21 March 2016
By Jennifer Johnson, Head of Legal and Economic Affairs, EMF-ECBC
Today is a significant day for the European Mortgage Industry, as it is the official deadline for transposition of the Mortgage Credit Directive (MCD) into national legislation. As a result, this day marks the end, in principle, of almost five full years of consultation, discussion, negotiation and, in many cases, interpretation in Brussels and the 28 EU Member State capitals.
I say “in principle” because, whilst a majority of Member States has completed transposition of the Directive, a handful will need more time, but most of these are expected to complete the process in the next couple of months.
The path to the adoption and implementation of the Directive over the last five years has not been a straightforward one – although with European directives, perhaps it never is. Readers familiar with the MCD will however recall particularly tricky discussions with the European Parliament, when the then ECON Committee Rapporteur proposed a significant broadening of the scope to include a series of provisions relating, for example, to portability and subrogation of the mortgage, which had never been discussed or assessed at EU level before and which many feared were seeking to address very specific national concerns. Despite these sometimes large “bumps” in the road, the end result when the Directive was finally adopted in February 2014 was essentially a fair one, with an appropriate balance struck between the rights and obligations of lenders and borrowers.
How the Directive will work in practice remains, of course, to be seen. The interpretation challenges already experienced during the transposition phase, particularly relating to the calculation of the APRC, perhaps give a taste of what’s to come when the Directive is fully operational across the EU.
“Will there be unintended consequences of implementation?”
Furthermore, only time will tell what unintended consequences might arise from the implementation of the Directive. For example, the adverse – and clearly unintended – effects of the extensive requirements in relation to mortgage loans in a foreign currency are already apparent: in its attempt to address foreign lending concerns in certain Central and Eastern European Countries – which have incidentally in the meantime been approximately addressed by respective national authorities – the European Commission has, by way of the MCD requirements, created an unworkable or at best very expensive compliance regime, which is forcing lenders to withdraw from markets which were never the intended target of the legislation.
This is particularly detrimental to UK residents employed in the Republic of Ireland and paid in Euros, and vice-versa. Similar concerns have been highlighted in relation to Swedish residents working in Denmark and being paid in Danish krone. This is not only an unfortunate outcome, but an ironic one, given that lending in these border areas was one of the only true examples of the cross-border lending that the European Commission one day hopes to achieve, as outlined in its Green Paper on Retail Financial Services.
Speaking of the Green Paper, the EMF-ECBC’s experts have spent much of the last three months since its publication in December 2015 considering the European Commission’s assessment of European retail financial services markets and preparing the Mortgage Industry’s response to the extensive list of questions. The response was delivered to the European Commission last week.
In a nutshell, the Mortgage Industry is not opposed to having a more integrated cross-border market and increased cross-border activity. However, this potential is, in the EMF-ECBC’s view, mainly relevant for other types of financial services products that are simpler to provide than a mortgage loan. Indeed, the mortgage sector is a particular case when it comes to cross-border activities. This is due to the essential character of the mortgage product, which is intrinsically linked to the location of the property, and will, therefore, to a certain extent, always be subject to the respective national frameworks.
“The mortgage product is intrinsically linked to the location of the property, and will, therefore, be subject to the respective national frameworks.”
Furthermore, if a credit institution decides to enter a market, the decision is based on an economic evaluation of the advantages and disadvantages. Factors which prevent credit institutions from offering a product at cross-border level can be very different, such as lack of demand, high costs linked to different regulations, different mechanisms in Members States (e.g. length of foreclosure procedures) that influence pricing and the ability to offer a product in an efficient way for the entity and for consumers, and so on. Most of the obstacles highlighted by the European Commission in its Green Paper play a role in a financial services provider’s decision to service – or not to service – a market. In the end, the final decision rests upon whether or not there is a potentially economically viable business. For cross-border activities which imply operating in a market without establishing a physical presence there, economies of scale are hard to achieve.
The EMF-ECBC does, however, indicate that there are potential market opportunities in the area of digitalisation of financial services and suggests that the European Commission should focus on how the regulatory environment can better support a digital mortgage market. This being said, the EMF-ECBC notes that the mortgage granting process cannot be entirely digitalised. The assessment of the creditworthiness of the borrower, the valuation of the property and the intervention of a notary in a number of Member States, for example, remain key elements of the process which require physical presence or action of various actors in the chain.
The deadline for responses to the Green Paper was the 18th of March, so all eyes will be on the European Commission for the next couple of months in anticipation of a follow-up statement or action plan. Whatever the outcome, the EMF-ECBC will be ready, as always, to offer its expertise to the European Commission on the specific nature of the European mortgage business.