Partial Business and Regulatory Impact Assessment
Title of Proposal Partial Business and Regulatory Impact Assessment Proposals to Exempt Certain Heritable Securities from the 20 Year Security Rule Purpose and intended effect Background The 20 year security rule was enacted in the Land Tenure Reform (Scotland) Act 1974, which prohibited new feu duties. One of the main purposes of the 1974 Act was to prohibit the creation by feu superiors of new feu duties (annual payments which the owner of a property had to pay their superior), and this prohibition was supported by the introduction of the 20 year security rule so that superiors could not circumvent the prohibition by creating new sources of income through ground rents and interest payments on very-long-term leases/standard securities. Section 11 of the 1974 Act gives a borrower the right to redeem a security over a dwelling house after 20 years have elapsed since it was created. This is more commonly known as the 20 Year Security Rule. The borrower has to pay the creditor a sum calculated by reference to any money advanced to the debtor and not repaid, plus any interest outstanding. This overrides any contrary contractual provisions that are in place. While the rule was introduced as a protection for the borrower to deal with the feu duty system it has now become a barrier to providing assistance to potential home buyers. The situation has been exacerbated following changes in mortgage lending and as a result the rule is inhibiting Government s ability to provide support to home buyers. Scottish Government has offered shared equity schemes for over 9 years, making loans available to buyers with the loans linked to property value. Buyers are required to grant a standard security in favour of the Scottish Ministers. The schemes previously included a contractual clause which would be triggered in year 19 of each shared equity transaction. This meant that buyers were required to grant a new standard security in favour of the Scottish Ministers in substitution for the original standard security at year 19. This prevented the buyer attaining the ability to acquire the right to redeem under the 20 year security rule meaning that they could redeem their loan at its original value by reference to pounds and pence, rather than by reference to property value. The contractual clause ensured that the Scottish Government s original loan retained the link to the property value and was a means of managing financial exposure associated with the risks of the 20 year security rule. Changes to Financial Conduct Authority guidance on 24 th April 2014 (related to affordability tests and mortgage duration) meant that lenders were unwilling to participate in Government funded home ownership schemes such as the Help to Buy
(Scotland) scheme and the Scottish Government s Low Cost Initiative for First Time Buyers (LIFT) schemes, on the basis of there being a break clause at year 19. Without lender participation these schemes are not viable. In order to secure lender participation, the Help to Buy (Scotland) scheme has operated with no break clause since it was launched in September 2013 and the LIFT schemes have operated with no break clause since April 2014 on the basis that appropriate exemptions would be secured in the near future. Section 93 of The Housing (Scotland) Act 2014 introduced a new Section 11 (3) (d) to the Land Tenure Reform (Scotland) Act 1974 which provides Scottish Ministers with a power to specify by way of an Order the circumstances for when the 20 year security rule will not apply. Objective The provisions propose to exempt the following Scottish Government shared equity and equity release schemes from the 20 Year Security Rule:- (a) Homestake (b) Open Market Shared Equity Scheme (c) New Supply Shared Equity Scheme (d) Help to Buy (Scotland) Scheme (e) Help to Adapt Scheme The proposed changes will allow for lenders to continue to participate in these schemes. It will also ensure that the Scottish Government is not exposed to the financial risks of the 20 year security rule i.e. that borrowers would be able to redeem their loan come year 20 at its original value by reference to pounds and pence, rather than by reference to property value. The 20 Year Security rule is unique to Scotland and it does not apply anywhere else in the UK. Similar schemes which operate across the UK do not therefore have the risk of the non-participation by lenders and they do not also have the associated financial risks to Government. Rationale for Government intervention Unless these schemes were exempt from the provisions of the 20 year security rule, it would be unviable for the Scottish Government to continue to operate them. The amendment fits with the Scottish Government National Performance Indicator to Increase the Rate of New House Building. High house prices make it difficult for certain groups, particularly those on lower incomes, to realise aspirations for home ownership. They also make Scotland a less attractive place to live and invest in. Increasing the supply of housing and the responsiveness of the housing market is the surest way of improving affordability in the medium to long term. It will also support a wealthier and fairer Scotland.
