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FCA pushes European Commission for foreign currency shakeup

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The Financial Conduct Authority has asked the European Commission to reclassify foreign currency loans to lift the “burden” on lenders.

The regulator says in its response to the commission’s call for evidence on the European Union regulatory framework for financial services that the current definition of these loans is too broad.

Anyone buying overseas property will be subject to foreign currency regulations coming in on 21 March.

The current wording of the Mortgage Credit Directive means lenders of foreign currency loans need to disclose when exchange rates move more than 20 per cent.

In turn this will require them to offer borrowers the chance to swap a foreign currency loan into sterling.

The FCA says: “By adopting a very broad definition of foreign currency lending, the MCD imposes significant new burdens even where there is no currency mismatch between the denomination of the loan and the income or assets from which it is being repaid.

“An example would be a UK pensioner who has bought a property in Spain using a loan secured on their existing property in the UK. Despite this being a sterling loan repaid using sterling pension income it is classified as a foreign currency loan.”

The regulator notes that some lenders have stopped offering these loans as a result.

The FCA says: “So a measure intended to promote single market activity is inadvertently causing some lenders to withdraw from dealing with customers residing in another European Economic Area state.”

The regulator wants the commission to redefine the loans to reflect the exchange rate risk the directive is seeking to address.

It says: “This would promote greater market interest in servicing the needs of consumers who, while they may be living in a second member state, are protected from exchange rate risk because their mortgage and their income is in the same currency.”

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Comments
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  • Arron Bardoe 8th February 2016 at 3:46 pm

    I agree, MCD could be discouraging cross border investment in property.

    At present, I have clients purchasing in Ireland and gearing using mortgages, but a few lenders there have indicated they are withdrawing from providing mortgages to non-residents as a result of MCD.

    Some brokers have incorrectly quoted the EU has banned such loans, which is of course incorrect.

    In essence, these BTL loan are in euros and paid for by the rent received in euros, so are not a foreign currency loans, as they are not supported by offshore incomes.

    Ireland’s property market is such that foreign investment in property outside of Dublin could help revitalise the areas and help them cope with soaring rental demand.

    For the lenders, they are able to get rid of distressed properties that have not received mortgage payments in years and they can start lending again.