Last month, the European Commission published a high-level communication for the spring European Council with a comprehensive action plan to "clean up financial markets." It wants to move quickly, with plans to present a financial supervision package before the end of May, action to fill regulatory gaps on a "safety first" approach, and measures on "responsible lending and borrowing" in the autumn.
The onset of the credit crunch and banking crisis initially led the Commission hold back its plans for a white paper on mortgages. Now, it seems certain that the Commission will no longer accept that markets will deliver the right outcome for consumers without some form of cross-border regulatory intervention, based on its initial response to the credit crunch.
The Commission has been pursuing a comprehensive series of studies and impact assessments of various aspects of the market, including:
credit intermediaries;
equity release products;
tying-in, and its impact of customer mobility;
land registration, valuation and foreclosure;
consumer testing of the European standardised information sheet;
interest rate restrictions;
responsible lending; and
non-credit institutions.
In addition, it has been carrying out a series of cost-benefit analyses of some of the policy options. The outcome of all this work will be distilled into a series of proposals to meet the Commission’s timetable for action.
Hostility towards market failings in the US is a political reality in Europe. And, while clearly there are differences between the UK and US, some of that hostility could spill over to the UK. We saw elements of this in the build-up to the recent G20 summit and the different stances of France and Germany, and the US and UK.
The Commission and other European institutions appear to acknowledge, however, that markets in the US and Europe are widely different. A key goal therefore – both for us and for the European Mortgage Federation (EMF) – is to ensure that the Commission continues to acknowledge the diversity of national markets. The EMF believes, however, that this "could be challenging in the current climate."
There is an opportunity in the coming months to help the Commission strike the right balance between measures that would work on a global or European level and those that would not, and to try to avoid a clash between regulation at a European and national level.
We agree with the EMF's view that the industry should work with the Commission to try to help it identify positive and concrete measures that would benefit both consumers and firms, promote integration of European markets and underpin consumer protection where this is necessary.
The EMF argues that the best way forward is for the industry across Europe to propose a robust Framework for Responsible Lending Principles. This should be firmly rooted in best practice as it currently exists across Europe.
At this stage, the EMF believes that there is still an opportunity to define the terms of the debate at a European level by presenting principles based on responsible lending that are workable and deliver protection for consumers. There is also still an opportunity to show that the industry is already applying these principles on the ground.
But the EMF warns that if the industry is not able to come up with a satisfactory level of support for voluntary measures that ensure, for example, that borrowers receive adequate information when taking out loans, the likely alternative will be the imposition of rules on firms by the Commission.
The Framework will not establish any detailed rules but will set high-level principles for lenders to apply in line with their individual commercial policies. It also says that borrowers have a key role to play, and refers to a set of mutual obligations, with sound lending being matched by sound borrowing. But will that go far enough to satisfy a Commission that will be under considerable pressure to deliver robust consumer protection?
Clearly, there is now a major debate about the future shape of regulation in both Europe and the UK. Proposals for both are now being developed in tandem. We will continue to campaign robustly for complementary proposals in the UK and Europe – but the challenge in achieving this will be considerable. Meanwhile, there is a real risk of confusion and regulatory overload if there is conflicting intervention in the UK and Europe.
