Warning words from regulator over EU's Directive plans

Warning words from regulator over EU's Directive plans


Speaking at the Council of Mortgage Lenders’ (CML) conference last week, the FSA revealed that there are potential conflicts between its mortgage market review, and directives emanating from the European Union.

Speaking at the conference, Sheila Nicoll, Director of Conduct Policy for the FSA, warned the scope of the European proposals may go too far in terms of niche areas of lending and disclosure, reported the Financial Times.

She said: “As originally drafted, it captures a number of areas of lending that we would classify as niche. Bridging finance, high-net worth borrowers and credit union lending are examples.”

Ms Nicoll added: “These are areas that require a tailored approach that recognises their different characteristics. Given that cross-border sales in these types of lending is unlikely, we think it more proportionate to let member states deal with them at the national level," continued the Financial Times.

“Disclosure is another concern. Our MMR research highlighted detailed disclosure does not always result in consumers taking in information or making better purchasing decisions. We have proposed changing our national approach so that disclosure focuses on giving the key messages at the key points in the mortgage sales process.”

The mortgage reforms being discussed at an international and European level could damage the UK mortgage market even further and things are heating up now as Member States discuss the EC directive on mortgage credit, whilst the FSA are concerned that some aspects of the proposal will cause difficulty for many UK stakeholders.

Back in March of this year, the EC published its Directive for credit agreements secured on residential property and earlier the same month, the Financial Stability Board produced their review on residential mortgage underwriting and origination practices. At a local level we have the FSA’s review of the mortgage market, which proposes various changes that will affect mortgage sellers (both intermediary and branch based) and the mortgage sales process.

The EC Directive has been several years in the making, beginning during pre-credit crunch days with its original objective being to harmonise the way all EU countries deal with mortgage lending, conveyancing and valuations. But since the financial crisis, the Directive has taken a change of direction as the EC have used the credit crunch to add weight to the need for the mortgage directive.

Its proposals now focus on the legislation of the provision of mortgage credit, the advice and pre-contractual requirements with the emphasis on consumer protection. These proposals could ultimately lead to a more prescriptive approach in some areas of mortgage lending in the UK.

Explanations on how the FSA’s activity on mortgage regulation is ‘alive’ to all the developments, both internationally and in Europe, were provided by Shelia Nicholl, (Director of Conduct Policy at the FSA) during the Council of Mortgage Lenders ‘MICE’ event on November 3.

One of the first things she highlighted during her speech was that the FSB report had concluded that differences in national real estate markets, culture and socioeconomic policies meant that internal standardisation is not the answer. And she stressed that this should be considered for the proposed European legislation, as “imposing a prescriptive approach that doesn’t fit with different national characteristics will only result in significant cost while potentially denying access for many borrowers.”

There are a number of areas that the FSA agree with in the Directive, but there are contentious issues such as new consumer rights applicable to all mortgages that could be made mandatory across all Member States, for example the right to transfer a mortgage to a another borrower.  If features such as this became rights it would mean that consumers, who don’t want to take up any of the new rights, would still end up paying for them.

In the Directive, the EC suggest that the setting of Loan to Value (LTV) and Loan to Income (LTI) thresholds could be used by Member States as guidance for lenders to use when assessing credit worthiness, and the FSB believe they control the lenders exposure to loss if a borrower defaults. However, in the Mortgage Market Review consultation papers, the FSA have stated that they don’t propose to set maximum LTVs or LTIs, though this view may change as both the EC and, to some extent, the FSB seem to be supporting the idea.  In my opinion it could mean that the FSA may decide to adopt this mechanism as a way of protecting specific customer groups or types of products for example first-time buyers or equity release products.

So, this rocket has three trails of sparks flying behind it which are made up of the remedies being proposed to mitigate any further global contamination: the FSA’s MMR delivering the changes they believe are needed to UK mortgage regulation; the EC sparks that are pushing for the prescriptions contained in their Directive; and the third spark implementing the principles as suggested by the FSB report on mortgage underwriting and origination practices. 

Ms Nicoll highlighted differences over the amount of information around products and supervision, adding: “A particular case in point is the suggested level of detail required in advertising and generic material. This risks information overload, and consumers simply switching off rather than engaging. We’d like to see a better balance being struck.

“There’s no doubt that a passporting regime for intermediary firms could offer greater competition and choice for consumers. Equally, it could open up new markets for both lenders and intermediaries.

“However, strong and effective arrangements need to be put in place where passporting firms come into a new market. The proposal suggests that the home regulator will supervise the activities of any passporting firm rather than the regulator whose market the firm is operating in.

“We think it is vital to ensure consumer protection and a level playing field between firms that the host regulator takes the lead in supervising the firm’s conduct in its market.

“Just as we would find it difficult to judge the dealings of a UK intermediary selling mortgages in Bulgaria, the regulator in Rome will find it hard to oversee the actions of an Italian intermediary active in the UK market,” reported the Financial Times.

Ms Nicholl said the European proposal as first drafted means only those firms who look across the whole of the market can give advice. She said it should recognise the importance of tied and direct lending.”

Nicoll also said at the CML conference that although BTL regulation was a "matter for government" to decide, the FSA had considered its implications.

She said: "We certainly see the logic in having buy-to-let regulated alongside the residential mortgage market.

“We are very alive to the issue of BTL and the European mortgage directive. One of the problems is that the buy-to-let market is far larger in other member states, such as Germany, so it is difficult for them to see why it should not be regulated. But the FSA is very aware of the industry’s concerns on this.”

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As it stands, BTL mortgages against residential properties will be caught by European regulation currently being debated in Brussels.

The Association of Mortgage Intermediaries said last month that BTL regulation was already "a done deal" and all that remained was to thrash out the practicalities.

The Intermediary Mortgage Lenders Association, meanwhile, said the debate was still in play.

By Jason McGee-Abe

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