EU Mortgages Directive
The Committee consisted of the following Members:
Martyn Atkins, Committee Clerk
† attended the Committee
The following also attended, pursuant to Standing Order No. 119(6):
EU Mortgages Directive
On behalf of the European Scrutiny Committee I will say a brief word about why we have asked for this sitting. It may help the Committee if I take a few moments to explain the background to the document, and the reasons why we recommended it for debate.
In March 2011 the European Commission proposed a draft directive to provide for the regulation of residential mortgage lending across the EU. It relates to the pre-contractual stage of entering into a mortgage contract, and the authorisation of mortgage lenders and intermediaries, and is intended to ensure that they act “honestly, fairly and professionally” when dealing with consumers.
The main features of the Commission’s proposal concern advertising, pre-contractual information, advice, suitability and credit-worthiness assessment, and authorisation of intermediaries and specialist lenders. The proposal also included provision for the Commission to adopt, subject to revocation by the Council or the European Parliament, delegated Acts to supplement or amend non-essential elements of the proposed legislation.
In recommending the document for debate, the European Scrutiny Committee suggests that Members might particularly want to explore with the Minister any potential for the proposal to affect borrowers in the United Kingdom adversely; the possibility of better protection for UK citizens borrowing to finance residential purchases in other member states; and the single market case, from the point of view of UK mortgage businesses, claimed for the proposal.
Additionally, as Members will see from the conclusion of our report, we were concerned about the Government’s failure to schedule the debate before adoption of the measure by the Council, thus frustrating parliamentary scrutiny to an extent. Members will want to hear the Government’s explanation of that extraordinary lapse.
The Financial Secretary to the Treasury (Greg Clark): It is a pleasure to serve under your chairmanship, Mr Walker, and to have the scrutiny of the European Scrutiny Committee on what I suspect will be the first of many occasions.
As colleagues are aware, the area in question is rather technical, so I shall go through some of the provisions in a little detail, and explain why we are where we are. We are here to discuss the proposal for a directive of the European Parliament and the Council on credit agreements relating to residential policy.
The EU mortgages directive was brought forward by the Commission last April, following the 2007 Commission white paper on the integration of EU mortgage markets, and against the backdrop of the financial crisis. The Commission seeks to create an efficient and competitive single market for lenders, intermediaries and consumers by providing consumer confidence and customer mobility, ensuring that mortgage markets operate in a sustainable manner.
The directive provides for the authorisation and ongoing supervision of both intermediaries and lenders, and provides for an EU passport for intermediaries. It also includes more detailed provisions on the pre-contractual stages of taking out a mortgage, including advertising, both generic and individual information, advice and the lender’s assessment of the consumer’s creditworthiness.
The Government recognise the importance of a sustainable mortgage market for EU consumers, to support a stable housing market. The UK already benefits from a high level of mortgage regulation, which is broader and more detailed in many areas than that required by the proposed directive. As a result, the Government have been clear that the proposed directive should recognise the differences that exist between national mortgage markets.
Through the directive, the Commission should seek to achieve a European framework of core standards, supplemented by appropriate rules at a national level, to ensure proportionate regulation and the right outcomes for consumers. To ensure that the directive avoids imposing unnecessary burdens on UK lenders, intermediaries and consumers, the UK has, during negotiations, sought improvements in four key areas: the scope of the proposal, information disclosure, passporting and delegated Acts. I will briefly go through each of those in turn.
The Government believe that the proposed directive should focus on mainstream lending to enable consumers either to buy their existing home or to refinance an existing mortgage, and that decisions over the regulation of any niche products should be left to the member states in which these products are offered. That position has proved difficult to maintain, because many member states are opposed in principle to any exemption from EU directives.
