EU Referendum


Globalisation: a stampede of elephants


01/05/2015



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The game used to be to assess one or other initiative announced by the British government, and to tease out the EU origins that they weren't telling you about – identifying the EU "elephant in the room".

Now the game has gone global, and it is the media in the frame as we see the Daily Express complaining about new "bonkers" EU rules on mortgage lending, requiring stringent checks on the creditworthiness of applicants.

The newspaper is using personal finance expert Martin Lewis, founder of website MoneySavingExpert.com, to front a scare headline about remortgages, complaining that home owners who are seeking to remortgage when their mortgage term comes to an end are caught by the EU rules when under British rules, lenders can bypass the checks.

Certainly, it is the case that the FCA is having to tighten up the rules, but what the newspaper doesn't say is that this was going to have to happen anyway, with or without the EU.

The British problem is that the current rules stem from the Financial Services and Markets Act 2000 (FSMA), with regulatory framework having been in place since 2004. Now, the EU has updated the rules via Directive 2014/17/EU 4 February 2014 on credit agreements for consumers relating to residential immovable property, and the UK government is having to come into line with them.

However, as the Directive itself points out, "the financial crisis has shown that irresponsible behaviour by market participants can undermine the foundations of the financial system, leading to a lack of confidence among all parties, in particular consumers, and potentially severe social and economic consequences".

The Directive then informs us that the G20 had commissioned work from the Financial Stability Board (FSB) "to establish principles on sound underwriting standards in relation to residential immovable property", and the EU has considered it "… appropriate to ensure that the Union's regulatory framework in this area is robust, consistent with international principles".

The work of the FSB had started with a "Framework for Strengthening Adherence to International Standards", which was published on 9 January 2010. This was followed by the "Thematic Review on Mortgage Underwriting and Origination Practices", which was published on 17 March 2011 and then, finally, by its "Principles for Sound Residential Mortgage Underwriting Practices", which were published on April 2012, briefly recorded by Reuters, under the headline: "Global regulators map out safer home loans".

It is these principles which have made the UK regulatory code out of date, and required the EU to update its code. And the similarity between the EU directive and the FSB principles is uncanny. For instance, the FSB says:
Jurisdictions should ensure that lenders take into account all relevant factors that could influence the prospect for the loan to be repaid according to its terms and conditions over its lifetime. This should include an appropriate consideration of other servicing obligations, such as the level of other debt (secured and unsecured), the interest rate and outstanding principal on such debt, and evidence of delinquency. Lenders should also include an assessment of whether the loan can be expected to be repaid, including principal, interest, taxes and insurance, within the specified loan amortisation period from the borrowers' own resources (income and assets) without inducing undue hardship and over-indebtedness.
… while the Directive follows up with:
It is essential that the consumer's ability and propensity to repay the credit is assessed and verified before a credit agreement is concluded. That assessment of creditworthiness should take into consideration all necessary and relevant factors that could influence a consumer's ability to repay the credit over its lifetime. In particular, the consumer's ability to service and fully repay the credit should include consideration of future payments or payment increases needed due to negative amortisation or deferred payments of principal or interest and should be considered in the light of other regular expenditure, debts and other financial commitments as well as income, savings and assets.
As to the Express's "bonkers" EU rules, therefore, it is looking in the wrong direction. It should be focusing on the FSB, the chair of which is none other than Mark Carney, currently governor of the Bank of England.

However, the Express is not alone. In their inability to pick up the fact that most of the financial services rules (and many others) have gone global, the media generally are not so much missing an elephant in the room as a stampede of elephants. Heedless of the thunder of multiple pachyderms, they - along with the amateurs in Ukip - simply do not have the first idea of what is going on, or how the world really works