Question 4: Do you agree with guideline 1 on establishment, proportionality, review and documentation?
We recognize the intention of the guidelines to minimize potential consumer detriment. However, in order to achieve this, we believe that the guidelines should distinguish between complex investment products and non-complex retail products like mortgages.
Mortgages are already extensively regulated via the Mortgage Credit Directive as well as national regulation. This regulation includes demands for sufficient pre-contractual information, explanation of the mortgage product etc. In Denmark, mortgage banks are subject to the overall principle “Know Your Customer”, which ensures that an assessment of credit worthiness takes place with respect to each prospective borrower.
We find it difficult to see that guidelines, which try to encompass the specifics features of all banking products, will add value. We find that consumers taking up a mortgage are better served with the specialized approach for mortgages already in place. In addition to this, EBA has recently released draft guidelines on credit assessments and on arrears and foreclosure to be adopted in 2015. We therefore question the rationale of including mortgages in the general product governance framework as well.
Furthermore we find that the guidelines are excessively detailed and intervene with the individual financial institutions legitimate interest in organizing their business in the way they find suitable in order to comply with the legislation. One example being guideline 7.4 about coordination between units internally in a financial institution. A more principle-based approach would be considerably more cost-effective and is therefore highly desired.
Question 6: Do you agree with guideline 3 on target market?
The guidelines require manufacturers to identify a target market for a product. For mortgages, the target group is extremely broad: Real estate owners and persons who want to acquire real estate.
Furthermore the guidelines require manufacturers to identify market segments for which the products is considered likely not to meet their interests etc. and prevent that the product is offered to these market segments. Consequently the credit institutions will have to refrain from making a loan offer to a customer with sufficient financial means, if the customer belongs to such a pre-defined market segment. This is a far too general approach and could potentially limit the offer of mortgages for certain groups - e.g. first-time buyers.
In our view the starting point should be the individual customer, his or her financial situation and priorities with respect to the mortgages (low risk, fixed rate etc.). The Mortgage Credit Directive already requires lenders to provide information and explanation to consumers on mortgage products in order for the consumer to make an informed decision about which product is suitable for them.
Whether a consumer should chose a mortgage with a fixed or a variable rate depends on the individual consumers’ preference with respect to risk, time horizon of ownership etc. In our
view, the requirement to predefine target groups for mortgages, e.g. fixed or variable rates, will be a setback for consumer protection as opposed to the individual approach in place.
Question 7: Do you agree with guideline 4 on product testing?
The guidelines require manufacturers to conduct product testing, including stressed scenarios. The typical duration of mortgages in Denmark is 30 years. For mortgages with a variable interest rate, thinking up scenarios for the next 30 years will prove rather difficult and most likely be misleading for customers. For mortgages with a fixed interest rate for the entire duration of 30 years, stress testing will be of less relevance. In addition, it is very difficult for the creditor to predict the borrower’s financial circumstances throughout the lifetime of the loan.
Instead we prefer the current practice in Denmark of providing the customers with information on advantages and disadvantages of different mortgage types and their risk profiles and enable the consumers to make an informed decision.