The most important area in which we have sought an exemption from the directive is buy-to-let lending. Other member states such as France and Germany regulate such mortgages alongside mainstream residential mortgages, so they do not agree with us on the need to exempt them from the directive. The UK has been successful in securing recognition that buy-to-let lending is different from mainstream residential mortgage lending, and we have therefore succeeded in gaining a partial exemption for buy-to-let lending in the Council negotiations. That partial exemption works by providing a complete exemption from the articles on advertising, general information and the European Standard Information Sheet, on the basis that the UK already provides an equivalent framework. In addition, we have ensured that the articles
The UK’s position has been supported in the European Parliament, where MEPs of all parties have accepted amendments that would seek to exempt buy-to-let lending from the scope of the directive completely. It is important to recognise that the directive applies only to buy-to-let mortgages taken out by consumers, so lending to professional landlords is already exempt from the provisions of the directive. In addition to our concerns about buy-to-let mortgages, the Government will ensure that the application of the directive is proportionate for other forms of niche lending, such as shared equity loans and lending to high net worth individuals.
The Government have also raised concerns about the volume of information disclosure required under the directive. That will be costly to firms to provide, and we want to avoid the risk of information overload for consumers, which would get in the way of their ability to understand a product. The Government have had some success in ensuring that the overall volume of information to consumers is at a more proportionate and appropriate level.
The Government continue to argue against the introduction of a European Standard Information Sheet. The ESIS is very similar to the UK’s existing key facts illustration, but the Government are concerned that the transition costs of moving from one to the other, especially when the differences are so limited, may not be worth while. The UK has been negotiating for an approach that would allow member states to keep their own standardised disclosure if it is equivalent to the ESIS, but the Commission sees the ESIS as a key deliverable from the directive.
A number of member states, such as France and Germany, already use the ESIS on a voluntary basis; therefore, we have so far failed to gather sufficient support to oppose the ESIS in Council. Despite early support for the UK’s preferred approach, the final text from the European Parliament provided only an increased transition period for member states to introduce the ESIS. The Government will therefore continue to work closely with UK MEPs to ensure that the ESIS remains a negotiating priority as discussions progress to trialogues, which is where the process is at the moment.
As I have mentioned, the directive provides a passport regime for intermediaries. The Government have worked in Council meetings to ensure that the passporting provisions do not undermine the levels of consumer protection that we enjoy in the UK and other established EU mortgage markets. The Government have been successful in ensuring that the Council’s general approach supports the UK position and gives the Financial Services Authority sufficient powers to take action against firms when necessary to protect UK consumers.
The UK has also raised concerns about the number of delegated Acts in the Commission’s initial proposal. Our position is that delegated Acts should be used only in limited circumstances and in compliance with pre-existing agreements between the Commission, the European Council and the European Parliament. The UK has been successful in significantly reducing the number of delegated Acts and we will continue to ensure that that position is maintained throughout the trialogues.
In addition to those important points, the UK has also ensured recognition of our appointed representatives regime for intermediaries; secured flexibility so that both lenders and intermediaries can provide advice to consumers who want it; and ensured a balanced approach to how lenders assess consumers’ ability to repay their mortgages. Those amendments to the Commission’s initial proposal seek to ensure that the directive recognises the differences that exist between national mortgage markets. It will seek to provide a European framework of core standards, complemented by appropriate rules at the domestic level, to ensure a proportionate system of regulation and the right outcome for consumers. However, there is still some way to go in the negotiations before agreement will be reached on the text of the directive.
As noted in my predecessor’s correspondence to the European Scrutiny Committee, the Council presidency took the directive to COREPER on 30 May to confirm the “general approach” that would be taken. Member states were not required to vote. As the directive remains under parliamentary scrutiny, the UK would have abstained in the event of a vote. The European Parliament has voted on and agreed its text, with many of the provisions broadly consistent with the Council’s “general approach”.
As a result, the trialogue negotiations—between the Commission, the Council and the European Parliament—are in the very early stages, and the Government are still seeking to understand more fully the amendments proposed by the European Parliament as those discussions proceed. The Government will continue to work with supportive MEPs of all parties throughout the negotiations, to ensure that UK priorities are represented in the positions of both the European Parliament and the Council. We will seek to utilise the support that we have achieved in the Parliament to maintain and extend the partial exemption for buy-to-let lending and to push for greater flexibility of the ESIS. That will ensure that the directive recognises the differences that exist between national mortgage markets.
