Mortgage Reform Could Cause Issues

by Mark Johnston

The European mortgage market is undergoing a regulatory overhaul and there is a distinct impression amongst industry experts that these reforms may very well conflict with the UK mortgage market changes. 

The Council of Mortgage Lenders (CML) has suggested that pursuing three separate regulatory initiatives in parallel may very well lead to potential conflicts.  The Financial Stability Board (FSB), European Commission (EC) and the Financial Services Authority (FSA) are all in the ring attempting to promote a cross boarder mortgage market.  The CML has said that they will support the principles of the FSB and the EC but it is open in its belief that the EC should not have much influence in cross boarder markets in the mortgage arena. 

A spokesperson for the CML advised that “Consumer expectations and demands for familiar types of credit, national systems of property valuation and registration, and differences in funding markets and mechanisms will not be addressed by the EC proposals.”  Going further and saying that “It is highly unlikely that a single market will emerge from the European initiative.”

With the published recommendations of the Independent Commission on Banking, it is clear that there is serious banking reform on the horizon which will inevitably lead to a significant amount of change for the mortgage market.  The price of capital for the banks will be driven up by the potential to include other assets in the proposals, which could prompt business leaders to sell off whole business lines.  These other assets include mortgages, personal loans, credit cards and wealth operations.  This proposal may very well see the number of lenders in the mortgage market increase and competition increase, potentially leading to better mortgage rated and offers.  A further question posed on this ring fencing proposal is how “hard” the fence should be and whether there is a possibility for cross over financing of other business units.

The CML has noted that there is no way of knowing, at this stage, how all the different initiative from the different sectors will mesh in practice but what is certain is that there will be a significant amount of overlapping in potential reform.  It is hoped that any proposals put forward will comply and be consistent with the FSB and that the cross boarder regulators will collaborate effectively.  There are six European countries which are members of the FSB, as well as the EC, the FSA, the Bank of England, the European Central Bank and the Treasury.  So it is critical that there is at least a consistent approach and continued consultation throughout the process.

Discrepancies have already become clear to the CML, there is conflict between some of the FSB and EC proposals already drawn up.  Conflicts that are known can be managed and dealt with, it is the conflicts that are unseen and hidden in the regulations that have the potential to cause real issues later on down the track.

“The Commission appears, for example, to see product disclosure as a means of improving borrowers’ buying decisions while, in the UK the FSA is now moving away from this approach.

“Similarly, there are potential conflicts between long-established UK mortgage practices and the FSB’s implied support for restrictions on loan periods or proposals to protect investors. The latter may imply regulation of buy-to-let lending, which we oppose.

“We believe that it is crucial to achieve as much harmony as possible between national and international regulatory requirements, with a unified approach to the promotion of financial stability and adequate consumer protection.

“As the largest mortgage market in Europe, the UK will be playing a full and active part in the international debate.”

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