New report puts Euro regulation back on track
Published: 5 October 2011 | Author: Bernard Clarke
The hopes of UK lenders on plans to reform the regulation of mortgages in Europe have been boosted by a new report on proposals for a directive on credit agreements on residential property.
The report has been published by the European parliament’s internal markets and consumer protection (IMCO) committee and echoes the views of UK lenders on:
- the balance of responsibilities between firms and consumers in making the right kind of decisions about offering, and taking out, mortgage agreements;
- the importance of fostering competition in mortgage markets, as well as implementing the right kind of regulatory reform, in delivering the best outcome for consumers;
- the scale of barriers to creating a pan-European market in mortgages, and in asserting that seeking to promote one should be a lower priority than much more important capital market reforms being introduced to reinforce European financial markets and institutions; and
- the overall scope of the proposed directive.
The new report was drafted by the German MEP Kurt Lechner, who was nominated as rapporteur to express the views of the European parliament’s IMCO committee on the proposed directive. The report is broadly in line with a UK position that has been jointly developed by the Treasury, the Financial Services Authority, financial services trade associations led by the CML and individual lenders.
The approach taken by Mr Lechner contrasts sharply with an earlier report on the proposals for a directive by the European parliament’s economic and monetary affairs (ECON) committee. The ECON report sought to take the proposed directive in an unexpected and unwelcome direction that the UK believes would ultimately be damaging for firms and consumers.
Barriers to a single market
Helpfully, the new IMCO report begins by accepting that there is a huge difference between the aspiration to develop a single European mortgage market and the current extent of market integration, which "ranges from little to none at all." It goes on to list a series of significant barriers to market integration, including differences in languages, financial culture, land law and registration, valuation, and laws on foreclosure.
Summarising the scale of the problems presented by these issues, the report realistically concludes: "These obstacles are not addressed in the proposal for a directive and there is no prospect of their being eliminated, even in the medium term."
We agree with the IMCO committee’s conclusions both on the prospects for creating an integrated market and on the order of priorities for regulatory reform:
"The Commission is…correct in asserting that the opportunities for creating a single market, particularly on the consumer side, are extremely limited, and that any harmonisation should be cautious and should do no more than outline a possible framework.
"In any case, in view of the financial crisis, there are other initiatives relating to capital market legislation that take priority over this proposal."
We also agree with the report’s view that, for many people, buying and financing a house is the biggest investment they will make, and therefore deserves protection. But it argues that, as a rule, people are aware of the implications of this transaction, and therefore seek out information and take advice.
Mr Lechner identifies crucial differences between the markets for mortgages and other types of consumer credit. Regulating consumer credit across Europe is justified, he argues, because it constitutes a mass market in a range of standardised products that are used widely across national borders, and in which there is a danger of inexperienced customers being rushed into hasty decisions.
But his report concludes that in the mortgage market there should be greater emphasis "on maintaining product diversity, on the responsible citizen’s decision to conclude contracts and on competition between suppliers."
Responsibilities for lenders and borrowers
We agree with the report's sentiments on the balance of responsibilities between consumers and product suppliers, which were explicitly acknowledged in an earlier version of proposals for a European mortgage directive that sought to promote responsible lending and borrowing. We also believe that, in many respects, consumer interests are best served by promoting competition in national mortgage markets, which helps to deliver value and choice for customers.
Meanwhile, the report’s arguments on product diversity are encapsulated in the continuing debate about whether buy-to-let mortgages should be regulated under the proposed directive. Buy-to-let loans are a key feature of the UK market, though rarely seen in other European countries. They differ fundamentally from residential mortgages because they are targeted at professional property investors, rather than consumers.
The UK believes it is inappropriate to regulate buy-to-let under rules designed to protect consumers, and we understand that amendments have now been laid that would exempt this type of lending from regulation under the directive.
The IMCO committee’s arguments on product diversity, which we support, imply that regulation needs to reflect not only differences between national markets, but between different types of products that are targeted at different groups of consumers. If so, attempting to regulate on the misguided basis of a uniform (but, in reality, non-existent) European mortgage market looks fundamentally flawed.
We wholeheartedly agree with the report’s view that:
"The consumer’s ability to take account of the (specifics) of his situation by means of individual contractor arrangements with the creditor, where appropriate with the aid of an impartial adviser, should not be restricted by excessive regulation at European level, particularly since the cross-border impact is limited."
The danger of regulatory overlap
We share the view that, while there are differences between consumer credit and mortgages, two separate directives should not create different sets of rules where they overlap. Many countries have already implemented the consumer credit directive in a way that can apply to mortgages, the report points out, and the Commission must take this into account as it develops its proposals further to avoid creating unintended conflict between two sets of rules. The report says:
"With a view to the stability of financial markets, there is no need to regulate more stringently than the consumer credit directive does, because measures that have already been adopted – for example, those on bank supervision, capital requirements and securitisation – are also effective and are more appropriate instruments for this purpose."
We wholeheartedly endorse the overall approach taken by the IMCO committee in the new report. In our view, it takes a realistic view of the potential scope – and pitfalls – of a European mortgage directive. We also believe that broadly it strikes the right balance between promoting the interests of consumers in different countries and the joint responsibilities of lenders and borrowers in mortgage credit decisions.
Both the IMCO and ECON reports will now be scrutinised and debated, and amendments to the proposed directive voted on later this year. We will continue to reflect the views of UK lenders as the debate evolves.