EU Mortgage Directive Political Scenarios

Posted on 12 December 2013 by Ray Boulger

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Now that MEPs have passed the EU Mortgage Directive a look ahead to what might happen over the next few years throws up some interesting political scenarios which could have a very significant impact on the UK mortgage market.

I refer to next year’s Scottish Independence referendum and the possible UK (with or without Scotland) referendum on EU membership later this decade.

The deadline for adopting the EU Directive is likely to be January 2016, although the UK Government could decide to adopt it earlier, with the 7 May 2015 General Election possibly influencing the timing in terms of the legislative programme.

The Scottish Independence Referendum will be held on 18 September 2014 and currently the polls indicate a large majority for the No camp - roughly 2 to 1. However, in the unlikely event the Scots vote Yes independence will be probably become effective 18 months later, i.e. just after the deadline for implementing the EU Mortgage Directive.

Should the Yes camp win it appears Scotland will automatically cease to be an EU member at the date of Independence and it will have to apply for membership. This would normally require a commitment to join the Euro, which of course the SNP very sensibly no longer wants to do. Being allowed to join the EU will require a unanimous vote in favour of all the other 27 member states (or more if the EU has enlarged further by then). Agreement is by no means certain, not least because Spain may see a vote against as helpful in deterring the Basque region’s claims for independence.

Therefore, very soon after the UK, including Scotland, has adopted the EU Mortgage Directive, it is possible that the largest UK mortgage lender, Lloyds, plus another major lender, RBS (although by then it may be smaller as its branch sale may have been completed and we don’t yet know where the Head Office of the new bank, Williams & Glyns, will be located) could be headquartered outside the EU. An added complication would be the uncertainty of if and when Scotland would be admitted to the EU and if it was whether it would have to commit to joining the Euro!

Of course none of this may happen and indeed it is odds against, but it can’t be ruled out.

The second scenario, and one that is too close to call, not least because we don’t yet know exactly what basis we will be voting on, is that the UK eventually gets its referendum on EU membership, at which time Scotland may or may not be part of the UK. If the Scots vote No in their referendum then the UK, as currently constituted, will either vote to remain in the EU, in which case nothing changes, or will vote to leave, which it is expected would result in period of about 2 years for the many resulting negotiations to be concluded. The UK would then be free to not only reverse those requirements of the Mortgage Directive it considers unnecessary or unhelpful, but also to reassess other EU requirements which already impact on the mortgage market.

If on the other hand the Scots vote for Independence then a UK vote on EU membership would exclude the Scots, and the end result could be either England, Wales and N Ireland join Scotland in being a non EU member or Scotland remains the only part of the current UK outside the EU.

To potentially complicate matters further if Scotland votes for independence, the UK votes to leave the EU and subsequently Scotland eventually succeeds in gaining EU membership, Scottish banks would find themselves back in the EU (assuming they hadn’t relocated to England), with most of their lending outside the EU. If Scotland was then also forced to join the euro within a reasonable timeframe as a condition of EU membership, exchange rate fluctuations would then add to the complications.

Of course none of this may happen but if any of it does it will require a huge amount of time and effort by Government, regulators, lenders, brokers and others to consider and react to the consequences. Had the EU left mortgage regulation in the hands of individual member states and just provided guidance for those countries well behind the curve on regulation, most of the above scenarios would not have presented a problem! 

Categories: Regulation, Mortgages

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