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Endless process just keeps us all waiting

2011 constituted a determinant year in terms of financial services reform at European level, with the European Commission’s proposal for a Directive on Credit Agreements Relating to Residential Property being one of the new pieces of legislation of direct relevance to the mortgage industry.

After a short consultation of interested stakeholders, the EC launched the legislative process at European Union level with the publication of its proposals for a directive on March 31 2011. Following the Ordinary Legislative Procedure, it was then passed on to the European Parliament (pictured) and the European Council, which assembles national governments, for consideration.

For this piece of legislation two committees, ECON – the Economic & Monetary Affairs committee – and IMCO – the Internal Market & Consumer Protection committee, have shared competence for the file according to their areas of expertise, although ECON is the lead committee and has the biggest say.

“The use of delegated acts renders the proposal akin to a framework directive and undermines certainty”

The EC’s proposal deals with the consumer protection side of lenders’ activities, making it an essential piece of legislation for the UK mortgage industry. It is worth noting though that the EC’s original aim was to enhance the integration of European markets through legislation – in other words to facilitate the crossing of borders by lenders. But the onset of the crisis shifted the focus to consumer protection.

While the mortgage industry was supportive of the EC’s initial undertaking to achieve a single market for mortgages, the shift in focus has raised concerns, if only because we believe there is no business case at European level.

Member states that have encountered problems are taking care of them at national level and the EC has produced no convincing impact assessment to justify intervention at EU level.

As things stand, a number of measures in the proposals will have a detrimental effect on lenders, borrowers and the economy. Indeed, measures such as the duty to deny credit in the event of a negative creditworthiness assessment and to inform consumers of the reasons for the rejection, and the obligation to assess whether a product is not unsuitable for a given consumer, amount to an unbalanced shift of responsibility from consumers to lenders.

Increased responsibility means an increased risk of litigation, a subsequent rise in the cost of credit and ultimately a reduction in the offer. The net effect of this is reduced access to mortgage credit for consumers. The first victims of such measures will therefore be first-time buyers, the self-employed and low income households.

The directive is likely to have different impacts, depending on the member state, with some measures having the potential to damage individual markets. In terms of the UK market, for example, buy-to-let loans are included in the scope of the proposals, despite key elements such as the provisions on creditworthiness assessment, not being applicable to buy-to-let. And what the decision will be in terms of the European Standardised Information Sheet will be a determinant for the UK market’s ability to maintain its Key Facts Illustration which is the result of extensive, UK-specific consumer testing.

At a more technical level, the use of delegated acts – as introduced by the Lisbon Treaty – in the proposals constitutes a problem for the industry. Essentially, a delegated act provides the EC with the power to put flesh on the bones of its principle-based provisions in the future, without any involvement of the EP or consultation with stakeholders.

From the perspective of the industry, this renders the proposal akin to a framework directive and significantly undermines business certainty. As an aside here, it is questionable whether the use made of delegated acts by the EC is legal as the EC has applied delegated acts to essential provisions of the proposal, whereas in fact under the treaty, their use is limited to non-essential provisions.

The major concern for the industry has been the approach taken by the ECON rapporteur, MEP Antolin Sanchez Presedo. In his draft report, he transforms a framework directive – the EC text – into a descriptive piece of legislation, the scope of which has been extended far beyond the confines of the EC’s proposal.

This widening of scope has involved the introduction of full flexibility for borrowers with their mortgages as well as provisions on property valuation and repossession, which had been left aside by the EC, and prudential supervisory measures normally pertaining to the Capital Requirements Directive IV.

Discussions in ECON and MEP amendments tabled in autumn 2011 have tended to bring the work in ECON back to a reasonable place, a move which will hopefully also be influenced by the sensible approach adopted by IMCO at the end of January. How the final ECON report will shape up is difficult to say and much work remains to be done between now and the vote on April 24 and 25.

The work in the EP is of course only part of the story, with the Council also examining the file. The Hungarian presidency kicked off the Council’s deliberations in the first half of 2011, but most progress was made under the Polish presidency which produced no less than 10 compromise texts between July and December 2011.

By the end of 2011, this feverish activity had produced a text which remains aligned to a large extent with the EC’s proposals, but in doing so treads a different path from what is likely to emerge from the EP, at least from ECON.

There have been a number of positive signs for the industry in the Council’s compromise texts, not least of which is its disapproval of the use of delegated acts and its more cautious approach to the duty to deny credit.

But disappointingly for the industry, the Council favours prescribed EU-level competence requirements for lenders’ staff and provides for a discretionary duty to advise.

The Danish presidency is now working on the file and apart from a few issues which need to be ironed out, the Council will apparently soon be ready to go. As soon as the EP and the Council have their final positions, trilateral discussions will be held between them and the EC to thrash out a final agreement. When these discussions will take place and what the outcome will be is impossible to say. In fact, whether or not the negotiations will even conclude during 2012 is anybody’s guess.

Annik Lambert is secretary-general of the European Mortgage Federation

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