Response to The OFT's Residential Management Scoping Document

I am writing this open letter in response to the OFT's scoping document in relation to their proposed study of the residential management market. I write in my capacity as a leasehold management expert and property manager with over 25 years experience, and as a leasehold flat owner for more than 15 years.

For the purposes of this response I have restricted my comments to the leasehold market, but I believe it should be noted that similar issues occur with estate management and freehold rent charges - a market which remains almost entirely unregulated and without redress mechanisms.  This area is, potentially, growing faster in the UK than any other sector since local authorities have moved away from adopting public open spaces.

Any study must recognise that the residential leasehold management industry is bound by significant statute and regulations that offer a range of remedies and protections for consumers. Since 1985 successive governments have sought to overcome perceived inequities in the balance of power between landlords and leaseholders with a succession of poorly drafted Acts. These have offered some real protections but have also added to complexity and reduced consumer understanding of this type of tenure further.

Such changes have not entirely removed the rogues. They have been able to use this complexity to prevaricate and delay any response to genuine consumer complaints by using the tribunal and court systems and inevitable loopholes. It has, however, forced the responsible agents to look to professionalise and systemise their services to reduce risk and improve delivery.  Professionalisation has come in the form of specific qualifications (IRPM) and guidance notes and education provided by the likes of ARMA, LEASE and IRPM. None of this was available just 15 years ago. The standard of service delivery is higher than it has ever been and there is a recognition that expertise, diligence and compliance does result in the delivery of better services.

All of this comes at a price, but I estimate that the average management fee for full block management services is at an all time low in real terms. In 1988 I recall reviewing management fees for central London mansion blocks to £225 per unit per annum (ex VAT). Anecdotally and through recent tender exercises these fees remain at the same level or thereabouts. Outside London, fees average £160 per unit per annum and this number has been moving down for some years as a consequence of keen market competition during the recession which was marked by a raft of new players entering the market. There remains no real barrier to entry in this sector and this will remain unchanged without some form of  regulation that has the backing of statute. 

In all, it is not easily possible to manage profitably at these numbers given the demands that complying with Acts and regulations requires. Most agents supplement their incomes by involvement in a range of other activities, whether lettings, credit control, resales, health and safety, surveying services or self delivery of other building services. Without those, leasehold block management is increasingly marginal and many smaller businesses are barely profitable, or worse they continue to trade whilst technically insolvent.

The good news for consumers is that all agents are now required to be members of a redress scheme. If they are involved in any form of insurance mediation they must be FCA accredited. Around half of agents are members of ARMA and bound by their code of practice, the RICS code for residential management and their requirements for PI insurance and trust banking. ARMA is growing rapidly and despite the imminent arrival of ARMA-Q regulation which has significant cost implications for agents. Nearly 3000 individuals have qualified for membership of IRPM and so far more than 300 of these have gone on to become RICS associates. Consideration of statutory backing and a requirement for all leasehold managers to sign up to ARMA-Q would level the playing field and ensure a better consistency of standards.

Notwithstanding, many consumers continue to believe that they get a raw deal. This is, in part, due to a lack of understanding and information at the point of purchase. Leases are complex documents that need to be explained carefully. They are legally binding contracts relating to one of the biggest investments that most people will make. Despite this, they remain barely understood in a world where conveyancing has become a price driven, factory activity and insufficient time is given to explaining the covenants and duties set out in the leasehold documents either by sales agents or lawyers.

I do not believe that the scope of such an investigation can be complete whilst excluding registered social landlords and local authorities. Why would they be excluded? They manage leasehold buildings and there are many well publicised examples of the issues they have had to deal with.

It should be recognised that the services provided to close to 2 million leasehold flats in England and Wales are essential and require highly specialist knowledge across a broad range of subjects. It is not a job for amateurs and it is not easy to find train and retain expert staff in a market that is being reduced to a price driven commodity service. Those that are ARMA members and intend to be regulated through ARMA_Q now find themselves in a two tier market with those who choose to remain unregulated and often non compliant.

Finally it is worth considering that many of the buildings completed within the last urban residential development boom are now reaching the stage that major cyclical projects are becoming due. In too many cases cost pressure has resulted in inadequate reserve provision being made and this will result in further pressure on managers to find quick fixes and cut corners. These buildings are the most complex buildings ever used as homes and the costs of maintaining them in the longer term will be enormous. 

In summary then:

•  The scope must give consideration to the myriad of legislation and regulation that encompasses the very wide range of activities required of a manager for even the most basic of buildings.

• Consideration should be given to whether the current legal and regulatory framework is assisting or hindering the delivery of effective, value for money, services and whether simplification and consolidation would benefit all. 
• The study should investigate whether there is currently significantly more consumer driven switching than ever, as a result of both the increase in self governing Residents' Management Companies and successful Right to Manage applications. Is the market already fixing itself?
• The scope should include an investigation into the current Section 20 consultation thresholds and whether these remain realistic.
• The scope should investigate whether limiting contracts to one year (without more detailed consultation) is ensuring that best value can be easily achieved.

• The scope should recognise the increasingly professional service offered by managing agents.
• It should recognise the importance of IRPM and portable professional qualifications.
• It should look at whether sufficient training resource is available to consumers, particularly directors of residents' management companies and officers of tenants' associations.

•  The scope should allow for investigation of pricing and whether good agents are being driven out of the market,
• There is currently significant tension between consumer requirements for exceptional customer service and value for money.

• The likely impact of ARMA-Q regulation must form an important part of the scope of this study.
• The study should review whether an element of compulsion should be added to ARMA-Q to ensure that all agents are required to join so that all consumers benefit from its provisions.

• The study must recognise that consumers are rarely willing purchasers of management services at the point of sale - hence there is an immediate tension when the first service charge demands are received.
• Intermediaries  - lawyers, conveyancers, developers and estate agents -  have a responsibility to explain the real costs of management services over the life of a lease.
• The continued practice of 'lowballing' service costs at initial sale should be looked at carefully. 

• RSLs and local authority leasehold customers have the same right to be included in the scope of this study as those in the private sector.

• The study should recognise the essential,valuable and important nature of the work that managing agents undertake.

Yours Faithfully

 David Clark FIRPM AssocRICS

NB: The findings of the study into Scottish Property Managers were:

• competition in this market was not working well for consumers
• the level of switching was very low and that consumers often did not understand their rights and obligations, and did not have a clear understanding of the standards they expect from a property manager
• when things go wrong, there was no effective redress mechanism.

The same cannot be said of the market in England and Wales where there is significant competition,where switching is becoming increasingly normal and where there are effective redress mechanisms in the form of ombudsmen and tribunals.