In the period since the directive was first mooted, the financial crisis has brought disruption and uncertainty to lending markets in Europe and the UK. But the crisis only partly explains the evolution of the European mortgage directive over the last eight years.
During this period, the CML has formed a strong alliance with a range of bodies and individuals representing UK interests – encompassing other trade bodies, the CBI, the Treasury, the Financial Services Authority, and MPs and MEPs – to try to deliver the best possible outcome for UK firms and consumers.
A key member of this alliance is Vicky Ford, who, since she was elected Conservative MEP for the East of England in 2009, has played a central role campaigning in the UK and Brussels. In this interview, she explains her views exclusively to CML News & Views on the tortuous process of finalising the directive, the key victories for the UK, and what impact European regulation might have on the domestic mortgage market.
Until a few weeks ago, most commentators were expecting that the European parliament would vote on the CARRP directive earlier this month. But delay has been part of the process, and that vote is not now expected until September at the earliest. Whenever it finally comes, however, the parliament is now expected essentially to approve the agreement that has emerged from the three-way discussion between the European parliament, council and commission – the so-called "trialogue." It is anticipated that the vote will cement in place some important achievements for the UK – delivered as a result of the concerted lobbying campaign – including:
exclusion of buy-to-let lending from the scope of the directive;
the concession of being able to keep the 'key facts' illustration for a five-year period following final agreement on the directive before UK lenders will be required to introduce the European standardised information sheet for borrowers;
revisions that will allow UK lenders to continue to offer guarantor mortgages; and
proposals for a shorter 'cooling-off' period than originally anticipated for consumers after a mortgage offer has been made. A further concession is that, while all countries will have to agree a seven day cooling-off period, it will be possible for this to take the form of a ‘reflection period’ before the contract is signed. Customers will also be able to choose to go ahead anyway during this period, if they wish to do so.
Q. What has the UK won through the extensive process of lobbying and negotiation?
"We’ve managed to pull back a directive that could have had massive unintended consequences for the UK. At one stage, it would have meant lending in buy-to-let markets would have been impossible because lenders would not have been able to take into account rental income when assessing creditworthiness. We also had a problem with changes made by the European Parliament, which would have meant that guarantor and shared equity mortgages would have been outlawed, but after much negotiation we managed to make changes to the text to allow them to continue.
The UK has already undertaken a major exercise to look at responsible lending and I did not believe that we needed a new directive in this area. Many people say that one of the benefits of a directive is that you can compare products across the European market. I question how many home-buyers are actually looking at mortgage products in more than one country at any time. The 'key facts' document enables consumers in the UK to compare the products available to them, and that’s what is needed. I put in a lot of work via parliamentary amendments to try to get the European information sheet looking like the UK 'key facts' illustration, which at least has the benefit of having been devised through consultation with consumers."
The directive that we expect to be finalised later this year has its origins in the publication eight years ago of the European Commission’s Green Paper, Mortgage Credit in the EU. That paper set out plans for establishing a cross-border European mortgage market, and was followed up with a detailed study of costs and benefits – even though neither lenders nor borrowers have ever shown much appetite for mortgages advanced in other European countries.
Progress towards a directive was slow, and the onset of the financial crisis led the Commission to modify its earlier goal of encouraging the development of a European mortgage market. Its architects subsequently focused on drawing up pan-European rules to encourage responsible behaviour by lenders and borrowers. When the proposed directive was finally introduced in 2011, however, references to responsible lending and borrowing had been removed from its title, which now referred more generally to "credit agreements relating to residential property."
The next stage was for two separate European parliamentary committees – responsible for economic and monetary affairs (ECON), and internal markets and consumer protection (IMCO) – to scrutinise the proposed directive. Each committee appointed a rapporteur to oversee the process and express its view. The ECON committee’s rapporteur was the Spanish MEP, Antolin Sanchez Presedo, and his report proposed a radical new approach to the directive, with a strong emphasis on reinforcing consumer protection. Mrs Ford acted as a shadow rapporteur for the European Conservatives and Reformist (ECR) group of MEPs.
