The Finnish Government issued a proposal on the national implementation of the EU Mortgage Credit Directive on 19 May. The Government proposal contains amendments to certain Finnish acts. The Consumer Protection Act, for instance, would be amended with a new chapter on mortgage credits, which would contain provisions on the right of withdrawal from the credit, credit offers, and evaluation of collaterals. In addition, consumers would in the future receive key information on their credit on a separate, standardised form.
Zero interest rate floor would benefit both bank and customer
“From the banks’ perspective it is significant that the proposal guarantees full margins to credit providers, even when the reference rate is negative”, says Lea Mäntyniemi, Head of Regulatory Affairs at the FFI.
In practice this would mean that the bank could limit reference rates from going below zero in the credit terms and conditions. This would be extremely valuable for the profitability and capital adequacy of banks. According to the Finnish Financial Supervisory Authority (FIN-FSA), prohibiting interest rate floors would be problematic in terms of profitability especially to small banks who rely on deposits as their main source of funding.
“It is important for the Government to stick to its Programme, which states that no further national regulatory measures are to be taken when implementing EU regulations. The EU Mortgage Credit Directive does not contain any provisions that prevent interest rate floors, which means the proposal is justifiable also in this regard”, Mäntyniemi says.
Permitting a zero interest rate floor would also allow banks to continue offering several different benchmark reference rates to their customers in the future. This gives customers more choice. FIN-FSA and the Finnish Financial Ombudsman Bureau (FINE) also consider the proposed solution to be in the best interests of consumers.
Hurried implementation schedule
The proposals are to enter into force as soon as possible after they are accepted and confirmed, which means they may become implementable in only a few months’ time. Mäntyniemi considers this schedule challenging.
Banks have begun their preparations by updating their data systems and internal guidelines well in advance, but certain changes can only be made after the final contents of the regulation are known. “Credit providers must be guaranteed a sufficient transitional period to implement the obligatory changes”, stresses Mäntyniemi.