Documents considered by the Committee on 9 May 2012 - European Scrutiny Committee Contents


2   Financial services: residential mortgages

(32659)

8680/11

+ ADDs 1-4

COM(11) 142

Draft Directive on credit agreements relating to residential property

Legal baseArticle 114 TFEU, co-decision; QMV
DepartmentHM Treasury
Basis of considerationMinister's letter of 30 April 2012
Previous Committee ReportsHC 428-xxxi (2010-12), chapter 5 (29 June 2011), HC 428-xxxiv (2010-12), chapter 7 (19 July 2011) and HC 428-lvii (2010-12), chapter 4 (18 April 2012)
Discussion in CouncilPossibly May 2012
Committee's assessmentPolitically important
Committee's decisionNot cleared; for debate in European Committee B

Background

2.1  In December 2007 the Commission published a White Paper on the integration of EU mortgage credit markets. The Commission's aim was to identify obstacles that might restrict the single market for residential mortgages and to consider possible measures to reduce them. It described its objectives, and suggested possible policy options, as:

  • facilitating cross-border supply and funding of mortgage credit;
  • increasing product diversity;
  • improving consumer confidence; and
  • facilitating consumer mobility.

2.2  The Commission emphasised that the proposals in the White Paper would be further developed and subjected to rigorous impact assessment, including quantitative cost-benefit analyses, before any policy decisions were taken. Our predecessors, in clearing the White Paper from scrutiny, noted with approval the Commission's cautious approach to the possible need for legislative proposals.[51]

2.3  In March 2011 the Commission proposed this 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 lenders and intermediaries act "honestly, fairly and professionally" when dealing with consumers.

2.4  The main features of the Commission's proposal were:

  • advertising — the Directive would require complete disclosure of all terms and conditions in any form of advertising;
  • pre-contractual information — the Directive would require separate generic and personalised pre-contractual disclosure of information, would introduce a European Standard Information Sheet and would require the use of a standardised Average Percentage Rate of Charge;
  • advice — the Directive would require lenders and intermediaries to inform consumers as to whether or not advice is being provided and to have a clear understanding of the consumer's circumstances when giving advice;
  • suitability and creditworthiness assessment — the Directive would require the lender to take into account the consumer's personal circumstances, based on sufficient information and, if appropriate judge that the mortgage is "not unsuitable" for the consumer; and
  • authorisation of intermediaries and specialist lenders — the Directive would require the authorisation and ongoing supervision of intermediaries and specialist lenders.

2.5  The proposal also included provision for the Commission to adopt, in accordance with Article 290 TFEU and subject to revocation by the Council or the European Parliament, delegated acts to supplement or amend non-essential elements of the proposed legislation.

2.6  When we first considered this proposal, in June 2011, we heard that in order to ensure that the Directive avoids imposing unnecessary burdens on UK lenders, intermediaries and consumers, while ensuring an efficient and competitive single market and promoting financial stability, the Government would be seeking improvements during negotiations in four areas: scope, disclosure, passporting and delegated acts.

2.7  We noted the Government's intention to seek improvements to the draft Directive and asked to hear in due course about progress on the issues to which our attention had been drawn. In the meantime we asked also to hear about three points:

  • given the initial caution shown by the Commission as to the need for legislation, as noted by our predecessors, was the Government satisfied about the need for the whole of this proposal;
  • was the Government challenging the Commission on the value of its impact assessment; and
  • what aspects of the powers to be delegated to the Commission did the Government think were not appropriate?

2.8  In July 2011 we considered the Government's response to our questions. On whether the Government was satisfied about the need for the whole of this proposal we heard that:

