Europe and its proposal for the Mortgage market

Jan 16, 2015

The belief in Europe is that mortgage credit should follow the same structure for consumer credit, wherever possible.

European and international frameworks for conduct and responsible lending rules have been designed to align both consumer and mortgage lending in order to deliver similar consumer protection objectives across the board.

Mortgage_UKHowever laudable this aim is for consumer protection, there are many differences between the consumer credit and mortgage markets.  Not least is the fact that mortgage lending has to fit in with the often complex and lengthy legal requirements of the house buying process, whereas consumer lending usually involves taking out credit to purchase a particular item once the loan has been agreed.

Why is the MCD being introduced now?

It’s been 11 years in the making, but for the UK, now is not a very good time to introduce yet more new mortgage related rules…The dust has only just begun to settle on the FCA’s Mortgage Market Review (MMR), which was designed to ensure that the UK have a “mortgage market that works better for consumers and a market that is sustainable for all participants”. The EU has a more long winded reason for the MCD “…in order to ensure that consumers looking for such agreements [mortgages] are able to do so confident in the knowledge that the institutions they interact with act in a professional and responsible manner, an appropriately harmonised Union legal framework needs to be established in a number of areas...” But, will it deliver a harmonised Union legal framework?

Even though they’ve tried to minimise the impact to UK lenders, the FCA’s proposals (as contained in CP14/20) will have a huge impact for both mortgage lenders and consumers in the UK.

On the surface, both the MMR and the MCD appear to have been designed to achieve the same things, but the MCD will introduce changes to the UK mortgage regime, of which, the FCA believe adds little to consumer protection”. The FCA has, therefore, sought to rely on its existing rules where possible for implementation. Seems a logical stance, however, even though the UK regulators believe that the European framework is likely to achieve similar consumer protection objectives as the existing rules, what the FCA are proposing means that there is still going to be a huge impact on UK mortgage providers… and as quoted above, not much benefit for consumers either…

A survey completed by KPMG on behalf of the regulator concluded that the proposed regulations were likely to lead to a decline in new lending volumes. [Source: CP14/20[1]] If that isn’t enough to cause concern, the FCA have also stated that the scale of the compliance costs that firms will have to pay, (mainly around the change to European Standard Information Sheet – ESIS - from the KFI) is likely to be on a similar level to the MMR package of reforms that changed the format and content of the KFI.  There is little in the way of deviation from the directive allowed, when implementing the rules, especially around pre-contractual information, as the ESIS is to be fully harmonised across the European Union.  So, this means the UK will have to replicate the full ESIS requirements into rulebooks by 21 March 2016. However, we do get a slight ‘stay of execution’ as the KFI is classed as an “equivalent national disclosure” document it means that we can continue to use it, until 21 March 2019. But, the FCA believe that the KFI doesn’t quite meet the definition of an equivalent disclosure document and have suggested that lender will also need to provide additional or ‘top-up’ information alongside it, if they take advantage of the transitional period.

The transition from KFI to ESIS is guaranteed to cause confusion for consumers.

So, even though the MCD is to introduce “an appropriately harmonised Union legal framework” we can see that there are already differences creeping in, with regards to the UK’s and other Member States being able to continue to use other disclosure documents. 

As mentioned previously, the main area to be fully harmonised by the directive is the pre-contractual information, or the European Standard Information Sheet (ESIS), which must be implemented into the rulebooks by 21 March 2016. However, in the UK we will still be able to use the Key Facts Illustration (KFI) plus additional ‘top-up’ information until 21 March 2019. But, for some types of UK lending, (such as 2nd charges) firms will not have a choice and will have to use the ESIS disclosure document by 21 March 2016; for other lending specific to the UK (e.g. lifetime mortgages) firms will have to continue using the current Lifetime KFI. Also for some processes (such as contract variations) firms could continue to use the KFI even after 21 March 2019. 

How’s this for confusion…if the FCA implement the rules as proposed in CP14/20...

KFI is required for all lifetime mortgages pre and post 21/3/2016

KFI plus ‘top-up’ can be used pre 21/3/2019 or can go straight to ESIS w.e.f. 21/12/2015

ESIS is required for 2nd charges w.e.f. 21/3/2016

KFI or ESIS can be used for contract variations (rate switches or transfers of equity) post 21/3/2016

ESIS must be used w.e.f. 21/3/2019 if not implemented by 21/3/2016

...and there is some uncertainty around buy-to-let advances – are they regulated or not...is there going to be a new disclosure requirement or not...

This brings in additional complexities for UK consumers and lenders as the product the consumer wants or the route the firm chooses, could determine the amount and type of information the borrower receives. The example below highlights the issue…

On 22 March 2016…

A consumer, who is shopping around, visits 3 different mortgage lenders:

  • Lender 1 provides him with a full ESIS;
  • Lender 2 provides him with a KFI plus a separate ‘top-up’ document; and
  • Lender 3 supplies him with a KFI, which includes the additional ‘top-up’ information in the body of the document!

On 22 March 2019…The consumer has a mortgage and decides to switch to a fixed rate product, but will he be provided with a KFI or an ESIS?

The answer depends on the lender as they will be able to choose, which route to use as per FCA’s comments in CP14/20.  “We currently require firms carrying out rate switches or transfers of equity to give consumers a KFI. We propose to change our rules so that firms can use an ESIS instead if they prefer, for example if it is more efficient.”

40 years or more pass by…The borrower considers a lifetime mortgage and is presented with a different type of document, this time he gets a Lifetime KFI. 

Need we say more! Harmonised? We think not; Inconsistencies? Definitely!