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European juggernaut

While the FSA has been setting out its MMR proposals for the UK mortgage market, the European Commission has been devising its own rules for a Europe-wide directive which could steamroll over them


Regulation has been the thorn in the side of the mortgage industry in 2010. While brokers are still trying to battle the effects of the credit crunch and fighting for survival, the Financial Services Authority has been blasted for tightening regulation at a time when brokers need another layer of bureaucracy like a hole in the head. The Mortgage Market Review is a case in point.

Proposals in the latest consultation paper, published in July, include banning most interest-only loans and imposing individual registration. Those in the industry were immediately concerned about the paper’s effects.

Indeed, according to The Mortgage Alliance’s distribution indicator, three-quarters of directly authorised brokers expect the MMR to force even more intermediary firms out of the market.

And at a recent Mortgage Strategy round table on the MMR’s proposals, it was concluded that the abolition of fast-track and self-cert, also proposed, will cause the industry and consumers an almighty headache.

“If the MMR creates more bureaucracy, this along with higher prices means less churn in the market – it has to,” said Iain Laing, chief credit officer at Santander, at the event. “More bureaucracy and less churn means brokers lives are less profitable, which has to mean less brokers.

I suspect the broker industry is past the worst, but this has to give it another kick.”

But the industry may have more to worry about because while the FSA is devising its plan of action, the European Commission – a bigger and more powerful body – is busy drawing up its own proposal, the EU Mortgage Credit Directive, due to be introduced next year and which could steamroll over the FSA’s plans. The EC is apparently considering implementing new regulation across European countries.

One of its proposals include giving consumers a 10-day cooling-off period when taking out a mortgage. Borrowers would also be encouraged to consider mortgage providers from other countries.

The full directive has not yet been released, but UK trade bodies such as the Council of Mortgage Lenders and the Association of Mortgage Intermediaries have been provided with an advance copy of the proposals.

The EC wants to standardise European mortgage markets, but the CML is urging it to take a cautious approach in pressing ahead with its proposals.- It says in the UK there could be a risk of detriment to both the industry and borrowers by pursuing national and European regulatory reform at the same time.

Unsurprisingly, the initial reaction by some to news of the 10-day cooling-off period was shock, with many envisaging apocalyptic scenarios if the changes were brought in.

“It’s ridiculous to think it is necessary to add another 10 days to the already lengthy buying process,” one anonymous broker com-ments on Mortgage Strategy Online. “This is proof that the chimps have escaped from the zoo and are making the decisions.”

Others are concerned that it would have a negative impact on the housing market and also on the way lenders do business.

“The repossessions market would be in turmoil as would any purchase at auction with a mortgage,” another writes.

But would it be that bad, especially if it aided competition? While brokers could be forgiven for thinking regulators are out to make life difficult for them, EU-wide regulations in the past have had the objective of making it easier to transact business across borders.

“If it makes it easier to obtain finance across borders that’s great,” says Bill Warren, managing director of Bill Warren Compliance, “But would the FSA allow this to happen outside its control?”

And with the UK having a diverse range of products, a ’one-size-fits-all’ regulatory approach could limit choice not expand it. Ray Boulger, senior technical manager at John Charcol, says an EU directive may be helpful to some countries which have limited regulation, but the UK already has the most mortgage regulation of any country. As a result, we potentially have the most to lose.

“From a UK perspective, an EU mortgage directive is unwel-come,” says Boulger. “Our market is more sophisticated and offers more choice than other EU countries, and there is a danger the directive will not reflect our requirements.

Many regulations which may be appropriate for most EU countries will not be sensible for the UK. The EU wants to harmonise things, but one size definitely does not fit all in relation to mortgage regulation.”

Boulger says that the EU’s justification for interfering in local markets is that mortgage lending is of vital importance to the European economy because it claims it represents almost 50% of EU gross domestic product.

