Ever since the Financial Services Authority (FSA) began regulating the mortgage market many of the rulings imposed on the sector have been force-fed to the UK from Brussels.
With the European Union (EU) guidelines changing on a yearly, if not monthly basis, it is the job of the FSA to transfer the guidelines to the UK sector – which has undoubtedly caused problems and conflict with advisers operating in the market.
Over the past two years there has been a more autonomous approach to lending and in late 2006-2007 many lenders focused on new market opportunities and promoting technological solutions to further aid the market.
Lenders delved into new sectors, with near-prime in particular seeing a raft of new entrants in early 2007 as providers realised the potential benefits in this field. Lenders and technology providers developed more sophisticated products and platforms, while large US and European banking institutions made strides into the UK sector.
A statement by the FSA in a previous White Paper into EU legislation and its impact on the UK economy realised the opportunities in the European markets and stated that ‘cross-border financial market integration, in recent years, has increased substantially.
In the past decade the global economy has undergone rapid economic change. Financial market liberalisation, coupled with rapid innovation in technology and trading platforms, has resulted in more integrated and inter-dependent global markets’.
A White Paper into EU legislation looks set to cause further ripples through the market, and at a time of consolidations and uncertainty, the consultation could have serious implications for the future of the sector.
No over-reaction
It is no over-reaction to suggest that the market is worried at the moment.
Sparked by the crisis in America, and exacerbated by the current illiquidity and the problems being faced by the now nationalised Northern Rock, all of those operating in the market, from borrowers to brokers and lenders to trade bodies all undoubtedly want a period of calm, to reassess their position in the market and set in place a strategy for the coming months.
However, with continued announcements and proposals by the FSA, brought down from Brussels and the EU, it looks likely that there are going to be more market moves; some good, some bad.
Neil Johnson, head of policy and PR at the Building Societies Association (BSA), admits that the next step by the EU will be to look at promoting cross-border harmony among lenders to improve consumer confidence. He says: “The EU White Paper on mortgages seeks to facilitate the further integration of European mortgage markets.
“Following the problems that the European Constitution has had across the continent, the Commission is seeking to follow a more pro-citizen agenda and to demonstrate that it benefits individual consumers.”
“The Commission has also announced that it will be launching a number of surveys and studies of the mortgage market that will allow it to further inform its thinking in these areas.”
He adds that any move must be done with the end user – the borrower – in mind, as well as lenders. “It is easy to be negative about Commission proposals, and yes, much of what is being considered is already being done in the UK.
"However, some of what is being considered could potentially benefit lenders and it is important that the industry engages with the Commission to ensure that the benefits to UK lenders and borrowers are maximised.”
In the current climate it has been suggested that any plans detailed by Brussels might seek to clamp down on several practices, to shore up the sector.
However a spokesperson at the Council of Mortgage Lenders (CML) suggests that this could hinder, rather than help financial services. “One concern is that the European Commission might reconsider its views on the need for consumer protection measures in a knee-jerk reaction to the US non-conforming lending problems.
“We do not believe that focusing on consumer protection measures will contribute to market integration. They will deliver little benefit to the UK marketplace which already has high levels of consumer protection and, despite the impact of the global credit crisis, maintains efficient markets and wide product diversity.
"Legislative measures on pre-contractual information, early repayment and the presentation of interest rates will deliver the smallest gains at the greatest cost.
“The most appropriate approach would focus on liberalising national product markets, improving cross-border access to client databases and making land registration more effective and transparent. This would enable product suppliers from different countries to trade across borders more easily.”
So how have previous proposals, originally outlined in Brussels, fared in the UK?
Money laundering
It is no surprise that the EU member states, in their own right have all discussed the growth in financial crime, and as a result there has been a real determination to minimise the risks associated with financial crime and fraud.
In the UK, the issue of fraud reared its ugly head once again with the Association of Chief Police Officers claiming that close to £1 billion of mortgage fraud had been committed in the UK.
