It argues that:
Intervention in credit markets at this stage could hamper economic recovery across Europe.
There is a particular risk of harmful, unintended consequences in the UK because measures emerging from Europe at this stage could conflict with proposals from a separate review of the UK mortgage market currently being undertaken by the Financial Services Authority (FSA).
Any action by the Commission should focus on macro-prudential supervision, not retail mortgage regulation.
The banking crisis means that firms will, in any case, have little desire for cross-border lending in the foreseeable future. So, measures to promote a single market are unlikely to produce any net benefits at this stage.
Before the Commission announces any policy proposals, it should undertake more research in those national markets in Europe that are less well-documented. And any proposals should be preceded by rigorous, up-to-date cost-benefit analysis.
These arguments are further developed in our response to the Commission’s paper Public Consultation on Responsible Borrowing and Lending in the EU. The scope of the European paper is clearly much wider than just the market for home loans, but our response focuses principally on issues relevant to the residential mortgage markets in both the UK and Europe.
Economic recovery
Prospects for European economic recovery remain in a delicate state, and the role of mortgage and housing markets is crucial to the performance of the wider economy.
Given the wider economic importance of financial markets, it is entirely right that the Commission should consider whether they are functioning as effectively as possible. But intervention at this stage involves a high degree of risk. And it is crucial that the Commission is confident that any proposals it implements should promote stability and foster growth of financial markets, and thereby promote economic recovery.
Introducing the wrong measures now could distort markets, impose unjustifiable costs on the industry and stifle innovation, and could therefore be particularly damaging. So, unless the Commission can establish an unassailable case for intervention now, it should be cautious and delay any proposals for further consideration.
Conflicting initiatives
Following the global financial crisis, the FSA announced in February this year that what it had earlier intended to be an assessment of how well the mortgage conduct of business rules were working should be expanded into a much more comprehensive review of the operation and regulation of the whole UK mortgage market.
The critical next stage of this review is the publication of the FSA’s keenly awaited discussion paper in October. But any concrete proposals for reform emerging from the forthcoming discussion paper are unlikely to be announced before next year, and may take many more months thereafter to implement.
At this stage, there is still considerable uncertainty about the scope of the FSA’s review. However, one outcome could be that the FSA’s remit is extended to include the regulation of all second charge and buy-to-let lending, as well as first charge mortgages. We have been arguing for some time that it would, in fact, be more logical for the FSA to assume responsibility for regulating second charge lending, which should be simpler both for firms and consumers. But our view is that buy-to-let loans are commercial transactions and should therefore remain outside the FSA’s consumer protection remit.
The key point is, however, that because of both the recent history of the UK mortgage market and its size – it remains the largest in Europe – there is a strong case for the Commission to allow the UK review to run its course, and to take into account any conclusions emerging from it before publishing its own proposals for lending in Europe. Similarly, reforms that might be right for the UK should not automatically be exported to other European countries, where they may not be appropriate.
We are particularly concerned that UK lenders could potentially be confronted with conflicting regulatory requirements – and extra costs – if the FSA and the Commission undertake their reviews at the same time and come up with conclusions that do not complement each other. That could hamper competition and ultimately act against the interests of UK consumers.
What sort of regulation?
We believe that the Commission’s focus should be on macro-prudential supervision, and not regulation of the retail mortgage market. The Commission must not be swayed by what happened in the US sub-prime mortgage market into believing that any problems in Europe have been caused by poor retail lending.
In the US, poor supervision of firms and ineffective retail regulation were compounded by systemic problems to produce a wave of ill-judged lending, often to those with poor credit histories.
But in the UK and Europe, new products were developed against a backdrop of more responsible lending. In particular, sub-prime lending has not been allowed to proliferate in Europe on the same scale and with the same lack of regulatory oversight as in the US. The result is that mortgage default rates in Europe compare favourably with the US, suggesting that a much higher proportion of European lending remains resilient in a deteriorating economy.
Cross-border lending
Most commentators believe that mortgage market integration in Europe should be driven by moves by firms to enter new national markets, rather than by piecemeal cross-border shopping by consumers. But the aspiration of some firms to lend in foreign countries has been sharply curtailed by the banking crisis, which has also diminished the small amount of cross-border shopping by consumers.
Measures to promote harmonisation and develop a single market are therefore unlikely at this stage to produce benefits sufficient to offset the costs in national markets, particularly the UK, which already has highly developed and regulated mortgage lending. For now, therefore, we believe the Commission should concentrate on encouraging efficiency and consumer protection within – rather than across – national markets.
The need for research
Support for responsible lending is well established in Europe and the UK. It is being actively promoted by the European Mortgage Federation, which has published standards on responsible lending for home loans across Europe, bringing together established good practice in other countries.
We believe that there is a strong case for the Commission to undertake more research in those European countries where lending standards are less well documented, before it proposes any new policy initiatives. Additionally, any measures that the Commission proposes should be subjected to rigorous cost-benefit analysis before there is any prospect of them being implemented.
We do not believe that earlier cost-benefit analysis has provided clear evidence of the overall benefit of any particular set of measures that could be applied across all national markets. Additionally, earlier cost-benefit studies were based on analysis undertaken before the onset of the banking crisis and can now no longer be relied upon to provide a reliable comparison of costs and benefits in current markets. So, new cost-benefit analysis of any European proposals is now needed.
Conclusion
European mortgage and housing markets are in a delicate stage of recovery following a financial crisis and economic downturn that has diminished the appetite for cross-border borrowing and lending. The wrong sort of European intervention at this stage could damage prospects for recovery in housing and mortgage markets, and in the wider economy.
Regulatory initiatives from Europe at this time represent a particular threat to the UK – which remains the biggest mortgage market in Europe – because we are also in the middle of a comprehensive mortgage market review being undertaken by the FSA. There is a real risk that conflicting proposals emerging from two separate regulatory reviews could be particularly damaging for UK lenders and their customers.
The Commission should therefore await the outcome of the FSA review before publishing its own proposals. In any case, it should focus on macro-prudential supervision, not retail mortgage regulation. And the Commission needs to undertake more research on what is happening in different European countries, and subject any proposals to rigorous cost-benefit analysis to make sure they deliver real value for consumers.