  • the Government accepted the Commission's argument about the need for this proposal, provided it could achieve sufficient progress against its negotiating objectives — this would ensure that the benefits of the proposal would outweigh the costs;
  • the Commission had brought forward the proposal against the backdrop of the financial crisis, which took place following the publication of the White Paper in 2007;
  • both the Commission and the European Parliament were committed to taking action in this area to address "irresponsible lending and borrowing" in the EU;
  • the Commission's impact assessment noted that "The financial crisis had a substantial impact on EU citizens. Although an important contributing factor was the growth in securitisation, which allowed creditors to pass the risk of their lending portfolios to investors, consumers have faced the consequences first hand. Many have lost confidence in the financial sector and certain lending practices that used to prevail are now having a direct impact. As borrowers have found their loans increasingly unaffordable, defaults and foreclosures have risen. Addressing irresponsible lending and borrowing is therefore an important element in financial reform efforts";
  • while it should be recognised that the UK mortgage market had experienced historically low arrears and repossession levels since the financial crisis, the Government recognised the importance of responsible lending and borrowing and a sustainable mortgage market for EU consumers to support a stable housing market;
  • the Commission had also brought forward this measure in an effort to create an internal market for mortgages;
  • the summary of the Commission's impact assessment noted the case for EU action: "Action from Member States alone will result in different sets of rules, which may undermine or create new obstacles to the functioning of the internal market and create unequal levels of consumer protection throughout the EU. Common standards at EU level are therefore necessary to promote an efficient and competitive internal market with a high level of consumer protection and to avoid the development of divergent rules and practices in the Member States. The Treaty provides for action to ensure the establishment and functioning of an internal market with a high level of consumer protection as well as the free provision of services. Such a market for residential mortgages is far from completion as several obstacles exist to the free provision of services and the creation of an internal market. The legal basis for action is in the following Treaty provisions: Article 114 (ex-Article 95)";
  • the Government's impact assessment acknowledged that the proposal might result in increased customer mobility and increased cross-border activity of lenders and intermediaries through a passport regime for intermediaries, enhancing competition in the single market;
  • given national differences in culture, language and attitudes to housing this might be limited in the short to medium term; and
  • given, however, that the UK benefits from a well-established mortgage market, the ability for intermediaries to passport might present opportunities for growth over the longer term for UK firms to expand in to other Member States.

2.9  On the Government challenging the Commission on the value of its impact assessment we were told that:

  • the UK, together with other Member States, had challenged and continued to challenge the Commission on aspects of the content of its impact assessment in Council working groups and bilateral meetings;
  • for instance, the Government was particularly concerned that the impact assessment failed to consider the implications of regulating buy-to-let mortgages — more specifically, it failed to address the potential impact this would have on housing supply, including the wider social impacts and potential changes to housing tenure options, which were unclear;
  • Commission guidelines specify that a "proportionate level of analysis" must be undertaken, taking into consideration likely impacts and political importance and its impact assessment must be examined by an independent Impact Assessment Board;
  • the Commission's impact assessment for this proposal took place in September 2010 and the Impact Assessment Board deemed that it provided the necessary evidence for action in this area, but should be improved in various respects; and
  • the Commission had revised the report in line with the recommendations provided by the Board.

2.10  As for the aspects of the powers to be delegated to the Commission which the Government thought inappropriate we heard that these related to Article 6(4) on minimum competence requirements, Article 14(5) on an obligation to assess the creditworthiness of the consumer and Article 16(2) on database access — the Government was of the view that these articles were fundamental components of the Commission's proposal and, as a result, any amendments to these provisions should be discussed and negotiated through the Council and not through a delegated power to the Commission.

2.11  Noting these answers, we said that we looked forward to hearing in due course about progress in negotiating improvements to the draft Directive, so eliminating issues of concern.

2.12  When we last considered the proposal, in April 2012, we heard that:

in relation to the progress of negotiations

  • Member States were continuing negotiations on the draft Directive in the Council and that the Presidency had circulated a number of revised drafts based on these discussions, the latest produced on 17 February 2012;
  • responsibility for the proposal in the European Parliament had been split between the Economic and Monetary Affairs Committee (ECON) and Internal Market and Consumer Protection Committee (IMCO);
  • a significant number of amendments had been tabled in the European Parliament, over 820 by ECON and 300 by IMCO;
  • while the IMCO Committee had voted on the amendments for its final report, the ECON Committee continued to discuss the final amendments, with voting expected to take place in the coming months;
  • once both the Council and the European Parliament had agreed their compromise texts the proposal would be subject to "trialogue" discussions between the Council, the European Parliament and the Commission;

