The mortgage industry has been fixated by the sweeping reforms of the Mortgage Market Review, but there is another beast quietly sneaking up on the industry.
The European Credit Agreement Relating to Residential Property directive, to give it its full title, is a monumental piece of regulation passing through the corridors of Brussels.
Its proposals cover vast swathes of the mortgage market, from affordability and advice to valuations and repossessions.
It began life in the European Commission, when it conducted a study in 2005 to assess the benefits of harmonising European mortgage markets.
To become law, it also has to gain approval from the Council of Ministers, made up of representatives of the national finance ministries, and then get past the European Parliament’s scrutiny.
All three stages have happened at the same time, with an EC proposal amended repeatedly by the EP and simultaneously discussed at national ministerial level.
The directive’s path through the EP has been dominated by the scrutiny of two powerful committees – one for consumer affairs, the Internal Market and Consumer Protection committee or IMCO, and another on the wider economy, the Economic and Monetary Affairs Committee or ECON.
IMCO passed its draft report before Christmas but the ECON vote to approve its draft has been repeatedly delayed and is now due to take place on May 8. The ECON vote has been far more controversial, with Spanish rapporteur Antolin Sanchez-Presedo drastically expanding the scope of the regulation.
Members of ECON have accused him of exceeding his remit and even using the directive as a tool to boost support for the socialists in last year’s Spanish election.
The Financial Services Authority has been heavily involved with the process and regularly visits Brussels to ensure there are no rule clashes. UK trade bodies such as the Council of Mortgage Lenders and the Association of Mortgage Intermediaries are also alert to changes and have regularly made the trip across the Channel.
But there is a trade body that concentrates solely on European issues and represents mortgage lenders in every European Union country – the European Mortgage Federation. It was set up in 1967 and has grown in stature as European financial regulation has become more common.
Based a few hundred yards from the EC in the heart of Brussels, it holds an annual conference in November. It is well-attended by those interested in mortgage policy-making as the impact from Europe grows.
Annik Lambert has led the organisation since 2005 as secretary-general, having joined in 1992.
The Belgian lawyer was raised near the French border but has been based in Brussels her entire working life.
She worked as a barrister in commercial law, taxation and employment before joining as head of the EMF’s legal department. In 1995 she was promoted to deputy secretary-general and then the top job 10 years later to lead the EMF through its busiest ever period.
The mortgage directive is accompanied by changes to capital requirements, credit rating agencies and covered bonds – all huge areas in themselves.
Lambert says she used to have quiet summers, when the EC would effectively close down but not any more. The mortgage directive is her biggest job though, and there have been around 900 amendments lodged against the original proposal.
The concept of European intervention in the mortgage market began in the late 1990s, when the EC floated greater consumer protection rules from Brussels.
The industry dodged it then and the EMF was instrumental in drafting a voluntary code of conduct for lenders to sign up to across Europe, although the UK implemented its own code.
Then in the mid-2000s the EC proposed a harmonisation directive to standardise mortgage markets across Europe.
When the crisis hit, the focus of the directive was quietly shifted towards consumer protection and far-reaching regulation of the mortgage market, similar to the MMR.
Since then it has had a troubled passage and has been the subject of fierce negotiation between member states.
“I do not remember so many amendments to a single directive,” says Lambert. “It has been heavy work and we’ve been busy as there is a lot of interest in the directive.
“We believe there isn’t a case for the directive because while mortgage lending was the cause of the crisis in the US, it has not been here.”
Lambert believes that by taking assets off a bank’s balance sheet, securitisation has been a major problem in the US, whereas in Europe covered bonds are more common funding tools and stay on lenders’ balance sheets.
“In Europe, loans remain on balance sheets so the first priority is to make sure borrowers can repay loans,” she says.
“There have been problems but in no way is the mortgage industry responsible for the crisis and irresponsible lending has not been widespread.”
Lambert believes the UK and Ireland have mortgage systems that lie somewhere between those of Europe and the US.
“The UK funds its mortgage credit through retail deposits and securitisation and, unlike covered bonds, it does not stay on the balance sheet,” she says. “There were some sub-prime loans in the UK that you will not find in other markets, although there is not the same level of toxicity as in the US. It is in between the US and European systems and explains why the UK authorities have reacted more strongly than other national regulators in Europe.”
The FSA in Brussels
The FSA has reacted strongly indeed and Lambert argues it is going much farther than the European proposals. The UK regulator and the EMF speak as regularly as once a month to discuss the situation in Brussels – much more than any other national regulator.
The FSA also has strong relationships with MEPs and a direct line to the Treasury in the Council of Ministers. It is monitoring the situation on the Continent and has its tentacles in every area of the process to avoid clashes with its own regulation.
It has previously claimed it will lead Europe by example and hopes the European Union institutions will look at its own regulation as a guide. However, it does not always get its way and some clashes have proven unavoidable despite heavy lobbying from the UK.