“But it demonstrates its lack of understanding of the UK housing market by claiming that problematic mortgage lending in the UK and some other countries has been a feature of the European landscape,” he adds.

“While one can always find examples of bad lending and irresponsible borrowing, the low arrears rate in the UK is evidence that problematic lending was not a major issue.”

He says what the EU doesn’t realise is that the primary reason for the UK banking bailout was not bad mortgage lending, but the freezing of the wholesale markets and some of the banks’ non-UK mortgage activities.

However, a major issue with the EC regulation is timing. The CML says the European proposals are likely to emerge in early 2011.

“This raises issues for the UK as the FSA has the MMR which has been running in parallel and is due to conclude before the directive is final,” the trade body says in a recent newsletter.

“It is in no-one’s interests to have the cost of two sets of rules being implemented within a short time frame.”

The trade body adds that the FSA’s rush to implement the MMR in the UK should be tempered by the need to take account of the emerging plans in Europe.

“We hope the FSA will confirm at an early stage that it is pausing to reflect on its regulatory approach in the light of developments in Europe and feedback on its consultation paper,” it says.–

If the EC regulations are implemented and the FSA does not consider them in the MMR there is the possibility of conflicting rules. But Jonathan Cornell, head of communications at First Action Finance, believes the FSA and its successor will still have a role to play, regardless of what the EC does.

“The UK market is the most evolved in Europe, so we are miles ahead of the rest,” he says. “It may be that some of our regulations will change eventually, but I wouldn’t be surprised if European regulators copied a lot of what the FSA is doing. While it has had its challenges recently, it is way beyond the rest of Europe.”

Boulger agrees that while the FSA is likely to have been abolished by the time the directive becomes law, its replacement body will still serve a purpose as there will still be a need for regulation at a national level.

“The directive will set minimum, not maximum standards, so each member state will need to consider this when the new rules are adopted,” he says.

“There may be some areas where the directive doesn’t go as far as existing UK regulations, in which case we would need to assess whether to retain the stricter requirements already in place. It appears the national regulators will retain responsibility for supervising the regulated entities in their own country and so this will be an ongoing role for the national supervisors.”

Boulger says the directive will delegate certain matters, for example, registration of intermediaries, to the national regulator.

“This may be why the FSA recently changed its mind on registration of individuals rather than just firms,” he adds.

But Boulger is more pessimistic about what the impact to the UK mortgage market could be if the EU directive is implemented. In particular he questions what value it would offer consumers and warns that changes such as the replacement of the Key Facts Illustration with the European Standardised Information Sheet would drive costs up, not down.

“Replacing the KFI, a document the FSA now recognises doesn’t serve the purpose it expected, with the ESIS, which broadly contains the same information but in a different order, would be pointless,” says Boulger. “It will increase lenders’ costs, which of course will be passed on to consumers, but be of no benefit to consumers.”

Boulger says the blurring of what is and isn’t advice is also an area of concern. The EU directive proposes to separate ’explanation’ from its definition of ’advice’.

This, he warns, could mean consumers may assume the lender has given them advice in accordance with the rules, when in fact the lender will have been able to cut corners by just offering an explanation and pointing the consumer in the direction of the best product.

“Advice would be defined as ’the provision of a personal recommendation to a consumer on suitable credit agreements for that consumer’s needs and financial situation,’ which is fine,” he says.

“But the proposed alternative definition for ’explanation’ is that it would mean ’the provision of personalised information on the characteristics of the credits on offer without, however, formulating any recommendation’.

“With this definition it is easy to see that it will not be difficult for companies that don’t want to give advice to leave their customers with the impression they have had advice.”

This is something Warren is also concerned about.

“The separation of advice from the lending decision is also worth greater understanding as it is not 100% clear,” he adds.

Cornell is more relaxed about the changes and counters that the UK mortgage market has survived huge change recently and there will be more change to come.