Q. Why did it take so long to get a directive that broadly fulfils the UK’s objectives?
"Most European legislation takes a long time because it involves 27 countries. There was a feeling that politicians from Spain and non-euro zone, eastern European countries were trying to solve the problems they had in domestic markets through European legislation.
As negotiations continue, there may be many amendments and the rapporteur tries to bring these together. The negotiations go on until there is a Parliamentary position, and then there is a three-way negotiation – or trialogue – between the Parliament, Council and Commission.
Antolin Sanchez Presedo is a Spanish socialist, and they have had terrible problems in Spain. But you do not solve these problems by a 'one size fits all' approach. There was also very strong lobbying from the German greens, who wanted all foreign currency mortgages banned.
Many of us question whether we needed legislation at a European level. I do not think that regulating mortgage markets is a European competency. I want to see responsible lending but don’t think this can be achieved through trying to uphold pan-European standards or by encouraging a European market.
Fundamentally, the EU should not try to harmonise mortgage markets when countries have such different property markets. Instead of clunky legislation, problems could have been dealt with by a few amendments to existing consumer credit and banking laws."
Q. How important was it to work collaboratively with others to get the right result?
"You are never going to win if you don’t bring on board your allies. As well as working closely together with others in the UK, we made strong political alliances with like-minded centre-right politicians in counties like Belgium, Germany and Italy, who were also worried about European legislation adding unnecessary costs on the consumer.
I think there has been a significant improvement in the way the UK Treasury works with MEPs since 2010. I was present in every single debate and negotiation, and tabled more than 130 amendments and 50 requests to delete unnecessary provisions. But the UKIP group (the Europe of Freedom and Democracy grouping of MEPs) have never been in with the negotiations on banking reform, and having an empty chair is very frustrating. The negotiations can go on for many months and you are the voice in the room."
Apart from the CARRP directive, Mrs Ford is currently working on a range of other issues affecting lenders. Writing in Banking 2020: A Vision for the Future – a New Economics Foundation book published last month – she outlines a number of changes she believes are necessary to UK rules.
Q. What else is emerging from Europe that lenders need to be aware of?
"I am shadow rapporteur on the capital requirements directive (CRD4), which is shaping the rules for banking reform. On this issue, it is vital that EU countries are not forced to go at the pace of the slowest. If my amendments are passed, then the new legislation will free up capital for lending to sectors crucial to growth and jobs, such as trade finance, lending to small and medium-sized businesses, and infrastructure finance. Reducing the regulatory capital banks need to hold against these vital and socially useful functions would rapidly free up cash for these projects.
I have also proposed a number of measures regarding covered bonds. These are intended to help mortgage holders, investors and depositors. In some countries, these bond structures have been around for many decades, but the markets have ballooned massively since the financial crisis. We need to make sure that we learn the lessons of the disastrous US mortgage-backed securities market, and ensure that covered bonds don’t go the same way."
So, as work on the credit directive now finally draws to a close, there are still plenty of challenges ahead for Vicky Ford, as she divides her time between Brussels, Strasbourg (she continues to campaign for an end to "the Strasbourg two-seat circus") and Cambridge.
Q. Based on your experience, how do you see the UK’s relationship with Europe evolving?
"What we need to do is look at how we make the single market and trade work in a globally competitive world, but without over-regulating. But it is important for me to get home, to the family, to the constituency. I find that really helpful, getting back to my local community, who will remind me every time we are getting things wrong. They will tell me at Thursday night choir practice exactly what they think."
Like Vicky Ford, we are broadly pleased with the outcome on the CAARP directive, and acknowledge the benefits of working collaboratively on European issues. We look forward to continuing to work with her for a European framework that supports the interests of UK lenders and their customers.