As I have mentioned, although the UK benefits from a high level of mortgage regulation, I am sure that the Committee would support the Government in recognising the importance of a sustainable mortgage market for EU consumers to support a stable housing market. This issue clearly has some way to go, and I dare say that the Committee will undertake further consideration in due course.
The Chair: We have until 5.30 pm for questions to the Minister. I remind hon. Members that they should be brief. It is open to a Member, subject to my discretion, to ask related supplementary questions.
Chris Leslie (Nottingham East) (Lab/Co-op): It is a pleasure to serve under your chairmanship, Mr Walker. I am not sure that we have had that pleasure before in European Committee B. I know that we are all enjoying ourselves this afternoon. In the same spirit, I welcome the Minister to his post. This is the first of doubtless many long hours and days of scintillating and illuminating debate that he and I will share in very many of these equivalent Committees in the months ahead.
My first question is about the difference between European standard information sheets, ESISs, and our key facts illustrations, KFIs—I am sorry about the
Greg Clark: Certainly. I am grateful to the hon. Gentleman for welcoming me to the Committee. His hon. Friend the Member for Lewisham East and I have spent many hours debating in Committee a matter that I know is close to his heart—localism—and I am delighted to see her here today as well.
The question is very sensible. I myself wanted to compare the two documents. They are more or less the same, but they provide different types of information. The KFI disclosure publication is pretty clear and quite well expressed. It has gone through extensive testing with UK consumers and is something that they are familiar with. The ESIS approach is, on the face of it, designed to achieve similar results, but the disclosure document—I am happy to share this with the hon. Gentleman—includes a repayment schedule that takes up at least two pages of the document and sets out for each year up to however long the mortgage term is, perhaps 25 years, exactly what the repayment is in that year. I am advised—I am informed by the experiences of UK consumers—that that can better be summarised and need not be laid out in quite so much detail.
One of the other differences is that the European information sheet includes more on complaints procedures. Again, as we have a pretty well established system of supervision in this country, that can be expressed more concisely. There is not some vast difference that makes the documents totally incompatible in their objectives. The KFI has been subject to rigorous consumer testing; it is focused on ensuring that consumers get the right message at the right time; and it is not too detailed, or excessively repetitive. If consumers are familiar with something, and changing it does not offer particular advantages—no one has suggested that the KFI approach is deficient—it is best to stay with it because confidence and familiarity are important.
Chris Leslie: I am grateful for the Minister’s helpful reply. Elsewhere in the voluminous paperwork that we are used to in European Committee B is a reference to other negotiating points that the Government have sought to achieve in this convoluted negotiation process, including niche lending. In particular, the Government are looking for carve-outs or some sort of change in lending to high net-worth borrowers. What are the Government trying to achieve on behalf of those borrowers, what concerns them about mortgages for the super-rich in this case, and what special exemptions is the Minister seeking?
Greg Clark: If one considers the principles of the directive, it is about consumer protection, particularly protecting and giving adequate support to consumers who are the least financially sophisticated and to whom we all have a responsibility to ensure that they are properly advised and understand the information at their disposal.
We have argued successfully that the provision should apply to consumers rather than to professional financiers, because if someone is in the mortgage business that is their business and they are expected to know how to deal in it. That also applies in part to high net-worth individuals: the more sophisticated the consumer, the more they can be expected to have, and are empirically known to have, a pretty good understanding of the products on offer. Seeking to devise a system that covers two very different types of borrowing—borrowing by first-time buyers, and loans for several millions of pounds for people with a portfolio of assets—risks falling between the two. We think it better to focus on consumers for whom this degree of regulation is needed.
We are not saying that the matter should be unregulated, but higher net-worth individuals are likely to have more, and more varied, products that suit their particular needs. A voluminous set of regulations would be required to protect esoteric products, although there are clearly other regulatory points of view in terms of the prudential aspects. We think it right to concentrate on protecting those individuals who most need our protection.