Although these figures were disputed by the CML it is clear that fraud is a very real problem for the industry, and one that is becoming trickier to tackle.
Mortgage lenders have implemented greater and more stringent practices in an effort to minimise their risk to the possibility of fraud, another area in which EU directives have aimed to help. Its rulings on money laundering in particular, as part of its Third EU Money Laundering Directive has impacted the sector, with a greater focus on monitoring and customer due diligence.
Basel II
One initiative passed down from Brussels designed to benefit borrowers is Basel II. Aimed primarily at the other financial sectors, Basel II allows lenders to price more accordingly to risk.
The scheme gives the lender the opportunity to tailor the capital they align for each mortgage, depending on the probability of the borrower experiencing funding difficulties. The rate can then be altered to reflect the appetite for risk.
However, despite lenders realising the advantages of Basel II, a recent report by Astra Mortgages suggested that many brokers remained unaware of the potential benefits of Basel II.
Research from the lender, which was the first provider in the UK to receive Basel II accreditation, suggested that almost 90 per cent of brokers had no understanding of Basel II and its impact on mortgages. Of those who had heard of the initiative, 71 per cent believed lenders would use it to improve margins rather than mortgage offers.
Commenting on the findings, Stewart Hunter, head of introduced mortgages at Astra Mortgages, said: “It is interesting to see that this potentially highly beneficial pricing structure has gone largely unnoticed by the broker community.
“This survey highlights the need for better broker education as to the benefits Basel II can offer. This directive allows lower mortgage rates to be offered to customers with better credit records while the greater flexibility it provides makes brokers’ lives easier.”
With brokers unaware or sceptical of Basel II it is perhaps unsurprising that EU directives are not being fully implemented into the UK mortgage sector, and Chloe Taverner, head of marketing at TBMC, argues that any proposals must be proportionate, and match the dynamics of the UK system.
She explains: “Sensible supervision across all EU countries is important in order to make the most of the opportunities that the international financial markets present. However, although effective supervision is necessary to ensure financial stability, it is also important that regulation does not restrict the natural development of the markets.”
HIPs
Home Information Packs (HIPs) – another contentious issue in the market – also started life in Brussels. Designed to improve the house purchasing process, by speeding up the sale and providing greater security and details to borrowers before they commit to the sale, the initiative has been fraught with hold-ups, cancellations and claims that it has done nothing to improve the property sales process.
Article seven of EU Directive 2002/91, the paper called for the inclusion of Energy Performance Certificates (EPC), which ‘must be available to the owner or by the owner to the prospective buyer or tenant’.
The government took the decision to widen this, to include a more robust HIP, rather than a standalone EPC after its own research suggested that many buyers were dissatisfied with the current transaction process, and that that UK property transaction times were about twice as long as other European states.
However, having undergone several transformations and a staggered roll-out, the benefits of HIPs are still to be fully considered; and at a turbulent time in the market it is unlikely that any real assessment can be undertaken.
Ease of integration is essential
It is clear that EU legislation will continue the financial services sectors, both for good and bad, and it is up to the FSA to ensure that all regulatory changes are well detailed, and achieved with the minimum of fuss.
Ease of integration is essential for those operating in the market but with a determination to see a cross-border European mortgage market, it is clear that, even in the current conditions, legislators will not be torn away from their original plans for European mortgage harmony. It is quite clearly a case of ‘watch this space.’
Indeed a spokesperson at the CML added: “Our response to the White Paper in April will urge the Commission to take a long-term view and focus on removing the barriers to lenders offering mortgages in other member states, which would open up a wider and more liquid European mortgage market.
"We believe that an integrated European mortgage market is one that offers the same products at the same prices in different European countries.”
With borrowers in this country, and from other EU states all different, it is impossible to adapt a one-size fits all approach and the regulations being filtered through to the UK and other countries must reflect this.
