The mortgage credit directive: it's the final furlong in Europe - but some UK lenders are past the winning post!
Published: 19 October 2015 | Author: Luca Bertalot, secretary general of the European Mortgage Federation - European Covered Bond Council
Many firms in the UK are at least six months ahead of their counterparts in the rest of the EU, since they were free to implement the mortgage credit directive (MCD) from 21 September. Nonetheless, it is a timely moment to take stock of how the rest of Europe is faring in the process, and update UK lenders with what else is on the mortgage agenda in Brussels.
As is often the case with European directives, progress across the EU on the MCD is a multi-speed affair. At the last count, Belgium and Denmark had apparently almost completed the process, while many other countries were on schedule to make the deadline of 21 March 2016. A handful of states, including Finland, Latvia, Portugal, Slovenia and Malta, may need more time, but most of these hope to be operating under the directive four to eight weeks after the deadline.
First place – goes to the UK!
First place therefore goes resoundingly to the UK. But, to be fair to the rest of the EU, UK firms had something of a head start when it came to transposing the MCD, since the mortgage market review, implemented in April last year, went beyond many of the core provisions of the directive.
The European standardised information sheet is already a bone of contention in the UK
The directive might be thought of as implementing core and more peripheral provisions. During the legislative process, the big issues, like pre-contractual information, assessment of creditworthiness and early repayment, received a lot of attention in the negotiations between EU institutions in Brussels, and many of the industry’s biggest concerns were addressed at that time.
But, perhaps inevitably, interpretation of some elements of these is still being discussed. The European standardised information sheet (ESIS), for example, continues to cause concern. As had been feared, lenders in some member states, often supported by national regulators, are particularly worried about the concrete application of many of the ESIS requirements into law.
In many cases, these simply do not translate into the national context for a variety of reasons, perhaps as a result of differences in mortgage systems or language. And, in some cases, the outcome is likely to confuse consumers rather than assist them.
Needless to say, the ESIS is also already a bone of contention in the UK, given that lenders there will be obliged to abandon the key facts illustration (KFI) in its favour.
Questions, not answers
In working through transposition, some of the more peripheral provisions introduced by the European Parliament – which at the time did not receive a great deal of attention from EU institutions (despite industry efforts) - are now throwing up questions, but sometimes not many answers.
In particular, lenders in some member states are expressing concern about an interpretation of the foreign currency loan provisions in the MCD that may neither be neither in the interests of the consumer nor in the spirit of promoting the internal market.
This is a particular concern in some border areas where borrowers are paid in one currency, but could buy a home with a mortgage in another currency – as might be the case, for example, for borrowers from the Irish Republic working over the border in Northern Ireland, or Swedes working in Denmark, or with Finns and Norwegians. The option provided for in the MCD to facilitate a conversion of such a mortgage from, for example, euros to sterling, could be extremely difficult to implement when banks operate a single currency mortgage system.
Ironically, these provisions were arguably introduced by MEPs in response to concerns about foreign currency lending in central and eastern European member states – concerns which have, for the most part, since been resolved nationally. Now, the unintended consequences of these requirements are being felt in other parts of the EU.
These are just some of the issues which members of the European Mortgage Federation (EMF) legal affairs committee, responsible for the MCD, are currently discussing; unfortunately, and perhaps inevitably, there are many other examples of interpretation difficulties.
What else is coming?
While member states are still, in many cases, wrestling with transposition and interpretation of the MCD, the European Commission is already moving on. Its retail financial services policy objective for the present mandate is further to strengthen consumer protection. That would continue the work already undertaken by the last Commission in response to the financial crisis (to which the MCD was also considered part of the response).
The authorities are increasingly turning away from an agenda driven by financial stability to one emphasising consumer and investor protection
This objective will soon manifest itself – probably by the end of the year – in the form of a green paper on the future of retail financial services. Potentially, it will have a broad reach, including digitalisation, cross-border lending, debt advice and access to redress, among other issues. This focus on consumer issues and protection mirrors the concerns of authorities like the European Banking Authority, which are increasingly turning their attention away from an agenda largely driven by financial stability to one emphasising consumer and investor protection.
In addition to the ongoing work on the retail side, there is also much activity on the prudential side, with international institutions like the Basel Committee on Banking Supervision (BCBS) and those in the EU implementing rules relating to capital requirements, and liquidity and leverage, in the context of Basel III. Recent moves from the BCBS to improve and update these requirements are potentially so significant that they are already being referred to as “Basel IV” – and will likely drive industry work in this area for some time to come.
Over and above monitoring and contributing to this vast array of policy activity, the EMF-ECBC is striving to lead the market in other areas – for example in relation to the financing of energy efficiency. The energy performance of buildings has a very high profile in the EU and, earlier this month, the EMF-ECBC held a roundtable to discuss how the mortgage and covered bond industries can help to boost energy efficient investment in buildings, potentially by way of a European standard for a green mortgage and a green covered bond.
The event brought together the European Commission, the UN, organisations with a focus on sustainability in buildings, such as the World Green Buildings Council and Buildings Performance Institute Europe, as well as the Royal Institution of Chartered Surveyors, the European Group of Valuers’ Associations, and the EU mortgage and covered bond industry. Watch this space: www.hypo.org for future updates in this area!