EU mortgage reforms and the shifting power of civil society and the financial industry

Analysis of new EU mortgage reforms shows how civil society groups were able to translate their key goals into policy and counters the financial industry ‘capture’ narrative

Since the global financial crisis of 2008, the European Commission has brought forward more than forty measures to reform its financial architecture in response to the crisis.  The EU’s reforms have significantly altered the regulatory architecture of European financial regulation and deepened the single market in financial services.  These regulatory changes have coincided with a decline of the financial services industry’s lobbying power in the post-crisis context.

Existing international political economy (IPE) scholarship has largely focused on explaining patterns of incrementalism of EU-level regulatory responses to the crisis.  Specifically, IPE scholars have attributed the incremental nature of regulatory reforms at the EU level to the influence of financial industry groups and their lobbying efforts aimed at preventing regulation.  The literature thereby echoes the popular narrative that industry groups ‘captured’ the regulatory reform process.  Yet a closer look reveals that whilst the financial industry has achieved some success since 2008, for example in watering down the Commission’s plans for an ambitious Financial Transactions Tax, they haven’t had all their own way. This is demonstrated by analyzing the introduction of the European Mortgage Credit Directive– an issue which shows how newly-mobilised civil society groups have been able to achieve notable pro-consumer victories.

The decline of the financial industry’s fire power

There is no doubt that advocacy groups in favour of financial reforms, such as pro-consumer campaigners and advocates, are largely outnumbered by industry sector lobbyists. According to a study conducted by a Brussels-based NGO in 2011 entitled ‘The fire power of the financial lobby, financial industry groups had seven times more encounters with EU institutions than non-governmental organisations (NGOs) trade unions and consumer organizations taken together.  More than 700 financial sector organizations lobbied for financial reforms, compared with only about 150 groups from civil society.  The financial industry clearly also had many more material resources at its disposal than civil society groups.  In the 18 months between its foundation in June 2011 and December 2012, Finance Watch, a Brussels-based NGO lobbying on financial reform spent €330,000 on communications, meetings and research.  In 2012 alone, Deutsche Bank spent €1.99million on lobbying related to EU financial reforms.

Yet despite their significant resources, the financial crisis drastically changed the lobbying environment in which financial industry groups had to operate.  In the eyes of many policy-makers, financial industry groups were the culprits for the crisis.  This perspective was clearly reflected in the European Parliament’s resolution issued in July 2011 that ‘banks […] also bear their share of responsibility for the irresponsible lending practices’. Given the public outcry and emerging popular pressures in response to the financial crisis, recent efforts on the part of scholars to explain regulatory change pay surprisingly little attention to newly mobilised pro-consumer groups.

The example of the European Mortgage Credit Directive

The European Mortgage Credit Directive (MCD), adopted by the Commission in February 2014, introduced for the first time EU-wide rules in the area of mortgage loans.  Prior to the crisis, no EU-wide legislation for home mortgages existed, except for a voluntary code of conduct.  The new MCD Directive consolidates legislation across the EU, essentially harmonizing European mortgage regulations by setting the minimum regulatory requirements in a consistent way across EU member states.

In their response to a Commission consultation in 2009, financial industry groups were strictly opposed to the introduction of EU-level mortgage regulations.  Interviews I conducted with Brussels-based financial industry lobbyists highlighted how major European financial industry associations including the European Banking Industry Committee (EBIC), the European Mortgage Federation (EMF), and the European Association of Cooperative Banks (EACB), started lobbying the Commission against a new Directive before their proposals were issued in March 2011.  Industry lobbyists I spoke to also revealed that in an effort to avoid legislative action being taken, banks and mortgage lenders tried to lay out a different narrative arguing that the mortgage crisis was specific to the US securitization system, a system of funding related to mortgages that not widespread in Europe.  But these lobbying efforts failed to prevent the Commission from introducing the new mortgage regulations in 2014.

The pro-consumer alliance against the financial industry

Throughout the post-crisis mortgage reform process, consumer advocates actively supported regulatory change.  In a context where EU legislators were keen on punishing the financial industry and introducing new regulations, consumer groups, who generally favoured a broad scope for the Directive and a minimum harmonization approach in order preserve existing national legislation, largely saw their demands reflected in the Commission’s proposals in 2011.  An alliance with consumer advocates proved to be beneficial to Michel Barnier, then the European Commissioner for the Internal Market and Services, in his efforts to push for reform in spite of industry opposition from banks and mortgage lenders.  In its consultation summary of November 2011, the European Commission noted that national consumer associations served as an important information transmitter about abusive practices in relation to mortgage loans, providing ‘examples of practices of unfair advertising and marketing’.

A slightly more consumer-friendly outcome

Despite industry opposition, pro-reform advocates saw important parts of their demands translated into policy in the final Directive.  A general right for consumers to repay loans early, made it into the legislation.  To ensure that borrowers can meet their credit obligations, the reform also heightens credit worthiness assessment standards.  The Directive also includes a general ban on ‘tying practices’ where other financial products are packaged together with a credit agreement affecting consumers negatively – a provision not included in the initial Commission proposal but one pushed for by consumer advocates.  The Directive also introduces a minimum standard for advice, curbs misleading advertising of mortgage credit and creates an information requirement, in the form of a standardised information sheet that can be compared across borders and facilitates consumers to be able to shop around.  Although the new regulation does not ban loans in foreign currencies, as consumer groups had demanded, it does introduce additional consumer safeguards to protect consumers against exchange rate risk, reflecting proposals put forward by the European Consumer Organization.  In contrast, my interviews with financial industry lobbyists revealed how their lobbying efforts to prevent the Commission from focusing more on consumer protection than on market integration had failed.

The Directive was only recently transposed into national law in March 2016.  What we can see so far since then is that consumer protection standards have been harmonized at the EU level, without going much above and beyond existing regulations in member states with high standards.  Although the mortgage reforms were a rather incremental and compromised solution, they reflect certain policy alterations prompted by pro-reform advocates.  The story of new regulatory reforms in the EU since the crisis highlights the shifting lobbying power of civil society and the financial industry and provides good evidence against the prevailing argument that financial industry groups ‘captured’ regulatory reform.