The European Commission will come up with new proposals for regulating mortgages, although probably not until next year – and is likely to publish a consultation paper in June.
In responding, we will strive to ensure any proposals continue to provide opportunities in the longer term for the few lenders operating in European markets without increasing the regulatory burden on UK firms as a whole – particularly as the Financial Services Authority (FSA) has already launched a review of the mortgage market in this country.
The Commission had originally planned to publish proposals at the end of 2007 but shelved its plans in the aftermath of the credit crunch. In doing so, it acknowledged arguments put forward by us – and others – that long-term proposals could not be considered in such uncertain conditions.
But the impact of the ensuing financial disruption and the banking crisis has now led the Commission to focus on measures to reinforce consumer protection and choice for European consumers, and play down those designed to encourage mortgage market integration across Europe.
European proposals
Next year, we expect the Commission to publish proposals covering:
Information for mortgage customers before they sign a contract. The Commission has been testing the existing voluntary European standardised information sheet but is understood to believe it is inadequate. There is a real danger, therefore, of legislation creating problems for UK lenders by introducing requirements that conflict with the existing ‘key facts’ illustration for mortgage customers in this country.
The annual percentage rates of charge (APRC), possibly requiring separate APRCs for mortgages and other types of consumer credit.
Responsible lending. The consumer credit directive only touched briefly on this area, but the Commission may introduce new rules based on data it has been collecting on arrears and possessions in different countries. European regulation might constrain loan-to-value ratios, for example, or specialist lending products, perhaps including equity release. There is also a possibility that requirements for compulsory advice could be introduced.
Possession of property in cases of mortgage arrears.
Any new regulatory requirements are likely to apply to both first- and second-charge lending. And unless UK lobbying is successful, it will almost certainly apply to buy-to-let lending as well, as the distinction between residential and buy-to-let mortgages is not seen as significant in the rest of Europe.
The UK approach
The ongoing review of mortgage regulation in the UK by the FSA – which is running alongside the European plans – presents a further complication. The FSA has assured us, however, that it is in close touch with the Commission and is aware of the potential for conflict.
As Michael Coogan pointed out in his recent speech to the FSA conference on mortgage regulation earlier this month, the UK regulator’s business plan “recognises the need to engage with, and influence, the EU regulatory agenda.” His speech continued: “It is therefore absolutely vital that what the FSA does in this UK review runs with the grain on international issues, both in banking supervision more generally as well as mortgage regulation specifically.”
Current indications are that the FSA, the Treasury and lenders are generally aligned on issues where the EU may propose to intervene on mortgages.
Lobbying activity
The Commission has asked the consultancy London Economics to undertake cost/benefit analysis of various policy options, and that work has now begun. We are meeting London Economics twice this month, both independently and as part a team from the European Mortgage Federation (EMF).
We will also take part in an open hearing on responsible lending hosted by the Commission in September. And we are stepping up our lobbying activity, both with the Commission and with representatives of member states and MEPs. The forthcoming European elections may make consumer protection a key issue.
The EMF, meanwhile, has published draft standards on lending responsibly in Europe. Although its document is inevitably a compromise reflecting views from a range of countries, it argues that firms are already assessing credit-worthiness responsibly and acting fairly, are aware of their obligations on over-indebtedness and access to housing finance, and act with forbearance when things go wrong. All of this is reinforced by the low level of complaints about mortgages across Europe, and low levels of default.
The EMF document helpfully refers to responsible borrowing by consumers as a necessary counterpart to responsible lending by firms. In the section on assessing credit-worthiness, it also upholds an important distinction between the requirement to make a responsible assessment of a borrower’s ability to re-pay and simply relying on the surety. We see this as vital in the UK.
Conclusion
We are under no illusion that there is a significant risk that what the Commission proposes could impose serious costs on lenders in the UK, and disrupt and constrain future innovation in the mortgage market – already hampered by the banking crisis and resultant credit crunch.
It is quite possible that some proposals may prove not to be in consumers’ best interests in the long run, although superficially attractive if they limit the risks borrowers face while making a long-term commitment.
While the EMF document is helpful, it is unlikely to transform the debate on European regulation. And it will not dilute the findings of studies undertaken by the Commission, which is putting a considerable amount of work into scrutinising performance of the market and the risks inherent in particular sectors, and is unlikely to be persuaded that there is no need for intervention.
The political context does not help lenders and is likely to become even more unfavourable in the aftermath of the European elections. As the damage caused by the recession becomes clearer, the attitudes of politicians, policymakers and the public will harden.
We will work to safeguard the operating environment in the UK, while seeking to promote opportunities for the few lenders operating in other national markets. Maintaining complementary approaches nationally and internationally will be a crucial outcome of current regulatory debates on banking and financial services more generally and mortgage selling in particular.
