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A penalty-free world: How far should EU consumer protection go?

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  • 12/08/2011
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A penalty-free world: How far should EU consumer protection go?
Once again, proposed regulation from afar has raised eyebrows in the UK as the European parliament seeks to standardise the mortgage industry across the continent.

In what the CML has called a “radical reworking” of the direction of the European Commission’s mortgage directive, one MEP, Spain’s Antolin Sanchez Presedo, has suggested a host of measures, such as scrapping early repayment charges and arrears penalties.

His proposals, the CML has warned, effectively seek complete consumer protection and could have far reaching and unintended consequences.

However, on the face of it, the proposals do not seem entirely unreasonable.

Why should borrowers be penalised with ERCs if they have no choice but to move or arrears charges when times get tough? Isn’t a 14-day cooling off period sensible?

The problem is that flexible products do, and have always, existed in the UK, allowing borrowers to choose the features they need for a price they can afford. And the mortgage process can take months to complete, essentially already offering borrowers a lengthy cooling off period.

Of course, there is no denying the pain felt by those suffering arrears and the added weight of the charges that come with it, or the divorcing couple who need to break out of their mortgage inflicted with a thousand-pound penalty.

When circumstances change, that ERC-free product with a higher rate you ignored two years ago suddenly looks very attractive.

However, should penalties be banned when the cost of flexibility for all could be higher interest rates across the board and even tighter criteria as lenders seek to mitigate risk?

It is a tricky question, given that so many people are struggling on both sides – to pay and to borrow.

Charges and fees allow lenders to offer lower priced mortgages to customers who will never need to make large overpayments or break their contract.

But this is cold comfort to borrowers faced with arrears charges.

There is no question that protecting consumers from mis-selling, sharp practice, opaque terms and conditions, and impenetrable charging structures is absolutely vital.

However, I believe there comes a point when borrowers must accept responsibility for understanding the potential penalties they sign up to, particularly now when the economy and people’s jobs are in such flux.

Regulation to protect consumers must be realistic in its ambition; over-protection is as bad for the industry and borrowers as under-protection.

This is why mortgage brokers are so essential.

Intermediaries offer the expert advice that borrowers need to fully understand what they need and what they are signing up for, as well as helping them to get back on track when times get tough.

There is a long way to go before any of these proposals are set down in statute.

Yet, if the EU really wants to protect consumers, it should make getting impartial, whole of market mortgage advice compulsory.

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