in relation to the scope of the proposed Directive

  • the Government's initial Impact Assessment had noted that the majority of mortgage lending in the EU was to consumers borrowing from mainstream lenders, either to buy their residential home or to refinance an existing mortgage;
  • the Government believed that the proposed Directive should focus on this mainstream lending and decisions over the regulation of any niche products should be left to those Member States in which these products are offered;
  • this had proved difficult, as many Member States were opposed in principle to any exemptions from Directives;
  • the most important area where the Government had sought an exemption from the scope of the Directive was for buy-to-let lending, which it considered should be exempt from the scope of the Directive;
  • other Member States, like France and Germany, regulate these mortgages alongside mainstream residential mortgages and so they did not agree with the need to exempt them from the proposed Directive;
  • the Government had been successful in securing recognition that buy-to-let lending is different from mainstream residential mortgage lending and had therefore succeeded in gaining a partial exemption for buy-to-let lending;
  • the partial exemption would work by providing a complete exemption from the articles on advertising, general information and the European Standard Information Sheet (ESIS), on the basis that the UK provides an equivalent framework;
  • in addition, the Government had ensured that the articles relating to 'adequate explanations' and 'creditworthiness' could be tailored to the requirements of buy-to-let lending in the UK;
  • the Government had been supported in the European Parliament, where UK MEPs had tabled a number of amendments which would seek to exempt buy-to-let lending from the scope of the Directive completely — it would continue to work closely with UK MEPs to ensure that an exemption for buy-to-let lending remained a negotiating priority as discussions progress to trialogues;
  • in addition, the Government would ensure the application of the Directive would be proportionate for other forms of niche lending, such as shared equity loans and lending to high net worth borrowers;

on the issue of disclosure, as concerns pre-contractual information

  • while the current draft of the Directive contained the same overall number of articles providing for disclosure of information as previously, the overall volume of information consumers would receive had been reduced;
  • the Government continued to argue against the introduction of an ESIS, which would be very similar to the UK's existing Key Facts Illustration (KFI);
  • transition costs of moving from the KFI to the ESIS were expected to be high and the benefits for consumers extremely limited;
  • the Government had been negotiating for an approach that would allow Member States to keep their own standardised disclosure where this is equivalent to the ESIS;
  • the Commission, however, saw the ESIS as a key deliverable from this proposal and a number of Member States, like France and Germany, already use the ESIS on a voluntary basis;
  • as a result, the Government had so far failed to gather sufficient support to oppose the ESIS in the Council;
  • in discussions in the European Parliament, however, a number of MEPs had come out very strongly against the ESIS as "standardisation for the sake of it";
  • an amendment supporting the UK position had been included in the IMCO Committee report and an amendment supporting the UK position was currently being discussed in the ECON Committee; and
  • the Government continued to work closely with UK MEPs to ensure the ESIS remained a negotiating priority as discussions progress to trialogues;

on the question of passporting

  • the Government had worked in the Council to ensure that the passporting provisions would not undermine consumer protection in the UK and other established EU mortgage markets;
  • that the current compromise text supported its position and would give sufficient powers to the Financial Services Authority to take action against firms when required to protect UK consumers;

on the question of delegated acts

  • the Government's position had been that delegated acts should only be used in limited circumstances and in compliance with the conditions in Article 290 TFEU;
  • the number of delegated acts in the proposal had been significantly reduced;
  • the Government would continue to ensure this position be maintained throughout trialogues;

in relation to other issues

  • the Government had ensured recognition of the UK's "appointed representatives" regime for intermediaries;
  • it had secured flexibility so both lenders and intermediaries would be able to provide advice to consumers who wanted it; and
  • it had ensured a balanced approach to how lenders would assess consumers' ability to repay their mortgages.

2.13  We were asked to consider clearing this draft Directive from scrutiny, as it was expected that the Council would agree a general approach shortly. However, whilst we recognised the progress that had been made in Council negotiations, we did not think that was sufficient, particularly in relation to the ESIS, to warrant Government support for a general approach at this stage. It seemed insufficient to be so dependent, on this and the other priorities, 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 — given that the European Parliament's consideration of the proposal was still underway timing seemed not to be an issue. We said we looked forward to hearing of the Government adopting this approach and securing further improvements to the draft Directive.

2.14  However, despite earlier assurances from the Government about the utility of this proposal, we remained doubtful of this. So we also asked to hear from the Government:

  • whether there was sufficient single market justification for this proposal, given that it was already possible for borrowers to seek credit from institutions in other Member States (and indeed in third countries);
  • whether there was any merit in harmonising consumer protection measures in this area across the EU; and
  • what the view of UK business and consumer representatives was of the proposal.

2.15  Pending responses to both these requests the document remained under scrutiny.[52]

The Minister's letter

2.16  The Financial Secretary to the Treasury (Mr Mark Hoban) responds now, saying first that:

  • as we have acknowledged, the Government has achieved significant progress in Council negotiations on the proposal — this includes progress on all four of its key negotiation priorities of scope, disclosure, passporting and delegated acts; and
  • further progress has also been made on achieving recognition of the UK's 'appointed representative' regime for mortgage intermediaries and ensuring that the Directive would provide a balanced approach to how lenders assess consumers' ability to repay their mortgages.

