Property Management - Managing Agent Regulation

So the cost of maintaining these assets, as measured by the associated service charge, is also substantial. I estimate that each leasehold property has a reserve fund and service charge deposit of approximately £1,000 associated with it, and although it is always dangerous to extrapolate this type of analysis too simplistically, this would mean that the total being held at any one time by property managers would amount to £1.5 billion plus. I cannot think of another sector where so much money is held by businesses with no requirement to be registered with anyone. On this simple analysis alone, there appears to be a case for the regulation of this sector.

ARMA engaged an independent consultant, Mark Boleat, to provide some general guidelines as to whether regulation was viable for our sector. We were told that the government is most likely to regulate in those areas where:

• The value of the good or service is relatively high and occasional in nature such that the buyer is inexperienced and potential losses are substantial.
• The good or service being purchased is complex or produces services over a period of years, the value of which cannot easily be assessed by the purchaser.
• There is a significant imbalance of power between the buyer and the seller.
• There is substantial consumer detriment as a result of lack of regulation.
• Options other than statutory regulation, such as self-regulation, are not capable of dealing with the problem.
• Regulation is capable of addressing the issues in a satisfactory way and at a reasonable cost.

So, the payment of substantial service charges might appear to qualify within this definition. However, the process of regulation is also subject to the vagaries of political expediency. Sometimes regulation appears to be a knee-jerk reaction to a public outcry. Sometimes, the economic stakes are very high but the government has refrained from regulation.

How regulation of managing agents and property management works

The sector where there appears to be the most obvious need for regulation is car repairs where official estimates are that some 50% of all transactions are unsatisfactory, with consumer detriment possibly being as high as £5 billion a year; that is consumers are paying around £10 billion a year for services that are worth £5 billion.

The sector where there is most regulation is financial services. Here, the regulator, the Financial Services Authority, is primarily a prudential regulator concerned with ensuring the financial soundness of banks and other financial institutions. Financial services are a popular political issue, with banks and insurance companies always likely to be in the firing line for politicians and commentators. However, there is little merit in looking to financial services. Few other sectors have the same political attractiveness and in any event there is now a general recognition that regulation of financial services has probably gone too far.

So even if we believe that statutory regulation is needed, it does not follow that it will happen. The relevant government department has to decide which of many laws it wishes to promote and then has to secure the agreement of other government departments for a slot in the legislative timetable. In short, the government is not likely to respond to calls for regulation, particularly when they come from within industry rather than from consumer groups. Those seeking regulation have to make the case, including persuasive evidence of the need for regulation and how regulation can work in practice.

Although there is no requirement to register with any regulating body in order to go into business, any managing agent is bound by the law of the land, and there is a long list of statutes which impinge upon the sector. In the last 20 years there have been six specific Acts of Parliament for residential property managers to deal with. In addition, we believe there are at least 81 other pieces of relevant legislation or regulation that property managers must comply with.

As a result of all this piecemeal legislative activity, the problem we now face is how further regulation such as licensing could appeal to the government’s sense of priorities and how it might interface with the myriad of existing statutes.

Property Management Regulation: a deterrent to personnel?

Moreover, one of the key issues faced by property managers is the difficulty in attracting and retaining staff. Each successive piece of legislation makes the residential property manager’s job harder and harder.

While those committed to doing a good job labour under an increasing administrative burden, those who have no interest in doing a proper job either ignore the legislation and carry on regardless or exit the business leaving someone else to pick up the pieces.

It may have been better to adopt the Australian model and licence property managers, making them pass professional exams. But adding further constraints now to a sector groaning under the weight of Government’s micro-management is unlikely to be helpful.

The Government is unlikely to address this issue again, as its last piece of legislation, the Commonhold and Leasehold Reform Act 2002, was so complex and problematic that it has still not been fully implemented, four years after it was passed.

The Government has also established specialised entities for dealing with lessees’ queries, such as the Leasehold Advisory Service and the Residential Property Tribunal Service, which are both generally free of charge to leaseholders.

So from the point of view of a practising property manager, there is an enormous amount of statutory regulation already in place and several bodies exercise de facto control over market participants in the event that a poor service has been provided.

In my view the position we have reached is unfortunate in that the regulatory framework only has the ability to address wrongdoing after the fact. It does nothing to prevent the likelihood of wrongdoing in the first place and does nothing to establish the status of property managers to encourage top calibre professionals to enter the sector. Instead, by micro-managing the operations of our businesses we have reached a point where property managers are difficult to attract and retain, and are treated as “guilty until proven innocent”. The market reaction has been for many businesses to exit the marketplace altogether and we are in the middle of a period of consolidation. Many blocks are now simply uneconomic to manage and will be left to their own devices.

The full consequences of these trends are yet to be felt or understood. However, I strongly suspect that the market trend is significantly different from what the Government anticipated. In my view it is not more regulation that is required from a statutory perspective, but a different, more preventative approach built around professional entry levels and an enhanced professional standing for property managers. Licensing would be consistent with this. Regrettably, given the distance that has already been travelled along an alternative route, this approach is unlikely to materialise.

ARMA’s role in these circumstances is, in my view, an important one. We can take steps to try and redress the balance and promote the professional standing of the sector. We hope that in due course membership of ARMA will be a commercial pre-requisite for anyone choosing a property manager.

To conclude, while there may be a theoretical case for regulating managing agents on the basis of the sums of money involved and the economic importance of leasehold property, the likelihood of this happening in the foreseeable future is negligible. The problem with this entire approach is that it leaves property managers battling in a market place where barriers to entry are low and where incentives to exit are high. The market place is changing quickly in response to the legal framework, and it is not clear that it is changing for the better from a consumer standpoint.

Although I would prefer to have seen a more positive licensing approach taken to the whole issue, this is unlikely, so the only way of mimicking such an approach is by building ARMA membership into a commercial ‘must have’ which will act as a proxy to an operating licence.

Duncan Rendall is chairman of the Association of Residential Managing Agents and a director of Rendall & Rittner