“We need to work hard through the Association of Mortgage Intermediaries and help it do the great work it is doing in Europe,” he says. “It will let Europe know what is and isn’t practical and will offer to share the experience and expertise UK brokers have.”

Despite his concerns, Boulger does see some good points in the proposed regulation.

“Bringing second charge lending under the same regulator makes sense and should have been done from the start of FSA regulation,” he says. “Although the Treasury has now recognised this and the process in the UK has started, it may be that the knowledge of what the EU directive was likely to propose in this respect stimulated the Treasury into taking action.”

Warren says the establishment of advice standards is good, as is the inclusion of a clear statement that the consumer has to take a share ofresponsibility for their decisions.

Of course, this could all be conjecture. While the CML and other commentators have spoken out about the reforms, the EC itself has not yet revealed its proposals to the wider industry. So the obvious question is how likely are they to be implemented?

“Some changes will eventually happen, but a lot will fall by the wayside,” predicts Cornell. “How long it takes for them to come into force is impossible to know. While we are waiting we need to work on surviving the next few years.”

But Boulger says that the last government was wrong-footed on Europe in terms of voting rights, which could mean that the EC’s directives come unamended to a mortgage contract near you soon.

“The last government relinquished an opportunity to allow the UK more opt-outs by reneging on its promise to have a referendum on the Lisbon Treaty,” he says. “Had we done so and voted against it we would have had a bargaining tool, as did Ireland after its vote against it, and could have secured some concessions.

“There is little doubt the directive will be implemented this time, after the successful campaign by AMI, the CML, the Treasury and others five years ago to prevent a directive being introduced at that time. We must work to mitigate the problems it could cause.”

Boulger says on any robust cost-benefit analysis as far as the UK is concerned implementation of an EU directive would fail. “For the UK there will be few, if any benefits, but there will be extra costs,” he says. “But this has never stopped the EU before.”

The consensus is that the proposals will be announced early in 2011, giving brokers, lenders and the regulator just months to prepare. The industry has learned to adapt to change over the years and today only the most robust players are still in the market following the credit crunch, so there is hope that it can weather the storm.

But as has been proved time and again, the process of regulation is a bumpy ride and with two bodies making laws it’s only going to get tougher.

Industry will have to bear the costs of the many layers of regulation


Early next year the European Commission will publish a draft directive on responsible lending, which will be the culmination of seven years’ analysis, although it did start out with the different objective of mortgage market integration. Following the crisis the focus shifted to responsible lending.

In the summer the EC published a working paper as a precursor to its legislative proposal and worryingly it seems to base its thinking on the basis that irresponsible lending across Europe has contributed greatly to the financial crisis, in a similar way to the US – where it did. This is the wrong starting point if the EC expects regulation to deliver improved outcomes for consumers.

The main themes raised in the working paper mirror many proposals that the FSA is consulting on in the UK, although one might argue that the FSA, by going much further, is gold-plating the proposals. The EC proposes that lenders undertake creditworthiness assessments along similar lines to FSA affordability proposals. It also proposes registration of all brokers, similar to the approved persons regime in the UK. But there are some differences – the EC would like to standardise pre-contractual information in a European Standardised Information Sheet, which is similar to the Key Facts Illustration.

Any variance in content, however minor, will load significant costs onto the industry with no real benefit to borrowers.

While some proposals are welcome – penalties are proposed for consumers who do not tell the truth about their financial situation – others are a nonsense such as a 10-day cooling-off period to encourage consumers to shop around. Not only does this lead to dysfunctional behaviour, France has such a period and it merely results in the backdating of agreements. Anyway, under the EC proposals customers can sign a waiver to accelerate the process.

It is worrying that UK lenders are subject to parallel regulatory development at national and European level. It is likely that the EC’s proposals, together with the FSA’s plans, will reduce the size of the market, making mortgages both scarcer and expensive.

