Response sets out lender concern over European directive
Published: 4 November 2014 | Author: Bernard Clarke
The forthcoming European mortgage credit directive looks set to be the most significant EU-wide regulation to affect the mortgage market since the financial crisis. The UK will be deciding how to implement these changes over the next 12 months, and considering how it can complement the already robust national regulatory regime of the newly-implemented mortgage market review (MMR).
To do this, both the Treasury and the Financial Conduct Authority (FCA) have launched separate consultations. Last week, we responded to the Treasury consultation, arguing that the UK should do enough to meet its obligations as an EU state in implementing the rules. But we believe that going further could risk damaging an already well-functioning market that delivers good consumer outcomes. We will be responding to the FCA consultation before the end of the year.
We broadly agree with the Treasury’s proposed approach to implementing the directive. However, there are some specific issues that we highlight in our response, such as those relating to pipeline issues and buy-to-let (BTL).
The directive does not make provisions for mortgage cases that are open but not complete by the implementation date of 21 March 2016. This hard deadline, without a transitional period, suggests there could be issues for consumers completing mortgages around this period. Firms typically make mortgage offers that may be taken up within six to twelve months. There could therefore be thousands of cases spanning the implementation date, potentially causing disruption and frustration for would-be borrowers. We have suggested a number of solutions in our response to help smooth this transition and to avoid unintended consequences for consumers.
The second major concern we have relates to buy-to-let, which, in the UK, has so far remained outside the regulated system applying to residential mortgages. BTL is generally considered a business transaction undertaken by property investors, and it would be disappointing it the UK were required to change this long-standing approach because of European rules.
But, in accepting that the UK must do something, we support the Treasury’s decision to use a discretionary framework option for BTL lending, rather than apply the mortgage credit directive in full. By applying the framework only to customers who have the characteristics of a consumer, disruption should be minimised.
Another issue that concerns us is that the definition of a consumer is not entirely clear at this stage. In our response to the Treasury, we have made the case for greater certainty and suggested how better to apply the definition to certain groups.
The directive could, however, ultimately lead to BTL loans being regulated under a three-tier system (with non-regulated loans, as well regulation under both consumer BTL and mortgage conduct of business rules). This will potentially create confusion for BTL borrowers and complexity for lenders.
Following the successful implementation of the MMR, we believe that the directive adds little value to the UK mortgage market. We already have in place a regulatory regime that offers consumers full protection. The directive will impose new requirements that we are not persuaded will deliver extra protection to consumers. The directive therefore increases costs to firms with minimal benefits to UK borrowers.
Our full response can be read here.