FCA urges EU to redefine foreign currency loan

Ryan Bembridge

February 8, 2016

The Financial Conduct Authority has urged the European Commission to redefine ‘foreign currency loan’ in the Mortgage Credit Directive.

Currently people buying property abroad, even with income in sterling, will be subject to foreign currency rules coming in from March 21.

Under the rules lenders offering foreign currency loans will be required to disclose where there is a fluctuation in exchange rates of more than 20%. This will trigger an obligation to offer borrowers the option of switching a loan denominated in a foreign currency into sterling.

A whole raft of lenders including Lloyds, Nationwide and Aldermore have ruled out offering foreign currency mortgages.

The FCA said: “By adopting a very broad definition of foreign currency lending, the MCD imposes significant new burdens even where there is no currency mismatch between the denomination of the loan and the income or assets from which it is being repaid.

“An example would be a UK pensioner who has bought a property in Spain using a loan secured on their existing property in the UK. Despite this being a sterling loan repaid using sterling pension income it is classified as a foreign currency loan.

“Rather than introducing the additional disclosure systems the MCD requires for foreign currency lending, many lenders are choosing to no longer accept customers who want a foreign currency loan.

“So a measure intended to promote single market activity is inadvertently causing some lenders to withdraw from dealing with customers residing in another European Economic Area state.”

The regulator added: “The MCD definition of ‘foreign currency loan’ could be improved to better align with the exchange rate risk the directive is seeking to address.

“This would promote greater market interest in servicing the needs of consumers who, while they may be living in a second member state, are protected from exchange rate risk because their mortgage and their income is in the same currency.”

The definition of foreign currency loans wasn’t the FCA’s only problem with the MCD, as the regulator added that regulation could be better designed in terms of managing transitional impacts.

The FCA added: “It would be better if the legislation specifically provided transitional arrangements covering sales that are underway at the date of national implementation.

“Mortgage sales typically take time to complete (roughly three months in the UK). With the MCD containing numerous pre-sale obligations that apply to agreements coming into existence on or after 21 March 2016, this means firms either having to re-start those sales discussions that have not yet reached an agreement or firms implementing the MCD obligations several months ahead of the formal date of adoption. Both options are disruptive and introduce additional cost.”

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