“We were concerned at first because the FSA was moving quickly, whereas nothing was happening at European level,” says Lambert. “We did fear measures would be approved and implemented in the UK before anyone knew what would happen in Europe. Now we believe there are not many obvious potential clashes.”
One area where clashes seem likely is over pre-contractual disclosure and the medium through which it is given.
Most European countries introduced the European Standardised Information Sheet back in 2001 under the voluntary code of conduct.
The UK decided to go it alone and create the Key Facts Illustration as its own version of pre-contractual disclosure after an industry consultation. It is well understood but Europe wants to introduce the ESIS in an attempt to standardise markets and make cross-border comparisons easier for consumers.
“The FSA has been present in Brussels,” says Lambert. “It engages a lot with UK MEPs and the UK Treasury in the Council. There will be as few incompatibilities as possible but with the ESIS it seems unavoidable as there is a higher agenda of standardisation.”
The EMF now believes the ESIS is almost certain to go through, leading to big changes for UK lenders. Lambert says the UK lobbied hard at government level to avoid the ESIS being introduced but it seems to have failed.
Despite reports in February that the KFI was set to stay, the EMF seems fairly certain that it is now on course to be scrapped in favour of the ESIS. Suggestions of a tick box form across all nations have been floated, obliging lenders to provide certain information with the format decided by member states, but it was scrapped.
Lambert says the FSA is keen to keep the KFI.
“The worst possible scenario would be to keep the KFI and then lenders have to produce the ESIS on top of it,” says Lambert. “It would be a double obligation to provide the same information in different formats but we can’t say what will happen.”
Heated debate over cooling-off
Such has been the FSA’s involvement with Europe that clashes are rare but the directive proposes such radical changes to the market that points of disagreement do crop up. One area that has been the subject of fierce debate has been the introduction of a 14-day cooling off period.
Such contract flexibility already exists for many financial agreements but extending it to mortgages has proven controversial.
Initially it was an EC proposal, with the option for consumers to opt out in order to provide certainty over their loan. After intense lobbying, the proposal was subsequently dropped in late 2010, but has since been resurrected.
The cooling-off period already exists in France but Lambert says it is unworkable in some property markets because of legal issues, so she is surprised that it is now firmly back on the table. It is not known whether it will eventually be implemented.
“The problem for the reflection period is that it is a long process,” says Lambert. “In between the moment the buyer decides to buy a property, searches for a property and obtains a mortgage credit, weeks are passing. Often when buyers find a property, they have a first agreement with the owner, who needs confirmation that they can get the money quickly.”
Lambert says the system in France, for example, often poses problems for consumers as they need certainty the money is coming. As it stands, member states can decide if it means a reflection right before or after completion.
“If this is maintained then states will take a decision based on their national rule,” says Lambert.
The cooling-off period could go ahead but in its current form it seems to have little impact on the UK market.
The Building Societies Association interprets the current proposals to mean that the reflection period could occur before the loan has been transferred and before completion.
But there are key areas that are less welcome by UK lenders, notably proposals over advice and, perhaps more significantly, buy-to-let. Long rumoured to be the subject of imminent regulation in the UK, buy-to-let has lived a charmed existence with its ability to dodge regulation.
Across the rest of Europe, buy-to-let is treated in exactly the same way as residential mortgages, whereas the UK treats it almost as an investment product.
The European directive proposes regulating buy-to-let in the same way as residential, bringing the system in line with the Continent but creating a unique problem for the UK.
It is the main issue for the UK government and lenders, and they are furiously lobbying to gain an exemption.
“Our British members are concerned about buy-to-let,” says Lambert. “It is specific to the UK because although there is buy-to-let in other countries, it would just be a normal residential contract.
“We have supported UK lenders in so far as our position remains compatible with Europe generally. An exemption has been proposed but it will depend on the final discussion and which bodies side together.”
By this, Lambert means the horse-trading of European politics between the EC, EP and Council of Ministers.
“The Council of Ministers and IMCO would be ready to exclude it but the EC and ECON look set to stick to the initial proposal,” she says. “There are three in the discussion so if you have two authorities on the same side, it can make a difference. It is open at the moment.”
The proposals to make all mortgage sales advised were also controversial in the UK when proposed last March by the directive, but since then the FSA has proposed the same thing in the MMR.
The job of the EMF is to sport alliances forming and then try to get the changes it wants for lenders
The EMF, as a lender body, holds similar positions to the CML and BSA in the UK in that it is unnecessary and potentially bad for consumers.
“The industry believes that compulsory advice is not appropriate for lenders and borrowers because it means lenders tell borrowers what product best suits their needs,” says Lambert. “We believe the final decision should lie with borrowers.”
She believes full and necessary information should be given with all the necessary explanation but not advice. Once again, the proposal is open to the trade-offs between European institutions and countries meaning the outcome is uncertain.
