The European Commission has published a draft Directive (COM(2011)142) on credit agreements relating to residential property as a response to the financial crisis caused by irresponsible lending and borrowing practices. The draft Directive and supporting documents are available here.

In its press release, the Commission states its “determination to ensure that such practices are not repeated in the future, and to help consumers to regain confidence in the financial system”.

The draft Directive draws largely from the provisions of the Consumer Credit Directive while taking into account specific features of mortgage credit. There are draft rules on: advertising; pre-contractual information – with a ‘European Standardised Information Sheet’; the giving of advice; the assessment of creditworthiness; and early repayment. One issue which might cause some concern among lenders and intermediaries is an obligation to assess the level of knowledge and experience with credit of the consumer in order to determine the level of explanations to be given to him and adjust them accordingly. This is coupled with a disclosure obligation on the part of the consumer to provide complete and correct information.

Providing customers with standardised information to allow them to compare providers and make an informed choice is one thing, but our experience in the UK indicates that better information in itself does not prevent consumers making poor borrowing decisions. The FSA is already moving away from an over-reliance on information disclosure as the main tool for addressing poor decision making, and the FSA’s MMR proposals differ from the Commission’s approach in this respect. It is difficult to see how the harmonisation of the approach to consumer protection within the financial services market across EU Member States will enhance the steps which are already being taken by national governments, including here in the UK.

The Commission has expressed their aim to create an efficient and competitive single market for consumers, encouraging cross-border activity of creditors and credit intermediaries. This seems unlikely to emerge for the foreseeable future, with the availability of wholesale funding severely limited and mortgage lenders shoring up their balance sheets to meet enhanced capital requirements, leading to what comes close to a mortgage famine in some national markets. Putting these issues aside, is there really an appetite among EU citizens to shop outside their national borders to obtain mortgage finance, even with market obstacles removed?

The draft Directive now passes to the European Parliament and the Council of Ministers for consideration. There are already calls for a renewed consultation on the FSA’s MMR proposals in light of the draft Directive.