Michael Connarty (Linlithgow and East Falkirk) (Lab): I am pleased to be in your company, Mr Walker. I am concerned about the Government’s approach to buy to let, which is growing throughout Europe where many people are now letting properties that they bought as holiday homes. That has become more and more of a market, and should be regulated, but the Government are determined in all their approaches to exempt it—it is partially exempted at the moment. Will the Minister say more about that, because the Government seem to be saying that the market, which should be regulated as in the UK, distinguishes buyers of homes to live in from buyers to let? Outwith the UK it is fraught with difficulties and possibly corruption, so why should it not be regulated?
Greg Clark: I am pleased that the hon. Gentleman raises that point, because it allows me to emphasise that we are not proposing exemption from regulation for buy-to-let mortgages. We believe that they should come under existing UK authorities, through the FSA and ultimately its successors. It is important that financial products enjoy regulation. We need to reflect on the fact that, broadly, over the years, we have had a successful set of regulations here. In many cases, we do it better than some other European countries. Some of our constituents have had inferior experiences in other countries. So, it is absolutely not to say that we should experience an absence of regulation here; but if we are aiming to provide consistency across Europe, there is clearly an opportunity to do that for the mass market. The more differentiated the products, the more difficult it is to have a light-touch and proportionate common regime. However, I want to emphasise for the record that this is about retaining the UK’s ability properly to regulate that sector.
Michael Connarty: I totally agree with the Minister’s logic, but I cannot agree with his conclusion. Much of my approach to examining EU regulations and directives concerns the question whether having an EU-wide regime advances the interests of the people we represent. We have a very good system in the UK; why should we not have a system as good as ours for all the EU? Are there
Greg Clark: Again, the hon. Gentleman makes a reasonable and sensible point. Principally, this is about consumer protection, and clearly, corporations—professional institutions engaged in lending—are exempted from that. In a certain respect, buying to let is a business transaction, so the question is: is it similar to the consumer focus of the proposed directive, or more similar to the non-consumer side, which has always been left to national Governments? Successive Governments have decided to provide a degree of confidence in the supervision of buy-to-let mortgages in this country. The danger in extending that—in having a regime that covers all these different products—is that one has to involve more disclosure that is irrelevant to the mainstream aspect of the market. Bundling that all together seems to risk over-prescription, which is likely simply to add to the costs of consumers in this country, and none of us wants that.
Chris Leslie: The Minister will be aware that in paragraph 2.13 of its report, the European Scrutiny Committee voices a concern that Ministers are increasingly relying on Members of the European Parliament to secure concessions, rather than using the UK’s own voice in the European Council of Ministers:
“It seemed insufficient to be so dependent…on lobbying in the European Parliament, rather than maintaining pressure in the Council, where the Government had a direct voice and vote. So we suggested that the Government seek to continue Council consideration of the problematic issues”.
Is the Minister not slightly concerned at the UK’s waning ability to negotiate an outcome that the Government would like to see? Is this not a potential sign that, with the Prime Minister storming out of various negotiations at different times, he has a serious deficit of his own in terms of negotiating strength? Is the Minister slightly embarrassed about this criticism?
Greg Clark: The hon. Gentleman teases me in a very charming way, but he should look at the progress that has been made during the negotiations so far. Such matters are dealt with through qualified majority voting, rather than unanimity, so it is necessary to enjoy the support of other European countries. Progress has been made in the Council discussions, and some progress has been made in the Parliament. It is now, as the hon. Gentleman knows, and as I shall become familiar with, part of the trialogue between institutions. They can all continue to make changes and compromises. We will continue to make our case through all the institutions. I hope that I have made it clear that we do not regard the position we have reached as the final word. We want to make more progress, and I will use my best endeavours, when I have the chance to visit our partners in Brussels, working with our representatives from all parties in the European Parliament and with other member states through the Council, to make it clear that we want to continue to make progress.
