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What would an EU exit mean for the mortgage market?

A recent Mortgage Strategy poll put support for EU breakaway party Ukip at almost 70 per cent.

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The eurozone crisis and the response to it has sparked a fierce debate in the UK about its role and future with the EU, with potentially huge ramifications for financial services.

Faced with an increasingly eurosceptic party, prime minister David Cameron has pledged to renegotiate the UK’s relationship with the EU and then hold an in/out referendum by 2017 on the new arrangement.

The Government is undertaking a review of EU rules and will begin to report later this year but it is clear that financial services will have a key role in it.

Chancellor George Osborne has hit out at “directive after directive” from the EU as UK financial services deals with a myriad of EU regulations from investments to pensions.

But the debate over a future exit can often seem abstract so it is worth asking what impact it would actually have on the UK mortgage market?

Mortgage brokers have made their stance abundantly clear with a poll conducted by Money Marketing ’s sister title Mortgage Strategy last week showing almost seven in 10 brokers support EU breakaway party Ukip.

The first and most immediate impact of EU withdrawal would mean the UK would not need to comply with the European mortgage directive.

Set to become EU law in September, the UK has won key battles to exempt buy-to-let and rules affecting guarantor mortgages but there are still issues of concern.

Chief among them is the proposal for lenders to introduce a European Standardised Information Sheet to replace the Key Facts Illustration within five years.

The directive also insists on a second APR being produced by lenders to show borrowers how interest rate fluctuations could affect their deal over five years.

As part of the single market brokers and lenders can passport into the continent to sell mortgages across EU borders. 

The Council of Mortgage Lenders says an exit would not have much impact on mortgages as they would still operate under the “sphere of influence” of global and EU policymaking.

Association of Mortgage Intermediaries chief executive Robert Sinclair agrees an EU exit would have a benign impact on brokers because the UK’s mortgage market review is far beyond any European rules.

He says: “It may take away some of the nastier parts of the directive such as complying with the ESIS, which will be difficult compared to the KFI, and issues around APR but they are not insurmountable problems for our regulator.

“There are some brokers who use passporting but not very many. It is not a major issue here as it is much more appropriate in central Europe.”

John Charcol senior technical manager Ray Boulger says the ideal situation would be a “pick and mix” relationship with the EU but that does not appear possible.

He says: “The big plus of an exit in theory is that we could do away with lots of the red tape. The degree to which it would happen in practice is dubious because we have plenty of UK red tape as well as EU regulations. If there was a genuine reduction then it would be beneficial.”

The pick and mix option is one favoured by many Conservatives with the Freshstart group of more than 100 MPs setting out a roadmap for renegotiation.

Last week, Tory MEP Vicky Ford got the ball rolling with a plan for EU financial services reform that included a veto over financial services rules. She says the mortgage directive is a prime example of a regulation the UK would have vetoed.

Others are not as laid back about an EU exit with influential economic and monetary affairs committee chair and Liberal Democrat MEP Sharon Bowles claiming would be a “disaster” for financial services if the UK left because of the end of passporting.

Bowles says: “The idea that the UK would be the financial capital of Europe is absolutely not the case. Financial services would be on of the areas hugely affected.”

Conservative MEP Daniel Hannan believes an EU exit is crucial because current and future EU financial services rules are one of the “single biggest threats to prosperity of the UK”.

Hannan raises the prospect that there is more European regulation to hit the sector from the new supervisory bodies created alongside the banking union last year.

The European Securities and Markets Authority, European Banking Authority and European Insurance and Occupational Pensions Authority have power to monitor all EU financial services firms and can directly apply rules to national regulators.

EIOPA chair Gabirel Bernardino and Esma chair Steven Maijoor have signalled they would like to charge a direct levy on firms to increase its funding, which could hit brokers.

UK banks, including the biggest mortgage lenders, are supervised by the EBA and an exit would mean they do not have to legally comply with regulations above UK rules such as on capital requirements and responsible lending rules.

One example is discussion by supervisors about introducing a US-style option for repossession in the EU so borrowers could hand back their keys to repay their mortgage debt.

Hannan says: “All bureaucracies are grandiose and start sucking in more power. The idea you can have these vast groups of civil servants on huge salaries and not expect them to do anything is belied by everything we have seen.

“Financial services is one of the industries where we still have a global lead so I am terrified when I look at the people who will be deciding what is allowed and what isn’t.”

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