Consultation Within Government In developing the proposals, officials have consulted with colleagues from the Scottish Government Legal Directorate, Family and Property Law, Housing Supply Division, Communities Analytical Services, and the Scottish Law Commission. Issues that have been discussed have included the need for continued operation of Scottish Government shared equity and equity release schemes, the financial impact to Scottish Ministers if the changes are not introduced, as well as agreement to seek views on Islamic mortgages in Scotland. Public Consultation A consultation paper was published on 1 st October 2014 and the closing date for responses is 24 th December 2014. The Scottish Government plans to publish a report on the responses received to the consultation. Business As part of the public consultation, we will engage with a wide range of bodies including COSLA, SFHA, ALACHO, all local authorities, all mainstream registered social landlords, Homes for Scotland, and the Council of Mortgage Lenders. This will assist in understanding if there is any business impact of introducing the proposed changes. Options Option 1: Do nothing Option 2: Make an Order to exempt specific Scottish Government shared equity and equity release schemes from the 20 Year Security Rule. Sectors and groups affected The consultation paper proposes to exempt specific Scottish Government shared equity and equity release schemes from the 20 Year Security Rule. An Order will be laid in the Scottish Parliament which is subject to the negative resolution procedure exempting these schemes and the following categories of people may be affected: Benefits Lenders Local Authorities Registered Social Landlords Option 1: Do nothing There are no benefits if we do not proceed with the change.
Option 2: Make an Order to exempt specific Scottish Government shared equity and equity release schemes from the 20 Year Security Rule. This will allow for the Scottish Government, Local Authorities, and Registered Social Landlords to continue to operate Scottish Government shared equity loan and equity release schemes, particularly as a result of the increased scrutiny which mortgage lenders must exercise for shared equity lending as a result of the Financial Conduct Authority Mortgage Market Review (MMR) guidance which came into force on 26 th April 2014. It will also ensure that Scottish Ministers are not exposed to the financial risks associated with the 20 year Security Rule which allows borrowers to redeem their equity loan for its original value after the security has been in force for 20 years rather than by reference to property value. Costs Option 1: Do nothing There could be potential losses to the Scottish Ministers if we do not proceed with the change. Potential losses could be prevented with Scottish Ministers being able to benefit if property values will have increased over the 20 year period. The potential losses for the Help to Buy (Scotland) scheme are estimated to be between 120 million and 320 million (nominal) for a three year, 275 million scheme but could be, subject to high house price growth, as high as 850 million. These losses could arise because the scheme is currently operating with no contractual clause which could be triggered in year 19 of each shared equity transaction. Therefore, buyers who have not either sold their property or tranched up to full ownership in 20 years time could potentially redeem the standard security granted in favour of Scottish Ministers for the original loan amount rather than by reference to the property value. If the Help to Buy (Scotland) scheme was not exempt from the 20 Year Security Rule, there is a risk that repayment of the financial transactions for the scheme by the Scottish Government to HM Treasury would not be covered, particularly if house price growth is lower than expected. Since April 2014, the LIFT shared equity schemes are operating with no break clause in its legal documentation in order to secure the continued participation of lenders. Potential losses for the LIFT shared equity schemes could be prevented with Scottish Ministers being able to benefit if property values will have increased over the 20 year period. Estimated potential losses are estimated to be between 20 million and 55 million (nominal) but could be, subject to high house price growth, as high as 150 million (based on funding of 50 million for 2014/15). These losses could arise because the scheme is currently operating with no contractual clause which could be triggered in year 19 of each shared equity transaction.
