The forthcoming European mortgage credit directive looks set to be the most significant EU-wide regulation to affect the mortgage market since the financial crisis. With the relevant UK bodies currently consulting over how to implement European mortgage credit directive changes over the next 12 months, the Council of Mortgage Lenders has outlined its concerns.
It believes the UK already has a “robust” national regulatory regime with the mortgage market review (MMR).
Last week, the CML responded to the Treasury consultation, arguing that the UK should do enough to meet its obligations as an EU state in implementing the rules. But it believes that going further could risk damaging an already well-functioning market that delivers good consumer outcomes. The CML will be responding to the FCA consultation before the end of the year.
The CML said it broadly agrees with the Treasury’s proposed approach to implementing the directive. However, there are some specific issues that it has highlighted in our response, such as those relating to pipeline issues and buy-to-let.
The lender body says what the directive does not make provisions for mortgage cases that are open but not complete by the implementation date of 21 March 2016. This hard deadline, without a transitional period, suggests there could be issues for consumers completing mortgages around this period, it claims. Firms typically make mortgage offers that may be taken up within six to twelve months. There could therefore be thousands of cases spanning the implementation date, potentially causing disruption and frustration for would-be borrowers. The CML have suggested a number of solutions in our response to help smooth this transition and to avoid unintended consequences for consumers.
The second major concern the CML has relates to buy-to-let, which, in the UK, has so far remained outside the regulated system applying to residential mortgages. Buy-to-let is generally considered a business transaction undertaken by property investors, and the CML said it would be disappointing it the UK were required to change this long-standing approach because of European rules.
But, in accepting that the UK must do something, the CML supports the Treasury’s decision to use a discretionary framework option for buy-to-let lending, rather than apply the mortgage credit directive in full. By applying the framework only to customers who have the characteristics of a consumer, disruption should be minimised, it argues.
Another issue that concerns the CML is that the definition of a consumer is not entirely clear at this stage. In its response to the Treasury, the CML makes the case for greater certainty and suggested how better to apply the definition to certain groups.
The CML fears that the directive could, however, ultimately lead to buy-to-let loans being regulated under a three-tier system (with non-regulated loans, as well regulation under both consumer buy-to-let and mortgage conduct of business rules). This will potentially create confusion for buy-to-let borrowers and complexity for lenders.
Following the successful implementation of the MMR, the CML believes that the directive adds little value to the UK mortgage market, which it says already has in place a regulatory regime that offers consumers full protection. The directive will impose new requirements that we are not persuaded will deliver extra protection to consumers. The directive therefore increases costs to firms with minimal benefits to UK borrowers, the CML says.