Memorandum submitted by the Council of
1. The Council of Mortgage Lenders (CML)
welcomes the opportunity to send this brief submission to the
Treasury Committee as a contribution to the forthcoming meeting
on the EU and financial services.
2. The CML is the representative trade body
for the residential mortgage lending industry. Its 140 members
currently hold over 98 % of the assets of the UK mortgage market.
3. This response focuses on the implications
for the UK mortgage industry and consumers of the Draft Directive
on Consumer Credit (CCD). This has received its first reading
by the European Parliament. A revised draft of the CCD, agreed
by the Commission and taking account of the views of MEPs is expected
4. The CML and its members believe that
all secured lending should be removed from the scope of the CCD.
This was the position taken by the European Parliament at first
reading in April 2004. Unfortunately it is believed that the Commission
wishes to retain the concept of a purpose test by which secured
equity withdrawal and flexible mortgage products not wholly for
house purchase will fall within the scope of the CCD. The CML
fears that the next draft of the CCD will reflect this, ignoring
the views of MEPs.
5. The UK has a particular difficulty with
the CCD in relation to mortgages. This stems from the system of
dual regulation that exists in the UK. Broadly, mortgages will,
from 31 October 2004, be regulated by the Financial Services Authority
(FSA) while consumer credit transactions continue to be regulated
by the Office of Fair Trading (OFT). If the CCD has a purpose
test in order to include some mortgage products within its scope,
this will cut straight across the UK demarcation between the FSA
and OFT regimes. If equity withdrawal is included in the CCD,
the UK could therefore have the situation where these loans would
be regulated by both the FSA and the OFT with their different
requirements. This would be very difficult for lenders and would
deter many from offering these products. Regulatory overlap would
also be wasteful and expensive for lenders to comply with. Costs
would ultimately be passed on to the consumer. There is a real
risk that innovation would be stifled.
6. UK lenders believe that secured lending
is significantly different from normal consumer credit transactions.
Secured lending is characterised by long-term transactions and
a low risk profile. This is reflected in the relatively low interest
rates that prevail for mortgages throughout Europe. Mortgages
are generally more considered purchases than other consumer credit
transactions. UK lenders remain particularly concerned about the
inclusion of equity withdrawal products in the CCD. These products
are widely used by borrowers to protect themselves against difficult
times, to provide for their old age and to facilitate repairs
and improvements to property. The UK Government sees equity release
products in particular as important in terms of maintaining and
improving housing stock condition and in retirement planning.
The provisions of the CCD and in particular the responsible lending
provisions would in the CML view make it very difficult to offer
such products by requiring lenders to reassess a borrowers financial
position every time they wished to draw down funds under an existing
7. The European Mortgage Federation, the UK
Cross industry Group (combining the key UK credit associations)
and the CML all believe that secured lending should be excluded
from the scope of the CCD.
8. The CCD is in fact proceeding at a time
when DG Markt is known to be undertaking its own enquiries into
the European mortgage market with the aim of producing a Green
Paper in 2005. It is unfortunate that DG Markt's own deliberations
should be pre-empted by the CCD, whose primary focus is on consumer
credit rather than mortgages.
9. In addition, the Forum Group on Mortgage
Credit is currently considering whether to include equity withdrawal
in the European Code of Conduct on Mortgages, a course of action
that UK lenders support. It is likely to report in October 2004
and the Commission will then consider that report. Again, there
is a risk of pre-empting this work.
10. The Financial Services Action Plan endorsed
at the Lisbon summit in 2000 sets out the objective of an integrated
growing and innovative European market for financial services
with lower costs for consumers. As currently conceived, the CCD
could inhibit integration by increasing bureaucracy and stifle
innovation by deterring lenders from developing new and flexible
products. Far from stimulating economic activity as envisaged
in the Plan, the recent OXERA study (Commissioned by the UK Cross
Industry Group) predicted that the CCD would cause both a fall
in GDP and in consumer spending. As already suggested, the CCD
will actually increase the costs to consumers. It is significant
that the CCD has not been the subject of a full independent cost
11. In conclusion, the CML believes that
the CCD should reflect the view of the European Parliament that
all secured lending be excluded from its scope. This is sensible
in itself and consistent with the aims of the Financial Services
Action Plan. It also avoids pre-empting other work on mortgages
by the Commission.
12. This response has been prepared by the
CML. Comments and queries should be addressed to Andrew Heywood,
Senior Policy Adviser, in the first instance.
SPECIFIC ISSUES IN RELATION TO THE CCD
This section briefly details some of the more
important issues associated with the specific provisions of the
The CML does not accept that the CCD should
be subject to full harmonisation. The differing legal systems,
regulatory regimes and business operating environments of the
member states mean that minimum harmonisation is essential to
achieve sufficient flexibility.
While supporting the principle of providing
information that consumers require, the CML fears that the CCD
could impede securitisation through its requirements to inform
consumers of transfers of loans and to allow consumers to place
objections. There would be little countervailing consumer benefit.
In addition the retrospective application of the CCD to existing
loans would undermine investor confidence. In the UK securitisation
is well developed and has made a major contribution to boosting
the capacity of the mortgage market.
As already stated, equity withdrawal products
are likely to be within the scope of the CCD. By using a definition
based upon purpose, it cuts across both the regulatory system
and lender practice in the UK. With products involving flexible
draw down, current account mortgages and equity withdrawal/release
the UK lender will not know the purpose of the loan in advance
and this would be extremely difficult to track.
The Commission has indicated that it will exempt
loans over 100,000 euros. Though the Commission may see this as
a concession, UK lenders consider it unhelpful. The average existing
loan in the UK is around 100,000 euros and this therefore cuts
across the middle of lender portfolios. In addition for new borrowing
lenders have indicated that they would have to treat all loans
as regulated anyway because staff training and systems changes
would be too expensive/complicated. This actually gives an incentive
to lenders and intermediaries to encourage more indebtedness to
take loans out of regulation.
The approach of the CCD is prescriptive and
didactic, prescribing a list of actions to be taken by lenders
rather than a list of desired outcomes, allowing the lender to
develop appropriate systems to achieve those outcomes. A particular
problem arises with the requirement that the lender update his
financial information every time the customer wishes to draw down
on an existing facility. This would kill the flexible mortgage
and would badly affect some equity release products also.
The CCD places a duty on lenders to advise the
client about the most appropriate product instead of simply setting
out information clearly. This will make lenders more risk averse
in case of borrowers claiming they were wrongly advised at a later
stage. Also it favours those lenders only offering one product.
Lenders should be able to adopt an "information only"
approach as is possible in the UK.
The provisions setting out acceptable charges
for early repayment of loans could cause difficulties in that
there is a risk here that discounted rate mortgages where the
rate is discounted for perhaps two years would be unable to include
a high early redemption penalty as a deterrent. These products
are widely used in the UK and are recognised as a valuable tool
to enable first time buyers to enter the housing market.
The requirement that an intermediary cannot
claim a fee from both lender and borrower is excessive. What is
needed is transparency, not prohibition. The FSA in the UK does
not prohibit this practice.
The requirement that existing loans be brought
under the CCD within two years is excessive and will cause lenders
to incur large costs that will, ultimately be passed to consumers
who will derive very little benefit in return. The new FSA rules
in the UK are not retrospective.
14 September 2004