Option 2: Make an Order to exempt specific Scottish Government shared equity and equity release schemes from the 20 Year Security Rule. Benefits Home owners who have entered into shared equity agreements that contains an obligation to grant a new standard security at year 19 could see potential savings relating to avoiding the negotiating and legal costs of putting a new security in place in year 19 (with avoided legal costs estimated at around 900 per property). Costs We do not expect there to be any significant administration costs to the Scottish Government associated with exempting the specific schemes from the 20 Year Security Rule. The LIFT shared equity schemes and the Help to Buy (Scotland) scheme are currently operating with no break clause in the legal documentation. We do not expect there to be any increased administration burden on local authorities or registered social landlords if these specific schemes were exempt from the 20 Year Security Rule. We do not expect there to be any significant administration costs for mortgage lenders if these specific schemes were exempt from the 20 Year Security Rule. The LIFT shared equity schemes and the Help to Buy (Scotland) scheme are currently operating with no break clause in the legal documentation and lenders are aware of these changes. While home owners who purchased a home with assistance from one of the Scottish Government s LIFT shared equity schemes prior to April 2014 would lose their right to redeem the equity loan at its original value after 20 years, this loss is only theoretical. The reason for this is that these home owners will have entered into a shared equity agreement that contains a contractual clause requiring that the buyer grants a new Standard Security in year 19. If no standard security is granted, the Scottish Ministers could potentially take action to recover it equity share. Since April 2014, all home owners who have received assistance from one of the Scottish Government s LIFT shared equity schemes have been notified of the Scottish Government s intention to introduce changes to the 20 Year Security Rule. It is possible that buyers will have sold their home before year 19 or, in the case of the shared equity schemes, tranched up to full ownership. For those home owners who have not and who have entered into a shared equity agreement with a 19 year break clause, there are potential savings relating to avoiding the negotiating and legal costs of putting a new security in place in year 19 (with avoided legal costs estimated at around 900 per property). In addition, the proposed changes will help reduce any uncertainty for the owner and third parties of what the future legal position relating to the property is.
Scottish Firms Impact Test We do not expect that individual lenders will need to make any changes to their IT systems if the LIFT schemes, the Help to Buy (Scotland) scheme and Scottish Government equity release schemes are exempt from the provisions of the 20 Year Security Rule. Lenders are currently lending to buyers participating in the Scottish Government s shared equity schemes on the basis that the shared equity agreements that are being issued to buyers do not contain a contractual clause which would be triggered in year 19 of each shared equity transaction. As previously mentioned we will be engaging with a wide range of bodies during the consultation period and whilst we expect that there will be no impact on business from these proposals these discussions will highlight any issues we have not considered. For these reasons we feel it would be disproportionate to carry out any additional face to face discussions with business however if any impacts come to light during our discussion then we will look again at this aspect. Competition Assessment Using the Competition and Markets Authority competition assessment framework, it has been established that the preferred policy option (Option 2) will not limit the number or range of suppliers directly or indirectly, nor will it limit the ability or reduce incentives of suppliers to compete vigorously. Test run of business forms The Scottish Government s shared equity schemes are currently operating with no break clause at year 19. No new or additional forms will be introduced by this proposal therefore no test run needs to be completed. Legal Aid Impact Test We do not believe that the regulations would create any additional pressures on legal aid resources. This view has been confirmed with colleagues with policy responsibility for legal aid. Enforcement, sanctions and monitoring Option 1: Do nothing The Scottish Government has published guidance for registered social landlords to contact shared equity owners at year 19 to remind them that they are required to grant a fresh Standard Security in favour of Scottish Ministers at that time. Option 2: Make an Order to exempt specific Scottish Government shared equity and equity release schemes from the 20 year security rule. There are no specific enforcement or sanction mechanisms required. Should the
