The Financial Services Authority (FSA) has urged the European Union (EU) not to introduce legislation designed to harmonise mortgage regulation across all of Europe. European politicians believe having common consumer protection rules throughout the EU would lead to more competition between lenders and encourage borrowers to shop overseas for mortgages.
However, in a joint response to the EU with the Treasury, the FSA says that harmonised regulations would be expensive for consumers and could actually undermine the power of domestic rules in individual countries. It goes without saying that if European-wide rules were to be implemented, the FSA’s current mortgage regulation rulebook would have to be completely re-written, adding once again to the compliance load of mortgage intermediaries.
Market integration
The FSA response follows the publication late last month of two EU reports on the integration of European mortgage markets, giving lenders and banks across the Union a more level playing field, which in turn would deliver greater choice for borrowers. The findings of the reports will inform an EU White Paper, due to be published this Summer, which will lay down new rules for all mortgage markets across Europe.
The first report by the Mortgage Funding Expert Group looked at barriers that currently hamper lenders from either setting up business in other EU countries or offering their products across borders. The least controversial of the two reports, it looked at creating ‘an efficient and competitive pan-European mortgage funding market’. It concluded that: “Although European mortgage funding markets are already relatively competitive, targeted measures at national or EU level could further improve their operation.”
The second report from the Mortgage Industry and Consumer Dialogue could have a much bigger impact on consumer rules and therefore our own mortgage regulation in the UK. However, the report itself seems to have been something of a fudge, with no clear outcome. In publishing the findings, the EU said: “Even though they have not led to definitive conclusions on how consumer protection measures could be harmonised, discussion was open, constructive and highly useful.”
Consumer protection commissioner, Meglena Kuneva, said: “Consumers should be able to see
clear gains from any future community initiative in this field.” The full reports from both groups are available at www.europa.eu.
Drafting a response
Lenders, brokers and consumer advocates were consulted in drafting the response from the FSA and the Treasury. The UK response states that: consumers have a strong preference to shop for mortgages within their own national markets, which is unlikely to change; if firms wish to enter a new market they prefer to do so with a physical presence, rather than by cross-border trade; firms do not regard differences in consumer protection as a barrier to market access; and that integration in the European mortgage market should be, and is currently being driven, by firms who are willing to enter these new markets.
As a result, although the UK is supportive of the outcomes of the Mortgage Funding Expert Group, it is less enthusiastic about the Mortgage Industry and Consumer Dialogue. The submission states: “The Commission should not prioritise intervention on consumer protection. There is no evidence to suggest the absence of common standards is a significant barrier to integration.”
In reinforcing their position the FSA and the Treasury warn that competition and product diversity could be harmed by greater standardisation, and also that the cost of changes to regulations would have to be borne by consumers. The submission says that a proposed European Standardised Information Sheet would be inappropriate as a ‘one-size fits all’ disclosure document for the entire EU.
Neither does it support the introduction of an Annual Percentage Rate of Charge (APRC) to replace our own APR, with the submission saying that a harmonised calculation would ‘raise further complex questions about the precise assumptions to be used in calculating the APRC’.
This response was pre-empted in November 2006 by John Tiner, chief executive of the FSA, when he gave a speech at the European Mortgage Federation conference in Brussels. Tiner pointed out that regulation was brought in to address the UK’s own market failings, arguing that there was not a similar market failure in relation to the integration of mortgage markets in the EU.
Arguing for better regulation as opposed to further EU-wide regulation, Tiner said: “Regulation is not the only solution. In fact, a legalistic approach can impose unjustifiable costs and limit innovation and competition. Policy-makers must consider what is the most effective tool to address a particular situation, taking into account the need to secure specific outcomes and recognising the increase in costs.”
Creeping regulation
The possibility of further EU mortgage rules, along with European changes on Consumer Credit, are just two examples of what the Association of Mortgage Intermediaries (AMI) calls ‘creeping regulation’. Rob Griffiths, associate director of AMI, says: “We believe that the EU should focus on market-led initiatives rather than move to legislative measures to open up further integration of the European mortgage market, such as a focus on the Land Registry requirements of each country and access to consumer credit information. AMI is not in favour of further legislative requirements, considering that we already have full statutory regulation of mortgage brokers in the UK.
“We are also broadly in agreement with the FSA’s move to principles-based regulation and any EU legislative requirements would be another layer of regulation for our members and will, of course, have an impact on the move to principles.”
