date: 28 August 2009 e-mail: paul.broadhead@bsa.org.uk direct line: 020 7520 5917 direct fax: 020 7240 5290 European Commission DG Internal Market Rue de la Loi 200 1049 Brussels Belgium Dear Sir/Madam Public Consultation on Responsible Lending and Borrowing in the EU Please find attached the BSA response to the above consultation. If you require any further information please do not hesitate to contact me. Yours sincerely Paul Broadhead Head of Mortgage Policy
A response by the Building Societies Association to: European Commission Consultation Document: Responsible Lending and Borrowing in the EU Introduction 1. The Building Societies Association (BSA) welcomes the opportunity to respond to the European Commission s consultation on Responsible Lending and Borrowing in the EU. 2. The BSA is a trade association representing mutual lenders and deposit takers in the United Kingdom, including all 52 UK building societies. Building societies have total assets of over 375 billion ( 469 billion) and, together with their subsidiaries, hold residential mortgages of 245 billion ( 306 billion), more than 20% of the total outstanding in the UK. Societies hold around 240 billion ( 300 billion) of retail deposits, accounting for more than 20% of all such deposits in the UK*. Building societies employ about 50,000 full and part-time staff and operate through approximately 2,000 branches. (To avoid any possible confusion, we would point out that the BSA is not represented by the European Federation of Building Societies (EFBS) nor is any individual UK building society a member of the EFBS.) *Balances data as at end May 2009, so includes Britannia Building Society. 3. The BSA believes that in the context of the current financial crisis the Commission should be clear that the problems in the global and European economies today are a result of liquidity and structural problems in global financial markets. They are not a product of a dysfunctional and irresponsible residential mortgage market and the Commission should be mindful that they are not focusing their attention on fixing the wrong problem. 4. The Commission should avoid introducing prescription at the product level and should focus on ensuring that there are a clear set of standards and principles that can be implemented at a member state level taking account of cultural and structural market differences. Any changes should be outcomes focused in order to improve the experience of consumers and should be supported with a robust cost benefit analysis. 5. In the United Kingdom the Financial Services Authority (FSA) are currently carrying out a review of the mortgage market, following on from the Turner Review earlier this year. We believe that the Commission should await the outcomes of that review before concluding its decision on the action that it wishes to take. 6. The EMF EU Responsible Lending Standards for Home Loans provide a strong framework across the EU. This demonstrates that EU lenders are taking the matter of responsible lending very seriously. 7. The BSA is happy to engage further with the Commission on this and wider issues affecting the EU Mortgage Market as necessary. 2
Specific questions posed by the consultation paper Q1 Do you have evidence of misleading or unfair advertising or marketing practices with regard to mortgage and consumer credit? 6. Chapter 3 of the FSA MCOB rules cover the issue of financial promotion, advertising is further regulated by the Advertising Standards Agency (ASA). There is little evidence in the UK of widespread disregard for these rules. There have been very few cases of enforcement action in the UK relating to either advertising or financial promotion breaches. Q2 What are your views on the development of risk guidelines? 7. The UK already has robust rules in place to ensure the customer receives the full details of the proposed mortgage contract. This is via the FSA Mortgage Conduct of Business (MCOB) rules, in particular chapters 4 and 5. Chapter 4 contains detailed rules on the advising and selling standards that firms must adhere to. A firm must ensure that the product is suitable for the customer and that they can afford the mortgage. 8. Chapter 5 contains detailed rules on the disclosure requirements prior to the completion of the mortgage contract. The rules set out the range of information which must be provided to the customer. This includes: - The total cost of the mortgage - The monthly mortgage payment - The impact of a 1% rise in interest rates - The fee payable to the intermediary 9. The rules also require the firm to explain to the customer that it is important that they read and understand the information provided to them. We are of the view that the current rules are sufficient. Any changes to the information provided to the customer are likely to have significant cost implications for lenders, therefore any changes resulting from new EU regulation must have significant positive benefits for consumers. It should also be supported by a detailed cost benefit analysis. 10. We believe that there would be considerable cost and very limited consumer benefit to adopt an EU wide prescriptive approach with regard to risk guidelines other than high level principles that can be implemented at a member state level. Q3 In your view, are their certain (categories of) credit products that are inherently unsuitable for sale to retail borrowers? Would you welcome a set of standardised or certified credit products to be offered to consumers? 