Series 8 Episode 8: The future of mortgage lending: balancing growth, risk and consumer protection

Transcript

Dan Perks: Hi everyone, and welcome to Risk and Regulation Rundown, the podcast where we explore the latest issues shaping financial services risk and regulation. I’m your guest host, Dan Perks, and in today’s episode we’re diving into the world of mortgages, the shifts we’re seeing in the mortgage market and associated regulatory changes.

I’m pleased to be joined by two brilliant guests. Firstly, Karina Hutchins the Principal Lead for Regulatory Mortgage Reform at UK Finance and Alex England, a Director in PwC’s Non-Financial Risk practice specialising in regulatory conduct matters and retail banking. Both, thanks for joining me today.

Karina Hutchins: Thank you. Good to be here.

Dan: Brilliant to have you both. And Karina, thanks so much for being here and willing to share your insights from the role at UK Finance with us. Let's start by setting the scene. How does the UK mortgage market look at present and what are the key things you're seeing within it?

Karina: It's a really exciting and interesting time for the residential mortgage market. And if we start with first time buyers, broadly numbers are good, what we're seeing is the profile of first-time buyers are evolving, they're changing and that's based on pressures that they're experiencing when there’re trying to buy their first home. So, if you think about it, HPI house price index and wage inflation, they've not kept up with one another. There's a lot of affordability challenges. And as a result, the average age of a first-time buyer has increased to 33 years old, and that's continuing to increase, that was based on our data last year.

We've seen mortgage terms extending way beyond 35 years now to a maximum of 40. In fact, 20 per cent of all mortgage terms extend beyond 35 years, it's nearly doubled in the last five years. And that's because mortgage payments are expensive and people are trying to balance what they spend on their mortgage alongside all their other bills and household outgoings. So, we're seeing the demand for mortgages change. People are trying to buy expensive houses, borrow the most that they can, and they also need flexible lending rules to meet their individual circumstances. You've got people that are self-employed in gig economies, volatile income. So, what we're finding is the rules that were introduced as part of the mortgage market review over 10 years ago are arguably locking people out of home ownership, especially creditworthy borrowers. What they have done over recent years is, despite those affordability pressures, 99 per cent of borrowers have been able to keep up with their mortgage payments. And fortunately, mortgage repossessions are historically low. So, the mortgage market has proven resilient. But there's a big question here on did the mortgage market review go too far with its responsible lending standards. And is there an opportunity now to relax some rules somewhat to enable more sustainable home ownership.

Dan: Thank you very much. Fascinating. And you can really see how it's a different world now with the contextual factors we face in today's market compared to how it was back in 2014 at the end of the mortgage market review back then. And speaking of that key regulatory point back in 2014 is a lovely segue into one of the key topics we'll be discussing today, which is regulatory change right now and CP26/18. And on that, what is the FCA trying to achieve in this consultation and of the proposals they're putting forward, what are the ones that can make the biggest difference?

Karina: I think it's important to make reference to some of the important changes the FCA made before this consultation, namely around loan to income rules, that was joint with the PRA and on clarifying the stress test calculations. So last year they made some great changes to those barriers, but what they're doing with CP26/18, which is aimed at first-time buyers and underserved customers, is reviewing their responsible lending rules and seeing if at the margins they can help open up markets that are constrained by affordability changes. So, they are focusing on the self-employed, later life and the most exciting part, which I see and which a lot of members of UK Finance see is around interest only, because we know that with affordability challenges, trying to afford a mortgage on full capital and interest is pricey. Actually, if we allowed a percentage of that mortgage on interest only, that would open up home ownership for many, that over the course of their 35-40 year mortgage term can hopefully repay that interest only part as their life develops through pay rises, job changes, it could be inheritance or it could also be a fact of turning to later life lending if that's the right option for them in the future. The regulator is looking at how can it enable innovation and some more risk within its lending rules and trying to re-balance the risk that exists in the market right now.

