benefits of regulation which we shall distribute through all available community access points. We also propose using local community radio and the Muslim press to help raise awareness.