ECSH53050 - Determining what is in scope as an estate agency business and other factors to consider
There are some factors that need to be considered when dealing with estate agency businesses (EABs) or considering whether a business needs to be registered as an EAB.
Agents, self-employed agents and franchises
Some EABs operate through the use of agents, self-employed agents and contractors. Many will also use franchise models.
EABs utilise agents, self-employed agents and franchises as these types of models allow them to manage their costs and increase growth, while having overall control of its business. For example, self-employed agents often come with low overheads as they typically run their own businesses and work on a commission-only structure.
Principal and agent relationships
EABs frequently enter into arrangements with other parties to enable the EAB to provide its services to customers. This is known as a principal/agent relationship. `
These include appointing an agent or agents to act on behalf of an EAB (the principal) in the provision of their services. In a principal/agent relationship, the principal is the person or entity who gives authority to an agent to act on its behalf.
A principal in this context is the EAB that contracts with a customer through its agent and owns, and is responsible for, the transaction.
An agent is a separate person or entity appointed to act on behalf of the principal in the provision of their services. This arrangement may be directly between agent and principal or may be between an agent of the original principal and a further agent.
Use of agents also allow EABs to have a wider geographic range, without the cost of setting up a whole new branch.
Responsibility for the EAB meeting its requirements under The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) may differ depending on the EAB’s business model and the contract in place between them and their agents. The contract between the EAB principal and agent, along with their risk assessment (RA) and policies, controls and procedures (PCPs) must make the position clear who has overall responsibility for compliance.
If the EAB principal exercises control over the work and activities of the self-employed agent, such as the RA and PCPs used when they deal with customers, then the self-employed agent is acting on behalf of that EAB principal. This means the EAB principal is the relevant person responsible for the activity and compliance of the agent. The EAB principal would need to register the self-employed agent’s premises (including home addresses or contact addresses if they do not have a business address) and ensure those agents understand and manage risks in accordance with the principal’s RA. Whilst the contract between the agent and principal could place obligations on the agent in conducting the work, the responsibility to comply with MLR 2017 ultimately rests with the principal.
If the self-employed agent has substantial independence from the EAB principal, for example if they make key decisions on how the business is run and put in place their own AML controls, then, in terms of compliance with MLR 2017, they are not an agent of the EAB. The self-employed agent would become the relevant person, needing to register as an EAB in their own right and would be responsible for complying with MLR 2017.
One of the key factors for officers to consider is who does the agent present themselves as working for, and who does the customer understand they are engaging with? If they present themselves as working for the principal, and the principal also considers them as being part of its business, it is likely that they need to be included as a branch on the principal’s registration rather than registering in their own right.
Franchises
Franchise business models can vary in their operation and in terms of how control is exercised, similar to the agent model. Frequently there are indicators that both the franchisor and franchisee can make decisions that could be viewed as being in control of how their businesses are conducted. It will depend on the franchise agreement/contract that is in place.
Where a franchise agreement provides that a franchisee has substantial independence from the franchisor, then a franchisee is not an agent of the franchise and is operating independently on its own behalf.
For example, the franchisee makes key decisions on how the business is run and puts in place its own anti money laundering policies and controls. A franchisee in these circumstances must register with HMRC directly as an EAB and is therefore responsible directly for complying with MLR 2017, rather than relying on the franchisor to register and be responsible for AML controls in the business.
The EAB’s risk assessment must cover the risk of their delivery channels, which includes the use of agents or franchises. Similarly, their PCPs must cover who has responsibility for ensuring compliance with MLR 2017.
See ECSH44325 for more information.
Examples
The below table shows common examples of franchisees and agents, and the impact on registration.
Operating Model | Impact |
A franchisee working for one franchisor EAB | The franchisee must be included on the franchisor EAB’s registration, and their beneficial owners, officers and managers must be declared. They must follow the franchisor EAB’s risk assessment and policies, controls and procedures. |
An agent that operates for one EAB principal | The agent must be included on the EAB principal’s registration as a premises, and their beneficial owners, officers and managers must be declared. They must follow the EAB principal’s risk assessment and policies, controls and procedures. |
An agent that operates for multiple EAB principals | The agent must be included on each of the EAB principals’ registrations as a premises, and their beneficial owners, officers and managers must be declared. They must follow whichever EAB principals’ risk assessment and policies, controls and procedures when working for them. |
If in any of these scenarios, the franchisee or agent is conducting EAB activity in its own right, not on behalf of a franchisor or EAB principal, they must also be registered in their own right as an EAB.
