1) Agent goes out of business, funds are not protected

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1 Briefing from the Federation of Private Residents Association The Communities and Local Government Committee will take evidence from the new ministers at Department for Communities and Local Government with responsibility for planning and housing on 15 October. The session will focus on the Ministers new responsibilities and the package of proposals announced by the Government on 6 September to boost house-building, jobs and the economy In spite of the reforms in the 2002 Commonhold and Leasehold Reform Act, Leaseholders in blocks of flats can still have their service charge funds taken from them by their managing agent This can happen in three ways 1) Agent goes out of business 2) Agent receives Kick-backs 3) Agent receives commissions chiefly on insurance At present there is still No regulation of service charge accounts No regulation of managing agents No requirement for transparent accounts 1) Agent goes out of business, funds are not protected The law says that Service Charge funds must be held in trust. However it is not clear if this is one trust or client account or individual trust funds for each property There is no punishment if an agent does not do so. There is no requirement for an agent to clarify where and how funds are held. Associations to which managing agents belong all regulate the holding of client money, (RICS, ARMA, ARLA, NALS) but: There is no requirement for agents to belong to an association, and a new agent may not join ARMA for two years after setting up. Agents may fall out of membership unknown to leaseholders.

2 To give an example of a block on the South Coast. Five leaseholders own their freehold and leave their funds with their agent. The Agent dissolves his company. The Leaseholders are now keeping him on because they can t get their funds back, and trying to find major works sufficient to use up the money they hope they still have, somewhere.? Another Block of 100, which consulted FPRA, sacked their agent and are unable to get their trust fund money returned without an expensive court case and have been told by LEASE that they need an expert in trust funds to help them. Short term leaseholders (tenants) have their money regulated by the tenancy deposit scheme. We offer no regulation to leaseholders for huge sums held by unregulated managing agents. S. 156 of the Commonhold and Leasehold Reform Act 2002 would have protected leaseholders from losing their funds. It has not been brought in yet. After S42 of the 1987 Act insert.. what follows is a well constructed solution complete with a statutory punishment..(to quote here from the 2002 Act which is not yet in force 10 years later) S.42B Failure to comply with Section. S42A A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 4 on the standard scale In addition S. 156 (5) gave Local Authorities the power to bring proceedings, which saves leaseholders the expense of legal action themselves. The industry itself when consulted by government responded with Transforming Regulatory Enforcement Another key area of concern is theft of client money by lettings agents. Preventative measures should be introduced in order to protect consumers. A comprehensive system of identifying higher risks lettings firms should be introduced, and this should be complemented by an

3 increased willingness to prosecute. Unfortunately in our experience the police can mistakenly interpret dishonesty as bad business conduct In 2009 and 2010 ARLA received claims for 1.6 million under its Client Money Protection Scheme. ELIZABETH RICHARDS wrote, responding to the Government consultation on behalf of RICS, and the umbrella organisation NFOPP Our members take their professional and legal obligations seriously but they often complain that there is little incentive to do so, as no action is taken against their non compliant competitors. More resources are required to ensure that Trading Standards and the other relevant enforcement agencies pay sufficient attention to the property sector. for our sector our view of disproportionate enforcement is the lack of enforcement not over enforcement. (2) Managing Agents Receive Kick Backs An FPRA honorary consultant SHULA RICH speaks about the Managing Agent she met a member of ARLA who told her we re the only Agent in this street that doesn t take kick backs When Ms. Rich asked how the Agent knew? The reply was our contractors tell us A kick-back in this business is when the Agent receives a percentage of the work they give to a contractor back again. The leaseholders are billed accordingly. It can be called grease or a facilitation payment QUERY Given the Bribery Act 2010 isn t it time that we took this seriously enforcing guidelines to help honest agents who want to do the right thing? If a supermarket chain can have a clear anti bribary policy why not a managing agent? An Example from a national chain of supermarkets guidance (Morrison s) The Company prohibits:

4 the offering, the giving, the solicitation or the acceptance of any bribe, whether cash or other inducement to or from any person or company, wherever they are situated and whether they are a public official or body or private person or company by any individual employee, agent or other person or body acting on the Company's behalf in order to gain any commercial, contractual or regulatory advantage for the Company in a way which is unethical OR in order to gain any personal advantage, pecuniary or otherwise, for the individual or anyone connected with the individual.. 3) Agent receives commissions chiefly on insurance ROBERT LEVENE the FPRA Insurance Expert writes Legalised bribery! The Government, freeholders, insurance companies, insurance brokers and agents, managing agents, members of professional and trade bodies have all either consciously or unconsciously allowed a system to be created where leaseholders are routinely overcharged for the benefit of others. The overcharge is now so embedded that few stop and say hold on, there s something wrong here. This even affects leaseholders where they ve purchased their own freehold, exercised the right to manage or any of the other schemes. What is being referred to? The answer is insurance commission. It is not limited to insurance commission, but this is the most blatant abuse, other examples increasingly are the payments to various parties for collective supply of

5 electricity, digital services etc. where the leaseholder who pays the bill does not receive the benefit of their purchasing power. These commissions can be up to 30% of the insurance premium. Where home owners are spending their own money, they are free to make what enquiries they wish. Leaseholders are not. They are not even benefiting from the excellent protections Government introduced for them 10 years ago. QUERY How and When will the Government Act to protect leaseholders funds from disappearing in hidden commissions, bribes and unregulated accounts? The Centre Forum think tank published an extensive report during the summer that received support from MP s of all-parties and endorsed by the sector as a whole. How ill the new Housing Minister be responding to this report? Brief for Communities and Local Government Committee Select Committee to question new ministers at Department for Communities and Local Government with responsibility for planning and housing on 15 October.

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