UK consumers can choose from a vast array of mortgages. There are mortgages that will allow you to release equity, ‘repair’ your credit history, take account of your self-employed status, or build your own home. Whether you’re a first-time buyer (FTB) or repeat remortgager, your choices will be many and varied. The same is not true for borrowers elsewhere in Europe, which has prompted the European Commission (EC) to look closely at the subject of mortgages.
It is difficult to overstate the importance of this. The implications for both firms and consumers could be significant – which is why the Financial Services Authority (FSA) is making great efforts to ensure that Brussels understands and takes account of UK views. The FSA and the Treasury are working closely with UK stakeholders (including the Council of Mortgage Lenders (CML) and the Association of Mortgage Intermediaries (AMI) to achieve this – and a new FSA webpage http://www.fsa.gov.uk/Pages/About/What/International/EU/mortgages/index.shtml now offers a regular update for all firms.
Potential benefits
In putting mortgages under the microscope, the Commission has an eye on a potentially great prize. Consultants working for the Commission estimate the theoretical benefits of a fully integrated European mortgage market could be as much as 94.6 billion. This integrated market is one in which national borders are no constraint – the full range of mortgages being available, at the same price, in all countries. Industry and consumer experts have disputed whether this is ever likely to happen. After all, it is not hard to think of language, historical and cultural reasons that drive consumers to want to ‘shop locally’ rather than deal with an unfamiliar lender based hundreds, if not thousands, of miles away.
Barriers to an integrated market
But while some may doubt the figures, there is growing agreement among experts that significant barriers inhibit increased efficiency and competitiveness in the EU mortgage market. A Mortgage Forum Group, set up by the Commission in 2003 and made up of leading consumer and industry stakeholders, published a package of nearly 50 recommendations to the Commission in November 2004. It covered a wide range of subjects, from early repayment charges (ERCs) to the applicable law for cross-border sales, and increasing distribution channel diversity. The Forum Group sought various action on these issues; sometimes suggesting better enforcement of existing law. In other cases, it said the Commission might have a role in more actively supporting existing market developments. And in some areas, the Forum Group suggested there may be grounds for bringing forward new legislation.
The Commission responded to the Mortgage Forum Group with a Green Paper seeking views from all stakeholders on the case for intervention. Shortly after publishing this, the Commission made available the consultants’ report, which put the previously mentioned 94.6 billion figure on the potential benefit from an integrated market. The table on page 35 sets out the key dates – and a more detailed timeline is available as part of the new FSA webpage on the issue of integration.
Key dates for work in Europe
March 2003 Commission sets up Mortgage Forum Group
November 2004 Mortgage Forum Group completes its report
June 2005 Commission publishes Green Paper
November 2005 The Treasury and FSA make joint response to Green Paper
May 2007 Commission plans to publish White Paper
Better regulation
While the Green Paper was the first chance for all stakeholders to make their views known to the Commission, it wasn’t the first time the FSA and Treasury talked to it about mortgages. When it was examining the various barriers to integration, the Mortgage Forum Group asked the FSA to give evidence on the UK approach to disclosure. It was particularly interested in how we made use of consumer research when designing the UK regime. Subsequently, the FSA and the Treasury have been taking part in an Expert Group the Commission uses to help it consider the way forward. This Expert Group has discussed both the individual Forum Group recommendations and the next steps. The main point we made then, which we repeat in all our contacts with the Commission, is the importance of following a ‘better regulation’ approach. By this, we mean the Commission should:
- act only where there is clear evidence of detriment;
- fully explore, where there is a clear case for intervention, any market-led or self-regulatory approach before considering new legislation, and;
- adopt a consultative approach, including accompanying any legislative proposals with a full assessment of the costs and benefits.
- true cross-border sales (for example, a UK consumer taking out a Danish mortgage) are likely to remain few;
- the real benefits of integration will instead come from increased product diversity and choice in national markets – either as a result of new lenders entering those markets or existing lenders mimicking products available elsewhere in Europe, and;
- Member States will not have an equal share in the benefits of integration. Countries with less well-developed mortgage markets stand to gain more.
The UK’s message
This concern, and the ‘better regulation’ message previously mentioned, is the basis of the approach that FSA and the Treasury are jointly taking. In our view, the Commission needs to focus on achieving improved market access through non-regulatory initiatives. Industry-led improvements in the efficiency of mortgage funding arrangements are a case in point. These have the potential to deliver consumer benefits, through lower prices and product innovation, while helping to reduce barriers to market entry for lenders. We therefore welcome the Commission’s initiative of setting up a series of meetings with mortgage funding experts to review the potential for improvement.
We think this may be the most fruitful area for the Commission, but it is not the only initiative that offers potential. We also think the Commission can help to promote greater integration by:
- increasing non-discriminatory cross-border access to consumer credit data. This will help lenders take an informed view of the creditworthiness of consumers in a new market. In enabling lenders to have access to this information, it is of course necessary to respect existing data protection safeguards;
- developing trusted valuation standards, understood and used by valuers as well as lenders in all markets;
- raising confidence in repossession procedures – especially the transparency and efficiency of arrangements in different markets, and;
- further supporting improvements in the accessibility of Land Registry information through the existing EULIS project. EULIS is a co-operative venture between national Land Registries, creating a portal which allows worldwide access to electronic land title registers.
We don’t consider there is a case for the Commission to harmonise consumer protection measures across Europe. Any action in this area would be costly and these costs wouldn’t contribute significantly to achieving the desired integration benefits, because by and large consumers will not be shopping across border. Far better, we think, to allow consumer protection measures to remain focused on the issues and risks in each national market. We are also not convinced of the case for Europe to intervene by setting standards for mortgage intermediaries – or requiring advice as part of every mortgage sale. Again, we can see much cost arising from such measures, without it being clear how these actions would promote integration.
We are taking every chance we have to stress these messages. As well as talking to the Commission, we have been speaking to the European Parliament, which is preparing its own report on mortgages. We think several MEPs are sympathetic to the UK’s views and we are encouraged by the concern they are expressing about new European legislation potentially harming the market; imposing costs without benefit.
Next steps
With Europe expressing clear interest in the possibility of action on mortgages, we will keep in close contact with the Commission, the European Parliament and trade and consumer bodies. Just because discussions in Europe won’t mean overnight changes, firms shouldn’t close their eyes to the potentially significant long-term effects. We will be using our new webpage to help keep UK interests up-to-date with all the developments.