Shared ownership properties
A shared ownership is when customers can buy a property through the government shared ownership scheme if they cannot afford all the deposit and mortgage payments for a home that meets their needs. The customer buys a share of the property between 10% and 75% of the full market value and then pays rent to the landlord on the rest. More detail can be found here.
Where an EAB is involved in the selling of a shared ownership property, it will need to conduct customer due diligence (CDD) on all owners and the buyer.
If the EAB itself is part owner of the shared ownership property it is marketing, it will need to conduct CDD on the buyer and the seller (the other owner of the shared ownership property).
Repossessions and insolvency practitioners for EABs
Some EABs, especially property auctioneers, will deal with properties that are being sold as repossessions, or the sale of a business property when the business is in administration or liquidation. This may involve an insolvency practitioner or Law of Property Act (LPA) receiver being involved in the property transaction.
This can cause some confusion when testing a business’ CDD measures, and if it has correctly identified its customer and verified their identity.
Depending on the property transaction, the EAB may have to conduct CDD on the insolvency practitioner, LPA receiver, owner of the property, or lender (or all of them, if applicable).
Remember, a business should have included in its RA, an assessment of all customer risks and delivery channel risks. If they deal in repossessions and with insolvency practitioners, its RA and PCPs should explain what its processes are, along with how to identify its customer in this situation. Simplified due diligence (SDD) might also be used, depending on whether the business’ RA and PCPs correctly allow it to do so.
Further guidance on CDD is available within ECSH33300.
If you require further support in this situation, please contact the Operational Technical Specialist Team or consider a policy advice request.
Group structures
A business that is within a group structure (where a business is owned by another business) could be acting as an EAB, if selling property to other parts of the group.
This will depend on how the group is set up. A group may trade under one structure and, for instance, just have one VAT number and have business records for the whole group. A group could also have lots of separate businesses within the group that trade separately, and each separate business has their own VAT number and business records.
If within a group structure one business owns the property, and another business in the group sells the property, that would be seen as acting on instructions from a third party. This is EAB activity.
For example:
Business A is a limited company, that acts as an estate agency business. It also buys and sells its own owned property, which it redevelops and sells at a profit.
It uses special purpose vehicles (separate limited companies) to purchase each property, and manages the renovation, markets and sells them through Business A.
This would be EAB activity, as each SPV is a separate legal entity, so Business A is acting on instructions received from another person (the SPV), with a view to finding a buyer.
Any queries arising from group structures should be raised in a policy advice request via the Operational Technical Specialist Team.
Compliance and Authorisations – factors to consider
This section provides a series of common scenarios that have come in as advice requests.
A business just deals with the buying and selling of land, not buildings, is it in scope?
Yes, as long as it meets the definition of an EAB. Land can include agricultural land, development land, any building on land. It does not include houseboats but could include the sale of a mooring. It does not include the sale of biodiversity net gain (BNG) units, as these are not an interest in land for the purpose of the Estate Agents Act 1979 (EAA).
The sale of mobile homes may be in scope, but only if the sale includes the land the mobile home is on.
Does a business have to act for both the buyer and the seller to be an EAB?
No, a business does not need to act for both the buyer and the seller in order to be an EAB.
Often the EAB only acts for one party in a transaction. It is important that all EAB activity is assessed based on the definition of an EAB, from Regulation 13 and Section 1 of the EAA 1979. The definition applies to things done by any person in the course of a business pursuant to instructions received from another person who wishes to dispose of or acquire an interest in land.
Are introducing businesses in scope as an EAB?
Yes, if they meet the definition of an EAB. Their activities should be assessed against the definition in Regulation 13 and Section 1 of the EAA 1979.
They are also known as property sources, deal packagers, property investment consultants etc.
It’s important that you look at the specific activities that property sourcing agents are doing in order to ascertain if they are in scope or not.
Are property portals in scope?
Not usually. It depends on the business in question, but usually property portals only provide a way for a prospective buyer or seller to contact an estate agent, so are covered in the advertising providers exemption – see above.
Are property raffles in scope?
Property raffles, or competition companies that offer property as a prize, will be in scope of MLR 2017 as EABs if they are acting on instructions from the person who owns the property, and then selling tickets to win that property.
They are not in scope if their business owns the property itself, they need to act on instruction from another party.
They would form a business relationship with the seller at the point where they agree to raffle the property, and with the buyer, at the point their raffle entry wins the property.
Charity raffles for property can be in scope if the business is acting “by way of business” - see ECSH42575 for more information.
Other raffles with prizes that are not land or property, such those that offer cars or cash as prizes, are not in scope as an EAB.