The European Union finally published its Mortgage Credit Markets White Paper last December, months behind schedule and after many in the industry had already seen a leaked version of what it contained.
But however convoluted the process of introducing European legislation might be, we should not ignore it. It is important that the UK industry puts its weight behind the issues it feels most strongly about and tries to slowly manoeuvre this legislative tanker safely into port before we end up with rules and regulations that are not suitable nor appropriate for our home market.
The real worry is that if, as an industry, we are not able to affect these changes in the planning process, it will become nigh on impossible to change them once the legislation has finally been approved and been put on the statute books.
Harmony
At first, the EU was aiming at standardised regulation with a market-led approach, preaching the benefits that would come from closer integration between the European markets and pushing the need for the greater product diversity that integration would in turn generate.
These remain important to EU thinking on the subject, but it now appears there is more attention being given to harmonised consumer protection in a bid to create a level playing field for borrowers.
The Council of Mortgage Lenders (CML) believes there are two main reasons for this shift in attitude. In the first instance it said that because there have been some poor shows of support for the European Constitution, it has become increasingly important for the Commission to reaffirm its worth for consumers and show itself to be standing up and fighting their corner.
In the second instance, the problems that have erupted from the US sub-prime market have contrived to create an environment in which consumer protection has taken on a higher priority. There is a desire to introduce greater financial stability and transparency in a bid to protect consumers across Europe.
Whether the goal is primarily to develop European mortgage markets and drive competition between firms or to create a safer market for borrowers, both are laudable aims.
However, the problem comes in trying to create a standard framework that is practical, effective and relevant to each and every member country. It is like taking an elaborate patchwork quilt in which the design and detail of every square is different and trying to find a single colour to dye the whole blanket that does not destroy the individual work in each of the squares.
For those markets that are not well developed and have not evolved to the same extent as the UK, there will be a lot to gain from bringing in a standard regulatory framework. But for those countries that are well ahead of the field, such as the UK, there is also a lot to lose.
The White Paper talks about harmonised consumer protection, but what in essence does that mean? It also talks about improving product diversity, but again what does it really mean by that?
In the UK, there is a well developed and strong performing self-certification market. However in other countries in the EU, lending on this basis is not something they even believe is feasible.
Lenders in some countries do not have the information about borrowers to be able to assess them in the same way lenders in the UK can, so for them to get into a market such as ours would be difficult. The argument might then be that foreign lenders able to offer these types of products would look to provide them. But again, the poor access to information remains the issue.
To help resolve these problems, the Commission is consulting with stakeholders about the design of the high-level advice standards, exploring the potential for increasing responsible lending and examining access to cross-border credit data.
Security guards
The Commission is also forming an expert group on credit histories to advise on potential improvements to credit data access. But we should not be disillusioned by the huge amount of work involved to create effective solutions that can create real certainty and security for lenders. BM Solutions conducted research into the nature of the buy-to-let market in different European countries and the findings were quite incredible. The research looked at the buy-to-let markets in Germany, Poland and Portugal and compared them with the UK.
The need for a specialist buy-to-let mortgage was hotly disputed between the countries. In the UK, 79% of landlords are clear there is a requirement for a specialist mortgage product when purchasing a property to let. But this is not the case in the three sample countries where the situation is reversed – 94% of German landlords state that a specialist mortgage is not required; 92% of landlords in Poland and 80% of landlords in Portugal agreed. Would offering specialist buy-to-let products in these countries be a waste of time? Is the EU trying to force something on borrowers they do not want?
For those operating across borders, there are also more fundamental issues involved. At the moment, a lot of the talk has been at a high level and discussed the need to harmonise protection or improve product diversity.
But what about the language the contracts will be written in? Which language will be accepted, and who will pay for paperwork to be translated and validated? What about the security of the assets that lenders are providing money on? In many European countries the laws about repossession are not as clear cut as those in the UK.
While repossession is not how anyone would wish a mortgage to end, the reality is that if lenders are going to become involved in other countries and territories, they are going to want to be sure that their investment is safe. Should things go wrong, they will want to know they can gain possession of the underlying asset without too many problems.
There has also been a lot of talk about creating a unified Annual Percentage Rate of Charge (APRC). This is something that would be welcome, although there will be a lot of wrangling about how to do it and which method should be adopted. Each country does it in a different way and finding the best way to do it will be difficult.
Challenges
Introducing a unified APRC would force lenders to change their product literature, the calculations they make, overhauling the marketing material they use, implementing new systems and processes and investing time in training and educating both staff and customers on the new procedures. A single APRC would not be bad, but introducing it might be a lot harder than people think.
At a more fundamental level, there are also potential issues for the Financial Services Authority and the secured loans market, which might be forced under its remit. Brokers offering both first and second charge mortgages would likely need to gain some type of new qualification, while the upheaval involved for practitioners would be time consuming and expensive.
Such a move is unlikely to be welcomed coming so recently after the changes that have been introduced to the Consumer Credit Act and would bring substantial cost and resource implications.
It is unlikely that the end borrower would notice that much difference. In the first instance, changes would be slow and there will not suddenly be a glut of new lenders and intermediaries offering services to UK borrowers. The documentation and sales processes might change, but again this is not something which consumers tend to take too much notice of.
For those in the UK, the big issue will be about whether the sophistication and innovation that has so long been a hallmark of the UK market is compromised. If that happens, then fewer products and choices will make life more difficult for many of them.
At a time when the issues in credit markets have already put a squeeze on the availability of products, this is not something we want to see compounded in the future by inappropriate legislation.
Many of the aims of the White Paper are good, but the UK must make sure that they work to its benefit and do not undo a lot of the good work we have already done in terms of introducing regulation, product diversity, consumer protection and open competition to our market. n
Tim Hague is managing director of BM Solutions