If the EC is concerned about irresponsible lending, a more sensible approach would be to focus on effective supervision of firms and ensuring that any outliers are dealt with swiftly. It seems ironic at a time when regulators are so focussed on affordability for consumers, there is not the same focus on the affordability of the industry to bear the costs of the many layers of regulation being imposed.

Cooling-off period would be setback for bridging sector and consumers


So the European Commission wants to apply a cooling-off period to mortgages? Well, if this bananas EU directive is passed it would be a major setback to the bridging sector. This is another example of the EC thinking about consumers without properly assessing whether the regulation that is being put forward could be to the detriment of consumers.

After all, the unique selling point of the bridging industry is the speed with which finance can be arranged. A 10-day cooling-off period would immediately remove this essential tool for thousands of professional property investors and landlords. At the same time, it would hit many of them in the pocket by inhibiting or jeopardising their portfolios. It would also inflict major damage on a sector that is thriving.

Most individuals who make use of bridging finance do not need their hands holding. They just want funds as quickly as they can to make a deal work and have no time or inclination to cool down. They want to strike while the iron’s hot. They’re professionals and demand to be treated as such.

We dealt with a case a few months back where an auction purchase for investment purposes was rejected at the eleventh hour by a high-street lender because the property fell slightly out of the tramlines.

The borrower turned to us and, given his experience and quality, we made an offer within two hours of the case being underwritten. Less than 48 hours after being submitted, we released the funds and the case completed.

If a 10-day cooling-off period had applied at the time, this borrower would not only have lost his 10% deposit at the auction but also the property he desperately wanted.

Prime Minister David Cameron is calling for entrepreneurialism and yet this kind of directive is the antithesis of that, taking spontaneity and urgency out of business.

It’s hard to know for sure whether the directive, if successful, would apply to all mortgages, but our feeling is that it would only apply to the regulated mortgage market. We have no problems with this other than the fact it might place additional downward pressure on an already stuttering property market.

It’s vital that the bridging industry makes sure its voice is heard in Brussels. If not, and the EC implements a blanket directive, we’ll witness the worst case scenario of all – I’ll need to get a job and no-one out there wants me turning up at their door.

EU’s thinking is about five years behind the UK’s on some issues


As the embarrassment of the likes of Portugal, Ireland, Italy, Greece and Spain continues, the damage to those countries’ property, banking and mortgage markets makes the need for European action on responsible lending more likely.

Indeed, as the European Union has directives covering most other areas of money – credit, insurance and investments – it makes it even more likely that we will see action in this area. It is the unfortunate, but monumental, failure of the Greeks that will make this more certain. In addressing the issues arising from the credit crunch, the European Commission appear to be following the approaches of both the UK and the US. It is clearly looking to address the issues at both capital and liquidity levels with lending institutions, and also at conduct level by addressing EU’s thinking is about five years behind the UK’s on some issues the basis on which mortgages are sold to customers.

It seems that our elected representatives in Brussels are looking to legislate in the area of mortgages. The Financial Service Authority wants to press ahead with what it sees as its view of the issues before it has seen what the EC visits upon us. Surely, this is putting the cart before the horse. The Mortgage Market Review proposals are also akin to shutting the stable door after the horse has bolted.

The EU proposals are a compromise. In having to deal with some member states which have no regulation today to the complex disclosure rules in the UK, there is a vast range of options. At the heart of the EU proposals is delivering loans to informed consumers who participate in making responsible choices. But some of the thinking appears to be at the level that the UK was at five years ago, such as around disclosure.

We have found that disclosure does not work well and the Key Facts Illustration is recognised as a good piece of post-sale evidence, not valuable for shopping around, for comparing prices and terms or understanding the complex conditions of loans. It is also evident from early discussions that while some of the EU’s thinking is aligned with the FSA’s, the subtle differences in some areas and the varying terms used in others, could cause ambiguity if the proposals come to fruition.

We need to ensure the UK does not get out of step with other markets in setting standards and criteria that damage the competitive position of British businesses and limit the offerings available to UK consumers.


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