proposal be implemented, the Scottish Government Housing Supply Division plans to issue guidance to all registered social landlords asking them to provide information to all Scottish Government shared equity and equity release scheme participants that the specific scheme has been exempted from the 20 year security rule. The Scottish Government will monitor feedback from all buyers through its discussions with individual registered social landlords. Implementation and delivery plan There is no need for an implementation and delivery plan for options not chosen. Should Option 2 be implemented, the Scottish Government Housing Supply Division will work with registered social landlords to ensure that Scottish Government shared equity and equity release scheme participants are informed of the changes. Post-implementation review A formal review of the legislation will take place within 10 years of it coming into force to ensure that it is still fit for purpose. Summary and recommendation Option 2 is our preferred option as it will ensure that Scottish Ministers are not exposed to the financial risks associated with the 20 Year Security Rule and it will ensure the continued operation of Scottish Government shared equity and equity release schemes. Option 2 will allow for lenders to continue to participate in Scottish Government shared equity and equity release schemes. And it will mean that there will be potential savings for home owners participating in Scottish Government shared equity schemes as well as helping to reduce any uncertainty for home owners and third parties of what the future legal position relating to the property will be. Summary costs and benefits table Option Total benefit per annum: - economic, environmental, social 1 Option 1: Do nothing There are no benefits if we do not proceed with the change. Total cost per annum: - economic, environmental, social - policy and administrative There are no associated costs. However, without amending the provisions around the 20 Year Security Rule, it could become difficult for the Scottish Government and other bodies to operate shared equity loan and equity release schemes, particularly as a result of the increased scrutiny which mortgage lenders must exercise for shared equity lending as a result of the Mortgage Market Review that came into force on 26 th April 2014. There could be potential losses to
the Scottish Ministers if we do not proceed with the change. Potential losses could be prevented with Scottish Ministers being able to benefit if property values will have increased over the 20 year period. The potential losses for the Help to Buy (Scotland) scheme have been estimated to be between 120 million and 320 million (nominal) for a three year, 275 million scheme but could be, subject to high house price growth, as high as 850 million. Without the amendment there is a risk that repayment of the financial transactions for the scheme by the Scottish Government to HM Treasury would not be covered, particularly if house price growth is lower than expected. Potential losses could be prevented for the LIFT schemes and these have estimated to be between 20 million and 55 million but could be, subject to high house price growth, as high as 150 million (based on funding of 50 million for 2014/15). 2 Option 2: Make an Order to exempt certain Scottish Government schemes from the 20 year security rule. Making an Order would allow for the Scottish Government and other bodies to continue to operate shared equity and equity release schemes. Making an Order to exempt specific Scottish Government shared equity and equity release schemes would ensure that Scottish Ministers are not exposed to the financial risks There are no costs to the Scottish Government associated with the 20 year security rule provisions. The legal documentation for its shared equity schemes has already been amended to remove a contractual condition requesting the home owner grants a fresh standard security at year 19 in favour of Scottish Ministers. We do not expect there to be any significant administration costs to the Scottish Government associated with exempting the specific schemes from the 20 Year Security Rule.
associated with the 20 year security rule which allows borrowers to redeem their equity loan at its original value after the security has been in force for 20 years. We do not expect there to be any increased administration burden on local authorities or registered social landlords if these specific schemes were exempt from the 20 Year Security Rule. We do not expect there to be any significant administration costs for mortgage lenders. There could be potential savings for home owners participating in Scottish Government shared equity schemes. These savings relate to avoiding the negotiating and legal costs of putting a new security in place in year 19 (with avoided legal costs estimated at around 900 per property), In addition, the proposed changes will help reduce any uncertainty to home owners and third parties of what the future legal position relating to the property will be.
Declaration and publication I have read the Business and Regulatory Impact Assessment and I am satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impact of the leading options. I am satisfied that business impact has been assessed with the support of businesses in Scotland. Signed: Date: Margaret Burgess Minister for Housing & Welfare Scottish Government Contact point: John Mcrorie, Housing Supply Division, 8 th Floor, Highlander House, 58 Waterloo Street, Glasgow, G2 7DA
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