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By Trineke Borch Jacobsen, Danish Mortgage Banks’ Federation

In recent years the European financial sector has been the subject of cascades of EU regulation which has directly and indirectly impacted on the sector and its customers. The key issues include capital requirements, consumer protection, the anti-money laundering regime and the supervision of all of these various pieces of legislation.

There is no doubt that the common EU regulation of the provision of goods and services on a crossborder basis is a precondition for establishing and further developing the EU Internal Market – one of the core goals of the Union. Uniform legislation ties the Union closer together and opens up the Internal Market for goods, services and, most importantly for consumers and enterprises, market efficiency and more competition.

Not all legislation in the Union can or should be uniform, however. But issues decided by the Union for the Union must be dealt with in the same way everywhere – if not by the letter then in substance. Ideally, the issues under discussion should be carefully thought through with regards to need and proportionality, and impact assessed before being proposed by the European Commission, negotiated and balanced in the Council, democratised by the European Parliament and implemented in Member States, without goldplating or technical “improvement”.

This principle also applies when the purpose of the common efforts is to maintain financial stability through intense regulation of the financial sector. Uniform means that the legislation applies everywhere with as few adjustments as possible and is only adjusted in the pursuit of a uniform result in terms of impact of the regulation on the market.

It is, however, vital that close attention is paid to ensuring that EU regulation is proposed with a focus on issues of common interest which Member States cannot handle (better) on their own. If measures are not prioritised and are not proportional to their objective, they may prove counterproductive to the overall aim of cross-border activity and the development of the products available to European consumers.

National issues should be addressed by national legislators and targeted to the national market and national market players respectively. Issues concerning fundamental national legal infrastructure such as social services, health service and land registration and the interaction with related legislation are policy themes that probably should be reserved for national initiatives. Grey zones will emerge and be the subject of discussion, but it is important that political awareness of the distinction between national and EU legislative competence is in place.

This distinction requires self-discipline from both national legislators, with a tendency to escalate national challenges to the European level, as well as the European Institutions focusing on particular problems in one or two Member States and spreading the cure to the entire EU – whether an overall remedy is needed or not.

The level of harmonisation is often central when negotiating EU legislation. In reality any agreed level of harmonisation, whether minimum or maximum, can be bypassed by national legislators, whether intentional or not, if attention is not constantly paid to the need for the Union-game to be played on a level playing field.

This underlines the need for legislators of all kinds to recognise their mandate and its limits and also to recognise what the EU is all about, whether seen from the national perspective or the European one.

Key for the EU is the development of the Internal Market with a common market policy that aims to secure the four freedoms for citizens and businesses of the 28 Member States: to settle, work, travel and invest in other Member States.This sounds easy but it is not.

“European legal structures meet national structures in the process of implementation and strange things happen, often in rather peculiar ways which are quite unhelpful to the European principles and to the Commission’s vision of better regulation”

Sometimes common legislation becomes too detailed, and impacts on practices or conditions in Member States in unforeseen ways. In other instances, national legislators consider EU legislation to be incomplete and add layers of national legislation. Finally, on occasion, national legislators and authorities are not aware that national initiatives and practices technically convert EU legislation into something unintended and counterproductive.

The need for awareness can probably be illustrated by examples from every Member State in the EU, but I have picked some examples from Denmark covering the categories mentioned in the section above.

1. The Mortgage Credit Directive addresses, among other things, risks for borrowers when taking out loans in a foreign currency. Developments in relation to currencies and interest rates have been a serious problem for borrowers in some Member States, but not everywhere in the Union. In some Member States, consumers took out mortgage loans in a foreign currency prior to the financial crisis. The loan was issued in a different currency to the national currency and also to the currency that the consumer’s salary was paid in.During the crisis, currencies evolved differently, resulting in defaults by borrowers when payments on the loan stopped converging with salary payments, and outstanding debt increased because of the development in currency exchange rates.

   A practice that was correctly assessed as a serious threat in some Member States ended up being addressed in the Mortgage Credit Directive as a general problem. The Directive defines any loan that is not in the same currency as the consumer’s income as a foreign currency loan. It introduces special requirements for the lender regarding monitoring and other measures such as an obligation to provide an alternative currency to the consumer. Many of these measures are, practically-speaking unfeasible, and give rise to problems not seen prior to this legislation.

   In border regions where citizens are employed on a cross-border basis and commute between Eurozone and non-Euro-zone countries, employees are paid in a currency which is different from that of their domestic currency and different from the currency of their loan. This means that a Dane taking out a loan in DKK on a property situated in Denmark and taxed in DKK is a foreign currency borrower when his Swedish employer pays his salary in SKR. Danish mortgage banks cannot issue loans in SKR, meaning that a Danish mortgage loan can no longer be offered to this kind of borrower. This is a problem with no upside.

   As a result mortgage banks and other mortgage loan providers in primarily border regions, but also in other instances where the currency of the income and the loan is not the same, now face legal problems and transaction difficulties when offering loans that are otherwise uncontroversial. This is not the way to encourage cross-border activities, but Member States will have to deal with it. This example illustrates what happens when specific issues are dealt with by general measures.

2. In Denmark lenders have a special obligation to mark loans with a risk indication – a ”Traffic Light” – in green, yellow or red warning the borrower in degrees about the risky characteristics of any loan on offer.This comes on top of the EU information requirements in the Consumer Credit Directive (SECCI) and the Mortgage Credit Directive (ESIS), plus their respective marketing rules. The mortgage industry has never succeeded in obtaining a definition of risk in this context, but all loans are nonetheless marked with a risk warning.
3. In recognition of the huge volume of information that lenders are obliged to provide to borrowers wanting to take out a mortgage loan, an expert committee under the previous government – in the process of assessing the mobility in the Danish mortgage market – made a recommendation that mortgage banks should agree on and comply with “common principles for the compilation of loan documents”. Considering that 22 different legal acts – EU and national – impact on the communication between lender and borrower, there is a lot of complex material to deal with. The industry has highlighted this as a concern for years.But with this recommendation, the government and FSA have obliged the industry to negotiate another layer of information with the consumer representatives. The objective is to explain to the borrower how to navigate through the information and to require the lender to organise the documents so that they are provided in the same way.

   The measure makes good sense but this area is already heavily regulated by the EU. Nonetheless the FSA chaired the negotiations and will oversee the implementation of and compliance with the agreement, as with any other piece of legislation. It enters into force in February 2017.

4. By January 2017, a new price-portal for mortgage loans will be launched in Denmark. It will enable borrowers to compare loan prices at the time of entering into the contract and by way of a simulated model (based on real data collected by the mortgage banks and reported to the National Bank, which will be responsible for doing the calculations and maintaining the data in the portal) showing how the loan performs over time in terms of costs. Technically, this is challenging and costly too and requires the design of new IT-systems for the postcontractual monitoring of loans.It is a legal requirement to report the data in the correct format to the National Bank and to provide the technical infrastructure in order to be able comply with the requirements. This would also be required from a new market player.

All three of these Danish innovations will make it considerably more difficult for a new EU-market player to penetrate the Danish market. They would be considered as technical hindrances and rightfully so.

To conclude – there is still some room for improvement. In the meantime different mortgage games are being played on un-level playing fields.

This article was originally published in the October 2016 edition of the monthly EMF-ECBC  Market Insights & Updates newsletter. Please note that any views or opinions expressed in this article are those of the authors and not necessarily those of the EMF-ECBC. This article does not constitute investment advice.