What lessons can be learned from national regulation on mortgage credit?
Speech by Dan Waters, Director, Retail Policy, FSA
EU Commission Mortgage Credit Hearing Debate on Mortgage Borrowing
7 December 2005
Why regulate mortgages?
I have been asked to talk to you today to share the UK's recent experiences with mortgage regulation. As you may be aware, we at the FSA took on responsibility for the regulation of mortgage lending, arranging, administration and advice on 31 October 2004.
Mortgage regulation in the UK stems from the identification of specific causes of detriment in the national mortgage market. It was problems such as poor information; certain product features; regulatory gaps; and the treatment of borrowers in arrears that led the UK Government to introduce statutory regulation.
The Government was convinced that mortgage borrowers in the UK needed two things. Firstly, they needed good quality, clear and comparable information about the mortgages on offer in the market place to help them make informed choices. And secondly, they needed access to high quality, understandable advice as a mortgage is one of the biggest financial decisions most people are likely to make.
Now contrast this with the aim of Commission action which is to integrate mortgage markets in order to make them more efficient and competitive. They hope to achieve this by ensuring that mortgage credit can be accessed with limited hindrance throughout the EU, that market completeness is enhanced and that prices converge.
The goal of greater integration is a more efficient and competitive mortgage credit market which will contribute to the growth of the EU economy.
We support the Commission's aims, but I should emphasis that the FSA mortgage regime was developed to address particular detriment, and not because of a lack of completeness in the market. The lessons to be learnt from our regulations are how we went about identifying the optimum measures to address the specific problems in our national market. UK regulation did not bring about our diverse market in mortgage credit – we already had that, and it is not the model for addressing Commission concerns about integration.
How did the FSA regulate mortgages?
How did the FSA go about developing our mortgage regulations? Once the detriment had been identified, we then used cost-benefit analysis to assess each potential measure and identify the most proportionate, cost effective solution to the detriment which had been identified.
By publishing the cost-benefit analysis as part of our consultation papers we also invited comment on the analysis and further evidence from industry and consumer groups. We used the findings from the CBA to shape the overall package of measures, sometimes amending proposals or removing them completely depending on the evidence.
Our experience of introducing mortgage regulation illustrates how the cost of intervention can vary greatly depending on the measure concerned. For example, significant costs arise from intervening to standardise consumer information and advice. In the Cost benefit analysis we did on our proposals, we estimated that the total one-off cost of compliance with the UK regime would be 136.3 million pounds, and there would be 67.7 million pounds of ongoing costs per annum. Of the one-off costs 41.2 million pounds are a consequence of the disclosure requirements and 37.2 million pounds arise from the requirements on the sales process, advice standards and the related need for training and competency. In total, these requirements came to nearly 60% of the total one off costs of the UK regime, and almost 30% of the on-going costs.
Regulation of consumer information and advice is not cheap! My advice would be to make certain it is crucial to your end objective before you go down this road.
The Commission published a study by London Economics on 'the costs and benefits of integration of EU mortgage markets' to support the Green Paper. This is a good first step, but as the Commission readily accepts, it is a long way short of the sort of rigorous cost benefit analysis that will be required to justify any action. Further work needs to be done on the costs and the ability of each individual measure to deliver the intended benefits.
The London Economics study draws on the costs of UK mortgage regulation, despite the UK regime addressing causes of detriment in the national market and not a failure in EU market integration. The measures are not equivalent, so our cost-benefit analysis should not be used to extrapolate costs across Europe, although it may help to give an indication of the relative costs of particular measures as I have already mentioned.
Both the Commission and the London Economics study have recognised that cross-border sales, where the case for standardised information would be strongest, will make only a limited contribution to integration. The Commission should, therefore, focus on the more cost-effective measures which will enhance integration.
Better regulation
As I have said, the FSA welcomes the Commission's inquiry into the barriers to mortgage market integration and the case for intervention to overcome these. In particular, we strongly welcome the 'better regulation' approach on which the Commission has based its action so far. Better regulation means acting only once there is a firm evidence base. The Commission has made a good start through the mortgage forum, the Green paper and this hearing today.
However, there remains little evidence of the possibility of full integration as defined by the Commission - namely all products available in all markets. National markets will retain many cultural and behavioural differences which will make it difficult to realise the full benefits of integration. The Commission should recognise this, and focus on areas where the greatest gains are to be had and where the costs are least such as developing secondary market funding instruments and exploring voluntary measures such as standards for property valuation, and improving land registers.
I think this quote by Commissioner McCreevy summarises our position exactly:
"Every new piece of legislation that crosses my desk has to show that it provides a clear benefit to the European economy. I ask simple questions: Is there a case for action? Is it the EU that is best placed to act? Is a regulatory proposal the only possible solution or are there less intrusive, less costly alternatives that can achieve the same objectives?
Only if I get a "yes" to all these questions will new proposals get my stamp of approval."
