Ever since it became clear that the European Commission would press ahead with plans for a directive on mortgages, we have been working to try to avoid potential conflicts between separate initiatives to reform regulation in the UK and Europe.
Now, however, a third regulatory threat is emerging, say the CML.
At the end of last month – more than two years after the Financial Services Authority first unveiled plans for its mortgage market review– the EC finally published its own long-delayed proposals for a mortgage credit directive.
In response, we warned that pursuing two separate initiatives at the same time was likely to lead to an "unholy confusion of competing draft rules at a national and European level."
But, on 18 March, less than a fortnight before the EC set out its plans, a third regulatory body, the Financial Stability Board, published a report outlining its own proposals for "residential mortgage underwriting and origination practices."
Its plans are likely to affect all FSB member countries, including the UK, creating further uncertainty for lenders and consumers, as regulators come under justifiable pressure to reconcile three separate initiatives.
So, how will the FSB's proposals for mortgage reform mesh with the proposed EC directive and the FSA’s MMR? At this stage, the answers are far from clear.
The Financial Stability Board’s report
The FSB emerged in the aftermath of the financial crisis as a key international body for monitoring and making recommendations about the management of the global financial system.
Established after the G20 summit in London in April 2009, it succeeded the Financial Stability Forum (which had been set up in 1999) and exercises considerable influence. The FSB has no legislative powers, but sets global regulatory standards that its members are obliged to adopt.
Membership of the FSB is closely, though not exclusively, correlated with the G20. So, in Europe, the UK, Germany, France and Italy are members of both the FSB and the G20. The Netherlands and Spain are in the FSB, but not the G20.
The FSB's proposals
In its report on member countries, published last month, the FSB concluded that "poorly underwritten" residential mortgages had contributed significantly to the financial upheaval that began in 2007.
Like most other commentators in the aftermath of crisis, it identified weak underwriting practices in any single country as a potential source of global contamination through the process of securitisation.
What happened during the financial crisis therefore highlighted the importance of sound mortgage underwriting in all member countries, the FSB concluded.
It argued that lending should be based on three key principles:
- Supervisory bodies should require lenders to adopt minimum underwriting standards based on an accurate assessment of the borrower’s ability to repay "in a reasonable period of time." These minimum standards should be published and maintained in such a way as to be accessible to all interested parties.
- Policymakers should ensure that different types of lender, whether regulated or not, uphold underwriting standards. Regulatory oversight should be consistent, with effective enforcement to ensure lending standards are met.
- National policymakers should make sure there is appropriate public disclosure of mortgage underwriting practices that are upheld across the market.
The FSB acknowledged that, overall, national authorities were making good progress towards its recommendations. It concluded that nearly all FSB countries were regulated, prudentially or by consumer protection bodies or both.
But most countries did not yet have adequate public disclosure or monitoring of information about the overall health of lending, it said, including evolving mortgage underwriting practices and market trends.
The FSB report went on to make six recommendations to promote sound residential mortgage underwriting practices globally, helping to ensure continuing financial stability.
It said that:
- supervisors in individual countries should develop a framework for sound mortgage underwriting practices globally that is "as explicit and specific as possible";
- the FSB should develop an international principles-based framework for sound underwriting practices;
- regulators should regularly review underwriting standards and adjust them to address the build-up of risk in housing markets or to counteract any lending boom that poses a significant risk to financial stability;
- the regulatory remit should be extended in national markets to ensure all lending is supervised and regulated to safeguard both borrowers and investors, and to promote financial stability;
- regulators and supervisors should ensure mortgage insurers, where they are active, are appropriately regulated and robustly capitalised; and
- authorities should collect and disclose sufficient information to provide a comprehensive view of mortgage lending activity.
Finally, the FSB said it was important for supervisors and regulators "to maintain momentum" in improving lending practices.
The European proposals
Two weeks after the FSB report appeared, the EC belatedly published plans for a directive on credit agreements that had originally been expected last autumn. There were similarities – but also some striking differences – in their proposals.
Like the FSB, the EC said financial stability was a key priority. "The proposal seeks to promote financial stability by ensuring that mortgage credit markets operate in a responsible manner," the EC said.
But there was a major difference between the as
