EU white paper on mortgages

This page contains information on: 

• The EU white paper
• Legislative proposals
• Other proposals
• Recent developments NEW

The EU white paper

The white paper was published on 18 December 2007. A leaked version of the document had previously been widely circulated, however. Until the second quarter of 2007, the Commission appeared to be following a market-led approach in its thinking, placing a high premium on the economic benefits to be derived from the further integration of European mortgage markets and stressing the importance of promoting product diversity and the expansion of mortgage markets to drive economic growth. While that rhetoric is still in evidence in the speeches of those known to be wedded to a liberal market agenda, such as Commissioner McCreevy, and in the white paper itself, the white paper contains a number of proposals in the area of harmonised consumer protection which are at variance with this approach, though not all will materially affect the regulatory landscape in the UK. 

Two factors can be singled out as influencing the Commission in changing its standpoint:

The negative votes and unfavourable publicity surrounding the ill-fated European constitution appear to have engendered a desire across the Commission to confirm the relevance of the EU to its citizens by “delivering for consumers”. This has led to a change of rhetoric; noticeable for instance in the green paper on retail financial services and the open hearing that followed its publication.

The recent problems in relation to sub-prime lending and the related turmoil in wholesale funding markets have led to a perceived higher salience for consumer protection measure and a desire to ensure overall financial stability and transparency in the funding markets themselves.

While the white paper uses the discourse of  product diversity and expanding markets in the service of integrated markets and enhanced economic growth there is a focus round legislative measures to promote harmonised consumer protection in key areas, though still with an additional range of softer measures designed to streamline retail markets or deal with perceived deficiencies in wholesale markets. The document is high-level and does not include draft legislation but the direction of Commission thinking is clear.

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Legislative proposals 

The original leaked text of the white paper proposed a directive containing the measures set out immediately below. However, following widespread criticism from the industry (including the CML) and from some national governments the Commission appears to have reconsidered. On 4 December 2007 Commissioner McCreevy announced that the Commission would undertake further impact assessment and consultation before deciding whether to propose a directive. The white paper as published follows this approach. The matters which could eventually be the subject of a directive are as follows:

• Harmonise APRC across Europe. The Commission believes that this will aid product comparability within and across borders.
• Embody the ESIS (in an updated form) in legislation to ensure consistency of information and standard timing for delivery.
• Create a duty to advise when the consumer requests it. Such advice to be given by IFAs or lenders themselves.
• Create a duty on lenders to lend responsibly and to assess credit worthiness. Also to ensure that there is no discrimination across borders in terms of access to credit databases.
• Aim to harmonise early repayment provisions to ensure that customers can shop around more effectively using a right to repay early to promote product diversity.

The Commission will also review arrangements for “tying in” mortgage customers to other products to see whether (legislative) action is needed to ensure that customers are not disadvantaged or competition restricted. A study will go out for tender in April 2008. The EMF will submit comments by the end of May 2008.

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Other proposals

The Commission is also considering the areas of mortgage funding and mortgage market infrastructure and also some miscellaneous issues as matter for “softer” non-legislative proposals: 

• Encouragement to member states (by way of a recommendation) to improve forced sale and land registration procedures including use of scorecards for performance and in the case of registration, attention to the problem of hidden charges and the need to promote the use of foreign valuation reports. Member states will be encouraged to adhere to the EULIS project. In September 2008 the Commission announced that it will publish a draft recommendation (attached below) in this area in early 2009. It is unlikely to have significant practical implications for the UK.
  
• Matters relating to recent wholesale market problems: an examination of market practices and standards for the management of liquidity risk, the incentives on mortgage lenders to move risks off balance sheet, the prudential standards and transparency of bank exposures to securitisation transactions and transparency of information about risks from the investor perspective. A review of non-credit institutions to arrive at a view on balancing their participation in mortgage markets with possible risks to financial stability. An interim report from the non-credit lender study is expected shortly. This study has been given to the London Economics consultancy and will involve a survey in the different member states. The CML met London Economics to discuss the study in Junec 2008. The stud will be finalised by October 2008.
  
• An examination of the wholesale funding issues raised by the Mortgage Funding Expert Group and European Financial Markets Lawyer’s Group though without specific commitments to act on particular proposals. A further Expert Group on securitisation may also be convened.
• The establishment of an Expert Group on credit histories to assist the Commission on formulating proposals to improve the accessibility, comparability and completeness of credit data. National rules on circulation of credit data will also be examined to see if they constitute a restrictive breach of the Treaty of Rome.
  
• A review of equity release to see if further Commission action is needed. This is expected to begin shortly.
  
• A review of interest rate caps/restrictions. 
• Though not part of the White Paper, the Commission is also undertaking a study of the role and activity of credit intermediaries across the EU. This is now expected to report towards the end of 2008.

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Recent developments

The CML response to the White Paper was published on 28 April 2008. The CML response makes some key points about the Commission's overall package of proposals:

• The package of proposals developed by the Commission has been overtaken by events. The change in the economic outlook for Europe and the impact of the credit crisis, together with the downturn in European housing and mortgage markets, have rendered proposals predicted on rapid growth and increased product diversity outdated. It is not obvious what long-term and structural changes will take place in mortgage markets as a result of recent developments.
• The evidence base for the White Paper proposals is flawed. The White Paper rests heavily on the discredited and now outdated London Economics report and on the outdated reports by Mercer Oliver Wyman. The outlook for markets and for the broader economy have changed substantially over the past twelve months.
• The chances of the White Paper package producing net economic benefit in the medium term is now very small.
• The balance in the package is wrong; integration will be supply-side driven with lenders not consumers crossing national borders. The emphasis on legislation for harmonised consumer protection is, therefore, irrelevant; integration will not be driven by consumers accessing products in other member states.
• The non-legislative proposals have some merit, but should be subject to rigorous cost-benefit analysis under present market conditions and tested for possible pro-cyclical effects.
• Overall, the Commission should shelve its legislative proposals and wait until the implications of recent events are clearer before undertaking new studies on possible proposals to further integration.

The Commission has indicated that it recognises that the present situation is changing rapidly and that the outlook is very uncertain. Sources close to the Commission have stated that in this situation the legislative proposals in the White Paper cannot be brought forward, and that there will be no directive in 2008 or 2009. The CML welcomes this response to the challenging conditions now facing industry and consumers.

The Commission is expected to continue its work on the non-legislative proposals, but with strong emphasis on costs and benefits. The various studies already announced will be completed. The Commission is also known to be working on impact assessments of the various white paper proposals. A summary of the state of play in relation to the various studies and impact assessments is attached.

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