2.17  The Minister continues, in relation to introduction of the ESIS, that:

  • the Government notes that we share its concern over introduction of the ESIS to the UK mortgage market;
  • it is not the case, however, that the Government's negotiations are now "dependent, on this and other priorities, on lobbying in the European Parliament" — the Government continues to raise its concerns over the introduction of the ESIS in discussions with the Presidency and other Member States;
  • but it is important to recognise that the draft Directive is subject to qualified majority voting, which means that the Government cannot block the progress of the proposal without the support of a significant number of other Member States;
  • as noted previously, many Member States (including France and Germany) already use the ESIS on a voluntary basis and the Commission, which sees the ESIS as a key deliverable, has come out strongly against the Government's proposed position;
  • as a result, the Government has not been able to gain sufficient support in the Council on this issue to secure change or block the progress of the proposal;
  • once trialogues between the Council, the European Parliament and the Commission begin, the Government will continue to work with supportive MEPs throughout the negotiations, to ensure its priorities are represented in the positions of both the Council and the European Parliament; and
  • specifically, the Government will look to utilise the support that it has achieved in the European Parliament to maintain and extend the partial exemption for buy-to-let lending and to push for flexibility on the ESIS.

2.18  The Minister then turns to the three matters on which we wanted further information from the Government. He says first, as to whether there is sufficient single market justification for this proposal, given that it is already possible for borrowers to seek credit from institutions in other Member States (and indeed in third countries), that:

  • the Government has noted previously that it recognises the importance of a sustainable mortgage market for EU consumers, to support a stable housing market;
  • it supports the Commission's ambition to achieve an EU framework of core standards, provided this recognises differences that exist between national mortgage markets — this would ensure that those consumers taking out a mortgage in other Member States would be provided with a broadly consistent level of consumer protection;
  • as we had noted previously the summary of the Commission's impact assessment stated the case for EU action;
  • while mortgages secured against properties bought in the UK already benefit from well establish mortgage regulation, the Government understands that many MPs have had concerns raised with them by constituents who have faced issues taking out a mortgage from another Member State, such as Spain and Cyprus, to buy overseas property; and
  • while the Directive would not address all the issues faced by those UK consumers buying residential property elsewhere in the EU, it would provide a consistent framework of mortgage regulation — this would ensure that UK consumers, in taking out a mortgage outside the UK, would benefit from protections that are not currently available to them.

2.19  On the question of whether there is any merit in harmonising consumer protection measures in this area across the EU the Minister reiterates that the Government supports the Commission's ambition to achieve an EU framework of core standards, provided this recognises differences that exist between national mortgage markets. He continues that:

  • as was said in its Explanatory Memorandum of 8 June 2011 on the draft Directive, the Government considers that it is consistent with the principle of subsidiarity —creation of a more integrated EU mortgage market can only be achieved through a consistent framework of EU mortgage regulation;
  • the Government's initial impact assessment also acknowledged that the proposal may result in increased customer mobility and increased cross border activity of lenders and intermediaries; and
  • given the UK benefits from a well-established mortgage market, the ability for intermediaries to passport may present opportunities for growth over the longer term for UK firms to expand into other Member States.

2.20  On our third question, about the views of UK business and consumer representatives on the proposal, the Minister says that:

  • the Government has worked extremely closely with the Financial Services Authority, lenders, intermediaries and consumer groups to understand the implications of the Commission's proposal on the UK mortgage market;
  • he has held a number of discussions with industry and consumer groups on the Government's negotiating objectives and Treasury officials have also held regular working groups, attended by representatives from a wide range of these organisations; and
  • it is clear that the strong progress the UK has made, particularly in the European Parliament, has been the result of the combined efforts of industry, consumer groups and Government in ensuring that the UK is presenting a single message in Brussels.

Conclusion

2.21  We are grateful to the Minister for his elaboration of the situation in relation to this draft Directive. We remain unconvinced, however, of the utility of the proposal. Therefore we recommend that the matter be debated in European Committee B. We suggest that Member in that debate might wish to explore particularly with the Minister:

  • any potential in the proposal for adversely affecting borrowers in the UK;
  • 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.





51   (29332) 5128/08 + ADDs 1-5: see HC 16-xi (2007-08), chapter 13 (6 February 2008). Back

52   See headnote. Back


 
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