Griffiths says that although European level rules are a matter of life for EU members, the benefits of such changes should not be outweighed by the impact of implementing. Highlighting a previous EU example, the Markets in Financial Instruments Directive (MiFID), he explains: “We have always believed that any measures to bring about further integration must take into account member state mortgage markets and must not be taken to the detriment of those markets. We don’t want to see another MiFID-style directive that would mean a raft of changes to our current regime. Brokers need a period of stability and we sing from the same hymn sheet as FSA on this particular issue.”
Griffiths echoes the FSA in identifying the flaws in the EU’s thinking. “Regulation in the UK was brought in to provide solutions to particularly UK-based problems and we do not believe the Commission should necessarily consider further legislation as the answer to further European mortgage market integration,” he says. “The importance of brokers cannot be underestimated. One of the main reasons why non-deposit taking institutions in the UK have been able to access the UK mortgage market is because of the nature of our market – with many thousands of intermediaries across the country offering an instant distribution channel. The fact is that many EU member states do not have an intermediary market like the UK, which makes it much more difficult for lenders from other countries to access those markets.”
He says AMI is working hard to ensure the EU understands the issues brokers in the UK would face if new rules were implemented. Griffiths continues: “We are led to believe that the White Paper, due in June, will not include a great deal of initiatives aimed at the broker sector. The EU is currently scoping a study to look specifically at ‘credit intermediaries’ which would include mortgage intermediaries. AMI is working closely with the Commission to provide information and expertise on the UK intermediary market and how further integration might be achieved.”
Again Griffiths returns to the example of MiFID and the impact it had on the UK. “MiFID wasn’t supposed to impact on mortgage or insurance brokers at all,” he says. “But when the FSA came to implement it, it had to equalise the Conduct of Business rulebook in key areas, which meant that it did have an impact. Therefore, in two areas – Training & Competence and complaints handling – there were changes to COB, which meant there also had to be changes to MCOB and ICOB. This is a perfect example of how EU directives can have an impact on firms who were never supposed to be in scope.”
Putting off consumers
Ray Boulger, senior technical manager at broker John Charcol, points out that differences between the individual housing markets around the EU would put consumers off from shopping around for a mortgage outside of their home country. “The legal frameworks are different, the land registries are different, and most other European lenders couldn’t compete with UK lenders anyway.
“Empowering UK consumers to shop outside of the UK wouldn’t bring any benefits. To encourage cross-border shopping you would have to harmonise other barriers, and I can’t see that happening.”
Boulger points out that even in the UK, differences in the laws in England and Wales compared with Scotland and also Northern Ireland mean that lenders cannot apply a common process when dealing with borrowers in different regions. As a result, many lenders based in England do not do much business in Scotland or Northern Ireland. Boulger says the same scenario would be much worse if it were expanded across the EU.
If UK providers do want to target customers in other European states, then Boulger believes there is nothing stopping them from doing so currently anyway. He explains: “All they need to do is set up a branch or a subsidiary in the other country. That’s how it’s done now, and that’s how it will be done in the future.
“However some UK lenders are thwarted by other barriers, rules and regulations that other member states put in their way. What the EU could do that would be much more helpful for cross-border competition would be to ensure that other member states comply with the current rules, removing barriers and making it easier for foreign lenders to set up.”
Boulger continues: “If your business complies with UK financial regulations then currently it should mean that you can operate in the rest of the EU. This is not always the case. In Germany, for example, lenders are required to hold a German banking licence, which inhibits competition. What happens if these countries do not meet with EU requirements? Nothing. The EU must enforce the rules it already has in place.”
Boulger also says that if UK borrowers did shop overseas they could be put at risk because, even with harmonisation, FSA rules are far stricter and offer more consumer protection than anywhere else. He explains: “If regulations in the foreign country are lower than here, the customer wouldn’t have the same protection.
“The UK is far more sophisticated and there’s a lot we can teach the rest of Europe. Some other countries are still in the dark ages. In some parts of the EU you are not allowed to repay your mortgage early.”
The Council of Mortgage Lenders (CML) welcomed the Mortgage Funding Expert Group proposals, which include creating a passport system for lenders authorised in one state to be able to operate in another EU country, as well as measures to promote greater transparency and integration across Europe.
Michael Coogan, CML director general said: “It is right to see liberalisation, rather than further regulation, as the way to achieve more choice and better pricing in European mortgage markets.”
However Sue Anderson, head of external affairs at the CML, said it did not agree with the EU’s consumer findings. “We would be inclined to agree with the FSA and the Treasury that the consumer measures are the sticking point. The EU seems to think harmonisation would encourage consumers to shop on a cross-border basis, and I believe that’s incorrect.”
It’s likely that when the EU White Paper is published, changes to current regulations will be necessary. Whether they will be minor tweaks or wholesale reform, only then will we know what impact the FSA and Treasury’s joint response had on the EU.
