Compliance Corner: The EU vs The MMR

By Ray Cohen, Compliance Expert and MD of Jackson Cohen,

The world of compliance seems to be forever changing and the mortgage market is certainly getting its fair share!

The FSA have been busy with pronouncements on the mortgage market review and now Europe has decided to stick its oar in as well.  With the danger that the FSA implement their MMR requirements only to have everyone change again to meet the EU requirements, it was comforting to be told at a meeting with the FSA recently that they intend to try to dovetail the two together.

This may mean that implementation of some parts of the MMR may be delayed in order to fit with the EU directive.

The EU directive has been drafted to be reasonably non-contentious from a high level perspective. This is with the aim that it can be passed reasonably quickly (the credit directive took about 7 years to get through). It has to be passed by both the EU Parliament and Council and, even assuming it gets through reasonably quickly, it is unlikely we will see implementation before the early part of 2014.

There are many similarities to the existing UK regime as well as some of the ideas the FSA have put forward for the MMR – e.g. the requirement to assess affordability, an approved person regime for mortgage sellers and a disputes resolution regime. There are, however, some variances, some of which could cause difficulties for the short term market.

The first issue is the potential grey area that could be caused around buy to let. The proposals as they stand will cover all residential property loans to consumers. A consumer is defined as someone acting outside of their trade, business or profession. This raises the same issue that cropped up when the CCA was amended to eventually exclude investment property – i.e. when is a buy to let a business as opposed to an investment. Does the borrower have to have more than a certain number of properties in order to be classed as running a business? Which lender wants to take a chance on this or what level of documentation might they require before lending in order to be satisfied they aren’t running a risk of doing a regulated loan as non-regulated?

There is a danger that if clarification is sought from Europe they may just turn round and say their intent is to catch all buy to let regardless!

The proposals do not have any qualifying criteria – such as a specific percentage of occupancy, level of charge etc. so one option may be to request some criteria to be added that may help overcome the problem. Another option may be to request exemption from some parts of the directive for short term loans. There are bound to be other specialist markets in other countries which will also face issues and so this may be a realistic route to pursue.

Other aspects that would cause the short term market difficulties include a potentially specified affordability requirement that would not provide for the current exemption for rolled up/retained interest loans and a new European Sales Information Sheet (ESIS) to replace the KFI which may lack flexibility and an ability to gain waivers.

Astl will have a lot of work to do to try to make sure the EU does not adversely impact the UK market.