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Flexibility under fire

Angry mortgage lenders are warning that the EU consumer credit directive is fatally flawed and could kill off the blossoming flexible mortgage market.

The Council of Mortgage Lenders welcomed the Treasury&#39s regulatory regime for mortgages announced last week but has slammed the EU credit plan, which is on its way to becoming European law. The CML warns that the plan could jeopardise UK reforms and bring regulatory chaos.

The directive would require lenders to provide advice for customers every time they take out credit agreements restricting the customer&#39s ability to borrow within agreed limits. It would cover all areas of consumer spending, not just homeloans.

CML director general Michael Coogan believes the proposals will have a serious knock-on effect on one of the fastest growing areas in the mortgage market, preventing further innovation and development of new products. He says it would be unacceptable for the mortgage industry to have to go through the upheaval of statutory regulation in 2004 and then endure a similar structural change within a couple of years under a European directive. He says: “The double-whammy simply would not be justified in consumer protection terms.”

Coogan meets with MEPs and EU delegates in Brussels on November 12 to argue the mortgage industry&#39s case and negotiate further the details of the proposals.

There are more than 11 million mortgages in the UK, totalling loans of more than £600bn. The latest figures from Mori Financial Services show that flexible mortgages have become so popular they now comprise 20 per cent of the market. Products come in all shapes and sizes but usually offer payment holidays, allow customers to make extra lump sum or monthly payments or draw down against overpayments.

All mortgages offered by Skipton Building Society are flexible, which means any change in legislation would be particularly detrimental to its new business. Skipton head of corporate communications Jennifer Holloway believes flexible mortgages are facing a “death threat” from the new European consumer credit proposals.

She says: “Skipton began to offer borrowers flexible mortgages in January 2000 so it seems strange that legislation from Europe may force us to take a backward step when we are trying to increase, not decrease, the options available to customers. Like all UK lenders we eagerly await developments on this issue.”

Of the 13 types of mortgages it offers, 10 of Yorkshire Building Society&#39s products would be affected by the EU credit agreement.

Corporate affairs manager David Holmes says: “The directive will be really unwelcome for consumers. It would be like regressing 25 years and I have an issue with being told to take a step back into the dark ages. Why should we be made to do this when the Europeans should be made to follow us?”

Mortgage lender Virgin One has just celebrated its fifth birthday but account marketing manager Scott Mowbray fears the party may be cut short if changes in consumer credit are brought in.

He says: “We need to get this nipped in the bud with clear and robust representation in Europe. In terms of what we are doing at the moment it will be particularly difficult to function if these proposals are brought in. Implementing restrictions like those suggested would make the nature of our products completely different and severely compromise business.”

He believes that because the “job for life” no longer exists, consumers are demanding greater freedom with their money and that financial products are going to have to reflect this change.

Mowbray says: “We have a network in place so customers can make decisions for themselves as they see fit, rather than creating a situation where they are supposed to go back to their bank manager cap in hand every time they need a loan. It is no good trying to set up a must have advice scenario.”

Dramatic changes in flex-ible mortgage products would inevitably affect IFAs. A Mori Financial Services survey showed that 29 per cent of borrowers with flexible loans took out their mortgage through a financial adviser compared with only 25 per cent of other borrowers – indicating that this is a sold rather than a bought product.

Independent mortgage expert Mark Chilton says: “Why on earth should we go back to the days of the vanilla variable mortgage? In my opinion, CML should have been involved two years ago during the consultation process and the MCCB and the Imla should both get involved at some level. My view is that we need to get UK regulation sorted out first before we can even consider moving into European proposals.

Chilton says: “It&#39s ridiculous. If you apply the directive to the letter then you would have to seek advice every time you write a cheque.”

Charcol senior technical manager Ray Boulger was pleased by the strong res-ponse from the CML and says of the directive: “This is certainly an unusual way of promoting a regulatory body and I think the proposals would be very dangerous for the consumer. Why take away the benefits that the majority of customers are now starting to take advantage of, such as drawdown facilities?

“The best solution would be for it to be dropped, with sufficient firepower from the CML backed by the Govern-ment. I am sure there will be some way of negotiating.”

But even if the worst came to the worst and the mortgage industry was forced to accept the new Brussels proposals, Boulger says it looks likely that offset mortgages could escape the legislation.

He says that because offset mortgage customers do not increase their debt and alter payments using a current account or other facility, they may have a get-out clause.

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