Understanding the political machinations and trade-offs is key to knowing how laws are made in Brussels. If two sides are against one, such as the EC and EP against the Council of Ministers, then a proposal will likely be dropped.
The job of the EMF is to spot alliances forming among MEPs, commissioners and individual Council of Ministers members and then try to get the changes it wants for lenders. One example of the trade-offs is Sanchez-Presedo adopting wholesale some Council of Ministers proposals to put him in a better position to negotiate.
Lambert says the situation is fluid and it is difficult to say where the axes will fall, and that compromises can often lead to unforeseen consequences.
“It shows the interest raised by the proposals as we have never had so many amendments from so many MEPs and to different committees,” she says. “There is shared responsibility for some issues between ECON and IMCO so it is tough to say where it’s going because issues where the three parties are in agreement are not that common.”
One of the reasons the directive has proven so controversial has been the expansion of the rule changes by Sanchez-Presedo.
Normally ECON has a firm eye on the industry impact but the Spanish MEP has focussed heavily on consumer protection. He has drastically increased the scope of the directive and re-adopted Europe-wide proposals once believed to be unfeasible in areas such as valuations and repossessions.
“Sanchez-Presedo has tried to expand the directive much farther than we ever thought it could be,” says Lambert. “The EC has already considered some areas but found it impossible to regulate because it was not necessary or was too difficult considering the diversity of regulation throughout the member states.
“However, Sanchez-Presedo came back covering almost everything, including valuations, foreclosure and full flexibility of contracts for consumers. It was really wide and if everything had to be adopted then the cost of credit for consumers would have been unmanageable.”
Lambert expresses her surprise that the EMF has found more agreement with IMCO over industry concerns. She believes many of the changes were driven entirely by Sanchez-Presedo and questions whether the impact of the crisis on the Spanish economy could have been influential.
“It is a question of nationality too as he comes from a country that has been badly hit by the financial crisis because of the specificity of its market,” she says.
“He arrived as a rapporteur with good intentions and lots of commitment but he is not a mortgage specialist or a banker. A number of things he has proposed with the best possible intentions are not workable, especially if you want them implemented in the next 10 years.”
She believes he wants to do the right thing but doesn’t have a practical feel for what is workable and what is in the interest of the sector, including consumers.
Through a mixture of the financial crisis and Sanchez-Presedo’s actions, the directive has moved far away from its original intention to harmonise European markets.
Borrowing across borders
The European single market primarily exists to extend the free movement of people and goods throughout the Continent. The directive was intended to bring the mortgage market firmly up to speed on the European project. The question asked by many UK eurosceptics is whether there is any demand for such changes and whether it is worth the overhaul and cost.
“It wouldn’t work for, say, a Finnish bank to lend directly to a Belgian consumer as they do not know the market or the risk or regulation,” says Lambert. “Mortgage credit is specific as it is linked to the property, which is intertwined with the national country.
“It would be more difficult to have cross-border activities for mortgages than for, say, televisions or cars. It does work when the lender establishes a subsidiary or branch in another market and then consumers don’t mind the nationality of the bank. It is supply driven, rather than consumers crossing the border to get a better deal in another country.”
So Spanish lender Santander can thrive in the UK when it sets up a base but UK consumers have little appetite to seek out mortgages from a lender in another country.
The European market is clearly different from the UK, as demonstrated by the use of brokers. Before the crisis, there were almost 40,000 brokers in the UK and high numbers in the Netherlands, whereas the rest of Europe mainly sells mortgages direct through branches.
It is a sign of how difficult it is to regulate so many jurisdictions with different cultures, legal systems, regulations and languages. The FSA is finding it hard enough to build a consensus for the MMR in one country with one body responsible. In Europe, 27 nations in the Council of Ministers must find agreement with 27 European commissioners and hundreds of MEPs from Bucharest to Inverness.
It takes time to find consensus and even when they are agreed, implementation of directives by national governments can take two or three years and some countries may even miss those deadlines.
Obviously, it is a process that can take many years to move from proposal to implementation.
With her background as a barrister and 20 years at the EMF, Lambert has a clear grasp of the detail and a forensic analysis of how to achieve her aims.
The 13-person team she leads needs to be on top of their game as the European mortgage directive is just one of the pieces of regulation coming from the EU.
One thing for certain is that we’re going to be hearing a lot more from Brussels in the coming years and Lambert’s role is growing in stature all the time.
Annik lambert CV
Born: 1959, Belgium
Education: ULB Brussels, law degree and special licence in property law
Employment history: 1982-1992: Practising lawyer in commercial, taxation and property law, 1992-1995: Head of legal department at European Mortgage Federation, 1995-2005: Deputy secretary-general of EMF, 2005-Present: Secretary-general of EMF
What is your favourite film? None
Hobbies: Trekking and sailing
What mortgage do you have? That’s private