Mr Andrew Love (Edmonton) (Lab/Co-op): May I welcome you to the Chair, Mr Walker? It will be good to serve under your chairmanship, not just today but in future. I wanted to ask about progress on the completion
Greg Clark: I am grateful for the point that the hon. Gentleman has made. As a member of the Treasury Committee, he has taken a great interest in this issue over the years. Clearly, the country should be confident about having a financial services sector that is one of our biggest exporters. We have a well-developed market for financial products such as mortgages. Through the single market I hope that there will indeed be opportunities for British members to attract business overseas. That is certainly one of the advantages of the directive.
The hon. Gentleman is a sufficiently experienced parliamentarian to know that sometimes on the way to admirable and laudable objectives, we encounter pitfalls which, by making costly changes to the way we have successfully done things, counter the competitive advantage that our suppliers may experience in operating at European level. That is why the negotiation on the directive requires forensic handling. That is very much our intention, and it is my ambition—I know the hon. Gentleman shares it—to ensure that where we have an advantage it can be deployed in the interests of all our constituents who are employed in the financial services industry.
That the Committee takes note of European Union Document No. 8680/11 and Addenda 1 to 4, relating to a draft Directive of the European Parliament and of the Council on credit agreements relating to residential property; notes the success that the UK has achieved against its key negotiating priorities in Council negotiations on this Directive and that the Government recognises the importance of a sustainable mortgage market to support a stable housing market; and supports the Government’s view that the proposed Directive should recognise the differences that exist between national mortgage markets.—( Greg Clark .)
Chris Leslie: The Minister has explained the need for the directive, and I am grateful for the attention he has given to the issue. There are not vast differences between us, but I am grateful to my hon. Friend the Member for Linlithgow and East Falkirk for raising the issue of buy-to-let regulatory arrangements. There is a notion that somehow, all consumers are informed about what they are doing when they enter into a buy-to-let arrangement, but we know from history that many people have had their fingers burned in that endeavour. It is not unreasonable to ask whether we are getting the balance right and ensuring that consumers are adequately protected.
The mortgage market is crucial for our constituencies and for the wider economy. Changes to the regulatory arrangements are deeply important. It is important that responsible practices are pursued, especially after the
As the Minister said, in many ways the UK residential market has more developed characteristics than in other EU countries. The directive might allow more competition and therefore more choice for our consumers. That could indeed be a benefit, but we must ensure that we get the right regulatory balance. I agree that there is no point in going for standardisation simply for the sake of it. When we go through extensive exercises, we have to make sure that the benefits outweigh the costs, but it is an important thing to do.
My only slight anxiety is if the pattern of interest rates changes in future. Many of our constituents, perhaps with variable rate mortgages, will find that their repayments will change. To what extent are we preparing now to forewarn those mortgage customers of the additional costs that they may face? This issue came up during the Financial Services Bill. I would like to see the provision of information in an ongoing form for consumers, rather than simply key fact illustrations of the ESIS early phase of the contract. Mortgages can be for 25 years or more.
Some of our constituents will have perhaps been lulled into a false sense of security about ultra-low mortgage rates in certain circumstances, but mortgage rates can change. In recent months—during the spring, for example—we have seen instances of banks unilaterally increasing the variable interest rates on certain mortgage products, even though the bank base rate did not change. We know that capital pressures on banks can vary from time to time.
To what extent are we adequately preparing customers with such mortgages for the potential scenarios and the array of interest rate changes they may face? What if the interest rate was 4%, 6% or 7%? What about the affordability that they may need to prepare for? Are we giving people the tools to be sufficiently ahead of the game? Now is the time to address such forward-looking reforms. We need to encourage the inclusion of such ideas in this set of reforms. We should not just be looking back at the entry phase of the contract, but at customers who are already on interest-only mortgages, for example, who may not be aware of what could be around the corner.
Michael Connarty: First, I want to come back to the exchange on Members of the European Parliament. If Committee members would like to look back at my speech when we passed the Lisbon treaty, I said that it would be a tipping point and that the balance of power would shift markedly towards the European Parliament, the Commission and the Council, and that we as a Parliament need to get our act together to lobby the people who can change things in our direction.