11. We do not believe that there are any products in the UK market that are inherently unsuitable for sale to borrowers. It is important to recognise that the circumstances of each individual borrower are different and can be complex. Lenders aim to cater for those needs by offering a wide range of mortgage products. 12. It is important that lenders retain the ability to develop products which meet the needs of their customers. Any product level regulation, or standardisation of product design, could have the effect of stifling innovation. This could then prevent lenders from responding to the needs of their customers, resulting in the exclusion of certain customer types from the housing and mortgage market. It could also temper the competitive edge that lenders often try to exploit through products designed to meet a specific niche. 13. Any change to product regulation may also impact on existing homeowners, by reducing or removing their ability to refinance or move home. This would not only create financial issues if 3
they are left on their lender's Standard Variable Rate (SVR), but may also have an impact on their ability to change employment or cater for other lifestyle changes. We do recognise that some products, in particular self certification, were developed to cater for a specific customer type, but were perhaps incorrectly expanded and made available to a much broader customer base. 14. It should also be noted that an assessment of suitability is not the sole preserve of the mortgage lender or credit intermediary. The borrower has a responsibility to ensure, based upon any advice and information provided, that the product is suitable for them. Q4 Do you consider that mortgage lenders and credit intermediaries should always perform creditworthiness and/or suitability assessments before granting consumer and mortgage loans? For mortgage credit, what are your views on the criteria to be used in assessing suitability such as loan to income ratios or loan to value ratios? 15. Existing UK regulation requires the lender to conduct a creditworthiness assessment for each individual customer; we agree that good practice dictates that this should always be performed. 16. We do not believe that restrictions should be placed upon the maximum loan to income ratio which a lender may apply. Building societies ensure they develop a firm understanding of the borrower's financial circumstances before offering a loan. The methods used to assess affordability vary greatly throughout the industry. Some lenders have very complex affordability models, using socio demographic data, existing credit commitment and lifestyle information. Others use more basic models using 'debt to income' ratios to determine affordability. 17. We do believe it is the role of the Commission to develop the broad guidelines and standards that EU mortgage markets are operating under, but detailed guidance or rules on how this is implemented should remain at member state level. The Commission should take note of the EU Responsible Lending Standards for Home Loans published by the European Mortgage Federation (EMF). The BSA supports the development of these standards and believes it to be a suitable framework for the Commission to engage with. 18. Restrictions on the maximum LTV similar to the rules imposed in some member states will have a significant adverse impact on UK consumers. First time buyers will be unable to access homeownership without a significant deposit and existing homeowners may find themselves unable to refinance or move home due to changes in their lifestyle. As a consequence these customers may be driven to more expensive forms of unsecured credit, or may seek additional borrowing via a second charge. Therefore while each individual lender may have a low LTV, with the benefits of lower capital requirements and lower likelihood of loss upon default, the combined effects could still result in the customer taking on greater risk. 19. In the UK, Nationwide Building Society has recently introduced a mortgage offering up to 125% of the property value. This is designed to provide flexibility for existing customers in a position of negative equity (where the amount of outstanding mortgage is more than the value of the property it is secured upon) to move home if their circumstances dictate. It should be noted that this does not result in the lender or the borrower taking on additional risk and if maximum LTV s were imposed, then these borrowers would not be helped. 4
Q5 How should the lender or credit intermediary demonstrate or document the adequacy of the credit worthiness and suitability assessment? 20. Existing UK regulation already requires both the lender and the credit intermediary to make an adequate record of the affordability and suitability of the product for the customer, where advice has been given. This is covered within MCOB 4 and MCOB 11. We believe that these standards are adequate. Where a customer has chosen not to receive advice, these requirements do not apply. We believe that this is sensible approach. Q6 Do you think that these advice standards would be appropriate in an EU context? Are there others that should be considered? What would be the most appropriate means to introduce and enforce the application of advice standards? 21. The proposed advice standards already exist in UK regulation and we believe that these standards remain suitable and appropriate. Q7 Apart from a focus on financial education, are there any measures that could be taken to encourage responsible borrowing? 