Regulation  

Late amendments to EU mortgage rules ‘lazy and uneducated’

After more than 10 years in the making MEPs have passed the European Union Mortgage Directive.

The directive, designed to harmonise mortgage regulation in all 28 EU member states, was passed earlier this week and included several last minute additions that should concern lenders and advisers in the UK, according to Ray Boulger, senior technical manager of John Charcol.

A late addition to the directive is a requirement to provide a second APR where the initial mortgage rate is not fixed for at least five years. This additional APR will be calculated by reference to rates the lender has charged during the previous 20 years.

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Mr Boulger said: “Maybe this EU dictat will also force the FCA to reconsider its very sensible requirement for investment advertisements to state that ‘past performance is no guide to the future’ as the EU clearly believes the past is a guide to the future and what the EU dictates always trumps what the national regulator thinks.

“APRs are very helpful for some types of leading, such as unsecured loans and payday loans, but are hopelessly misleading for most mortgages.

“It is lazy and uneducated regulation from the EU that assumes that just because an APR is a very useful comparison tool in one type of credit there is an automatic read across to other types of lending.

“It should have dispensed with the current requirement to mislead mortgage consumers by quoting an APR rather than invent another one.”

The directive also requires lenders to offer consumers a seven-day cooling off period, called a ‘reflection’ period.

It appears individual member state regulators will have some flexibility to decide when the seven days should start and so Mr Boulger predicted the FCA will “no doubt sensibly” choose the least worst option.

He said: “This proposal adds red tape but probably won’t cause consumers a problem, except perhaps on bridges.

“However, as consumers will be able to waive this theoretical benefit it shouldn’t create any real problems, apart from one more piece of paper to sign, for the minority of consumers who want, or need, a quick completion.”

The directive requires the key features illustration (KFI) to be replaced by the ESIS (European Standardised Information Sheet), which does not include all the information now provided in the KFI.

The UK will have five years to switch from the KFI to the ESIS but as lenders will have to incorporate the second APR and confirmation of the reflection period within two years, Mr Boulger said some may decide it is better to change to the ESIS at the same time rather than amend the KFI.

“One size doesn’t fit all in the mortgage market... [f]or example well over 50 per cent of mortgages in the UK are arranged by a broker, whereas in some member states brokers are almost non-existent.”