We have always relied in the past on COREPER and the office in Brussels, but there is now a locus for Members of Parliament to have dialogue with Members
Secondly, may I express disquiet about the exclusion of an overarching policy and regulation for buy to let? The scenario in Europe—I have this in my constituency—is that the people who have bought homes for retirement are basically dying. Their families now have a property that they wish to continue using, developing and letting out; I certainly have friends in that situation. They must seek mortgages and finance. People in this country who have come through the enlargement of the European Union will similarly let out properties that were family homes when mortgages were originally taken out on them.
Leaving it to each individual jurisdiction might make it beneficial for us to control our own regulation. We have a good regulatory system in the field, particularly when people buy and transfer mortgages. Perhaps they go to live in another home while letting out the first home. It is not right for our Government not to seek the same protection for people elsewhere in the EU, as people now travel vastly more than they did in the past. They do not just go on holiday and buy a little place in France or Spain; they go everywhere. We must consider what happens when they decide to use their property as a source of letting income. Will they get the same treatment? Will they be defrauded? What protection will they have? If other countries do not have the same regulatory regime as ours, we must at least reach a compromise so that they have one with which we are satisfied.
I do not understand why the Government are putting so much energy into a full exemption from the regulation. I ask them to think clearly about it and talk to people in the market. As my hon. Friend the Member for Edmonton said, if we are to have a single market across the whole of Europe, particularly for financial services, we must have a high baseline of protection for those who enter it. I hope that the Government will take that into consideration.
Greg Clark: I am grateful to colleagues for their informed and sensible contributions. The shadow Minister’s concern to ensure that it is not just at the point when people take out a mortgage that we as parliamentarians have responsibility for ensuring that they can make payments is relevant. The KFI document to which he drew attention provides clarity about future risks, and the assessment of suitability deals with the potential for rate increases. As the document states in bold type, rates may increase by much more than the figures projected in the illustration, and there are steps to ensure that future affordability is assessed at that point. However, he is right to say that we should always be aware of the difficulties that people might face in future.
The hon. Member for Linlithgow and East Falkirk made some sensible points. He discussed the importance of working with Members of the European Parliament,
Mr Love: It was remiss of me not to welcome the Minister to his new position. One of the things that you will discover very soon is that you head efforts to monitor and take part in all the regulatory changes going on at a European level. That is part of your role in this position—
Mr Love: I apologise, Mr Walker, and I apologise to the Minister. I was trying desperately to frame my question in a helpful way. One issue taken up by the Treasury Committee is the different regulatory structures emerging at a European level from the twin peaks that will emerge from the Financial Services Bill. That puts an onus on us to ensure that we monitor effectively what is going on in Europe. Europe is much more activist in its regulatory framework, particularly on financial services. I urge the Minister, since he is at the centre of our efforts in this regard, to be careful to ensure that we maximise our monitoring to ensure that what happens in Europe is to our benefit in forming the single market, and that it will protect our consumers.
Greg Clark: I am grateful for the hon. Gentleman’s intervention, and he is absolutely right. I intend to monitor developments in the rest of Europe, and I would be grateful for help from the extra eyes on the Treasury Committee and the European Scrutiny Committee. It never does any harm to have a number of other people doing that.
Chris Heaton-Harris: One way to ensure that Members of the European Parliament can help us with scrutiny would be to allow them into the Palace of Westminster. Perhaps the Minister could help in the process of getting Members of the European Parliament passes for the House of Commons.
Greg Clark: I am delighted to say that as a distinguished former Member of the European Parliament, my hon. Friend took matters into his own hands in terms of being allowed in here. I suspect that there have been discussions about his suggestion, of which I have not been part, but I have no doubt that he will update me after the debate. I will have to take a view as to whether that should be another thing to add to my list of responsibilities.
I talked about how I would welcome the continuing contribution of the hon. Member for Edmonton. He makes a perfectly reasonable point about buy to let: where do you draw the line? So far, his point of view has prevailed throughout the negotiations. We have not secured a complete exemption for buy-to-let mortgages. It is well worth his continuing to be part of that discussion, and I respect his history and the thought that he has given to the matter.