22. It is very difficult to know exactly what could be done to ensure all customers borrow responsibly, due to the varying nature of consumer behaviour; certainly financial education will play an important role. Q9 Do you think policymakers should make distinctions between credit intermediaries in terms of the products they sell? Should credit intermediaries be treated differently in terms of the status of their relationship with lenders (tied versus untied intermediaries)? 23. In the UK, all intermediaries who wish to sell mortgage finance, must be regulated by the FSA, this includes those who may sell mortgage finance only on a small scale. Depending on the way in which the intermediary wishes to conduct their business, they will be authorised with specific distribution arrangements, such as being tied to a specific lender or group of lenders, or being able to offer products from any mortgage lender. 24. There has been some concern raised in the UK with regards to whether consumers understand the varying types of mortgage intermediary. The FSA are reviewing the current structure as part of their mortgage market review to determine if a less complex structure could be implemented, which continues to provide appropriate regulation, but is more consumer friendly. Q10 Could you give example of cases of misconduct, mis-selling or any other instances of consumer detriment linked to credit intermediaries in your country? 25. Yes, the UK can provide a number of examples of consumer detriment where enforcement action has been taken by the FSA. Go to http://www.fsa.gov.uk/pages/library/communication/pr/index.shtml for further information. Q11 Does the regulatory patchwork for credit intermediaries present a problem in your view? 26. It would not work if it was prescriptive to each member state. We would support the development of high level principles and standards that can be implemented at member state level. The UK has a robust regime in place for some time, we would again refer the Commission to the EU responsible lending standards for Home Loans drafted by the EMF. 5
Q12 What would be the most appropriate way to address potential conflicts of interest, particularly with regard to fee/bonus/commission structures? Should any measures in this regard apply to bank client-facing staff as well as intermediaries? 27. The regulation in place in the UK requires the intermediary and lender to disclose any commission payable to the intermediary by the lender. Although there is no specific regulation regarding fees charged by the intermediary to the customer, there are requirements for the intermediary to disclose details of the fee to the customer. Existing regulation also ensures that the intermediary and the lender are not permitted to accept any fees which commit the customer to the application, until the customer has had an opportunity to consider the key facts illustration for the proposed mortgage contract. 28. The FSA has raised concerns with a small minority of intermediaries in the UK, that some may have recommended products based upon the commission attached to the product, even though the product may not have been entirely suitable. This is no indication that this is widespread practice however; work is required to ensure that this practice is eradicated. We believe that this can be done without additional requirements from an EU level and we are aware that the FSA is reviewing the remuneration of intermediaries as part of their wider mortgage review. 29. In the building society sector, branch based mortgage sales staff are not generally remunerated directly from the mortgage sale. Most staff are paid a fixed salary and any bonus or commission payments are based upon a number of key performance targets and other business objectives. Q13 What are your views on the registration and supervision of credit intermediaries? 30. We believe that it is right that credit intermediaries should be subject to regulation, although would resist any notion that the lender should be in any way responsible for the actions of an intermediary. Enforcement of the regulation should remain the responsibility of the national regulator. If the Commission is committed to EU level regulation of intermediaries then this should be limited to high level principles and standards and implemented at member state level. Q14 What are your views on prudential and professional requirements for credit intermediaries (such as minimum capital, professional indemnity insurance, educational or professional qualifications)? 31. We support the view that it is important that credit intermediaries are required to hold professional qualifications and professional indemnity insurance as is currently the case in the UK. The question of capital is rather more difficult. The introduction of capital requirements for credit intermediaries could have unintended consequences in that it could present a substantial barrier for new entrants to the market. Q15 How do you think the activities of credit intermediaries could be brought within existing complaints and out of court redress mechanisms? 32. It is the belief of the BSA that complaints and out of court redress mechanisms should be consistent for intermediaries with that of lenders. This will ensure that it is a simpler process for consumers to deal with and would be far more likely to deliver equitable outcomes. 33. Given the very different cultures and markets across the EU, we believe that this is best dealt with at member state level. The costs of implementation are far likely to outweigh any benefits of harmonisation. 6
Contact This response has been produced by BSA in consultation with its members. For further information please contact Paul Broadhead, Head of Mortgage Policy. Paul.broadhead@bsa.org.uk or +44 (0)207 520 5917. 7