Select Committee on Treasury Written Evidence

Memorandum submitted by the Council of Mortgage Lenders

  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 shortly.


  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 agreement.

  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 benefit analysis.

  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.



  This section briefly details some of the more important issues associated with the specific provisions of the CCD


  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

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