Nov 2011 – A tale of two reports

Two widely differing reports on the European mortgage directive have been published adding further to the confusion in this area. Paul Smee, director general of the Council of Mortgage Lenders, explains

This autumn, most lenders’ attention is firmly focused on MMR 2 – the FSA’s long-awaited revisions to its first draft of the mortgage market review. Exactly how any proposals are implemented will be crucial for the future of our industry. But perhaps just as important in shaping the regulatory framework for UK lenders and consumers – even though it does not command as much attention as MMR 2 – is the proposed European directive on mortgages.

European directive

The directive has had a chequered history. In an earlier guise, it sought to balance responsible lending and borrowing, recognising that there are joint responsibilities for both parties to a mortgage agreement. But the directive has always had a number of potentially conflicting objectives. And one of these has been to promote a single European market in mortgage credit, even though there is little enthusiasm for cross-border lending by firms and an almost complete lack of interest in borrowing from institutions in other countries from consumers.

Earlier references to responsible lending and borrowing have now been displaced by proposals for a directive on credit agreements on residential property. These are currently working their way through two separate committees of the European Parliament, responsible for economic and monetary affairs (ECON) and internal markets and consumer protection (IMCO).

Each committee has appointed its own rapporteur to express an initial view of its behalf. But the outcome has been two sharply contrasting reports.

ECON report

The first was published by ECON, and is in danger of taking plans for the directive in an entirely unexpected – and unhelpful – direction. It proposed a series of robust new consumer protection measures, including an automatic right to over-pay the mortgage (and to draw down any overpayments at a later date) and the right to transfer the mortgage to another property.

In a market in which a continuing shortage of funding is reinforcing what is already a strong aversion to risk and a lack of any real appetite for cross-border lending, measures seeking to reinforce consumer rights in inappropriate ways may simply result in the exclusion from the mortgage market of an even greater number of customers.

Lenders, not just in the UK but across Europe, may therefore be reassured to hear that more than 800 amendments to the ECON report have so far been proposed, indicating that there is widespread disagreement with many of its recommendations. But while we may therefore be in for a lively debate, its outcome is uncertain.

IMCO report

Much more helpful, meanwhile, has been the report from IMCO. It acknowledges that there are considerable barriers to creating a pan-European mortgage market, including differences in financial culture, languages, land law, valuation and legislation on foreclosure – as well as a lack of appetite from consumers. It goes on to argue that there should be more emphasis on maintaining product diversity.

A good example of this is buy-to-let lending, a key feature of the UK mortgage market but rarely seen in other European countries. Buy-to-let differs fundamentally from residential mortgage lending and is targeted at professional property investors, rather than consumers. In our view, it is inappropriate to regulate buy-to-let under rules generally intended to protect consumers. We therefore hope that amendments to exempt this type of lending from regulation under the directive will be accepted.

The IMCO report also helpfully revives the concept of a balance of responsibilities between firms and consumers. We accept that providing the right kind of protection for consumers is crucial, but so is the principle that informed customers should take responsibility for entering into a credit agreement and their choice of a particular product. The report argues that the choice of consumers, supported, where appropriate, by impartial advice, should not be restricted by excessive European regulation.

We also agree with what the report says about the order of priorities for European regulators. It argues that capital market reforms being introduced to reinforce European financial markets and institutions are more important than the regulation of credit agreements on residential property and should therefore have a higher priority.

The report also urges caution about the impact of proposed new regulation on rules already in place. It argues that there is no need to regulate more stringently than the consumer credit directive does, and that measures on bank supervision, capital requirements and securitisation are more appropriate and effective. We agree, and would add that, from a UK perspective, there is added risk of regulatory overlap and conflict because of measures that will be introduced by the FSA.

Finally, the report argues that promoting competition in mortgage markets, as well as implementing the right kind of regulatory reform, will help deliver the best outcome for consumers. We agree with this too, and on behalf of lenders will continue to try to ensure that we avoid inappropriate regulatory intervention and that changes introduced in Europe and the UK help restore a diverse and competitive mortgage market.