The EU Directive on Mortgage regulation is aimed at the regulation and distribution of mortgages in what is perceived to be a EU wide mortgage market  dogged with regulatory failures.   The measures to be introduced are aimed at reducing the amount of irresponsible lending and borrowing.

What Will Be the Effect on Mortgage Intermediaries?

The main provisions  will regulate the marketing of mortgage products, the provision of information and advice  and the greater scrutiny of the creditworthiness of borrowers with  emphasis on the assessment of the long-term affordability of mortgage products sold to individual borrowers.

The biggest impact will be the provisions aimed at cracking down on commission-based payments to intermediaries.  The stated wisdom behind the commission crackdown is that such commission payments encourage the provision of  advice geared more towards the commission to be earned by the intermediarie rather than the clients actual needs and interests, resulting in totally inappropriate advice.   An example given is the client being encouraged to remortgage two years into their current mortgage arrangements even though to do so was particularly disadvantageous to the client.

The ‘principles’ based remuneration to be introduced across the EU will bring payment structures to intermediaries across the EU in alignment with consumer needs, benefitting the consumer to a tune of E349-523m and costing providers and intermediaries E3m.

The impact of the proposals could have a substantial effect on UK based mortgage brokers, as many still depend on payments from the mortgage providers for a substantial part of their income.  Despite the recent  movement from commission-based to fee-based payments , the indirect channel of a fee based system of remuneration remains precarious, especially in light of the collapse in mortgage lending and the greater emphasis by the largest lenders on the direct distribution of their mortgage products.  

So what is the future outlook for mortgage brokers with their numbers reduced by 45% since 2007? It is feared that this further tranche of regulation may lead to a further shake-out in the broker market reducing consumer choice.

How will the Directive Effect Borrowers?

 With a one-off cost to implement the changes across the European Union estimated to be between £336m and £554m, the Directive is going to be a substantial cost to lenders.

As the European Parliament consider the Directive, there are questions as to how the provisions of the Directive will effect individual borrowers.   Provisions within the Directive regulating the  advertising and advice by lenders, introducing a universal method of calculating APR and requiring lenders to provide explanations to borrowers if their applications are rejected will have an impact on borrowers.  The extra cost to the lenders of these provisions are likely to be passed on to the borrowers within the calculation of the APR.  A further burden on the Borrower is the duty to provide evidence of long term affordability in addition to proof of credit worthiness and having sufficient capital to finance a deposit.  Borrowers will however, benefit from the introduction of an entitlement for borrowers to repay their mortgage early without penalty.

It should be noted however, that the Directive although in it’s final draft,  is at the approval stage and may not be in the same form when it  comes into force.  Further, the Directive is drafted to combat the ‘light-touch’ regulation of the financial services that exist in many of the EU countries.  Many of the restrictions on advertising and advice are already in place, in one form or another in the UK.   Although the EU state that the cost should be bourne fully by the Lenders who will not be permitted to pass on the burden to the borrower, the extra costs will have to be funded from somewhere, and may pundits in the market predict that the lenders will pass the costs on in the form of higher rates

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