Companies offering controversial sale-and-rent back schemes will have to be authorised by the City watchdog from July, it was announced today.

It comes after the Office of Fair Trading (OFT) warned last year that sale-and-rent back deals, which involve individuals selling their home at a discount and renting the property for a set period, could cause “serious harm” to vulnerable homeowners.

Regulation will start next month in order to address the most immediate problems for consumers – followed by a more comprehensive regime which will start on June 30 next year.

Ed Harley, of the Financial Services Authority, said: “We know that some consumers enter into sale-and-rent back arrangements without understanding the costs and risks involved. This can be a source of real distress for people in already difficult circumstances.

“Firms entering our regime will need to run their business in a way that means customers are treated fairly.

"This includes making clear to customers important details, such as the length of time they can stay in the property, before they enter into the arrangement.”

From July firms will need to have adequate resources and be run by “fit and proper people”. They must also have rules and procedures in place to ensure that business is conducted properly.

Most importantly, the move will give customers access to the Financial Ombudsman Service if things go wrong.

There are fears that the recession could drive increasing numbers of people facing repossession to enter a sale-and-rent back agreement in a bid to avoid losing their home.

The rapidly growing sector has come in for heavy criticism from consumer groups amid claims that some companies pay less than 60 per cent of the market value for properties, while others levy steep rent increases and some evict people after just 12 months.

From July, consumers will be able to check that a sale-and-rent back company is regulated by checking the FSA’s register online, or by calling the FSA consumer helpline on 0300 500 5000.