Dan: Thank you. A wide-ranging scope there that the regulator is looking into. And Alex, since the financial crisis, the direction of travel has largely been towards tighter lending standards. And as Karina mentioned earlier, the FCA is now asking whether in some areas we've become a bit too cautious. How significant a change is that? And how do we strike the right balance between widening that access and avoiding a return to the problems of the past?

Alex England: The topics the regulator is now consulting on reflect, as Karina mentioned, an opportunity to open up areas of the mortgage market which have been underserved under those types of standards especially given the context, Karina, you talked to with regards to how mortgages as an asset class have performed through what has been an increasingly uncertain world actually since 2014. There's a lot to go for here. Opportunity to better support people to get onto the housing ladder with different products, more flexible underwriting policies, better support to customers with non-standard incomes, and support to customers to meet their goals in later life and with generational wealth transfer. On that last point, my colleagues in Strategy& have done some interesting research around the later life piece. And there's some interesting stats in there around how much of the UK wealth is held in housing. Roughly 50 per cent of UK wealth is held in housing. From a pension's perspective, pensions are unlikely to meet consumers' retirement needs. Four in 10 people are under saving for retirement. The UK population is aging, so that group in that bucket is getting bigger. And over a third of age 55s are either using or would consider using a later life mortgage. So, there's a lot to go for, just in that section of the FCA's proposals.

And with opportunity is going to come risk. The regulator is trying to stimulate some growth here with this flexibility. And that comes with some risk, principally is there more risk of harm to consumers by taking more risk on the affordability and on underwriting. And the regulator is going to lean heavily on consumer duty here. It's going to require lenders to make sure product deliver values, that consumers understand the decisions that they are making, and that the right support is being provided to vulnerable customers, which clearly in some of these areas, you're more likely to see some of those. Lenders will be expected to act to prevent foreseeable harm, and that's the line where we're likely to see some tensions between what's in the policy debate now and where that line is going to land on re-balancing risk.

Dan: That's brilliant. Thank you so much Alex for sharing that. And one of the best things about these podcasts is to have people like yourself on who are engaging with clients every day on these topics. So, what's generally the view amongst the industry in respect of these changes? And what will determine if lenders do lean into this opportunity that the FCA are consulting on?

Alex: Firstly, I do think there's appetite for growth here. We saw uptake of some of those individual flexibility provided to firms on the LTI requirements. When we speak to our clients, we hear similar things in terms of what's on their minds. So, prescriptive rules historically have been a consistent position for them to rely on from a compliance perspective. The risk of complaints where consumers or in the later life example I discussed, their beneficiaries end up with an outcome they didn't quite expect from the outset. The role of the FOS in that and how they independently resolve disputes and how much lenders can predict where the FOS is going to go in some of those scenarios, and also a clear understanding of how prudential and conduct regulations are going to end up interacting in this new world. There are some policy areas that lenders are interested to see more on in order to take up the changes once they've been enshrined in policy. Overall, we see a positive, constructive engagement with this. And we've had some interesting conversations with our clients around interest only, Karina as you spoke to, and around the later life market, where actually some of the views we're hearing is that there's an opportunity to differentiate with simple, easy to understand products and streamline customer journeys.

Dan: Brilliant. And on the flip side Karina, Alex has spoken there about some of the key priorities and potential opportunities for firms. What are the obstacles or what is there that firms still think could hold them back despite the changes that have been proposed by the FCA?

Karina: It's important we enable firms to take more risks. The regulator is doing a great job with introducing permissive rules. They are essential, but some firms need clearer FCA expectations and alignment with the FOS. They are worried what could happen in X number of years' time if the customer did put a complaint in, arguing that that product wasn't suitable for them in line of consumer duty. And what would the FOS’s interpretation of that be. So permissive rules are essential, but expectations from the regulator will give more firms, particularly those smaller ones or those with stricter risk appetites, more confidence. Without that confidence some lenders may be too cautious and with them being permissive they won't be adopted. That's really going to be the key to success here. If we look at the first-time buyer and underserved customers consultation alongside the PRA's current LTI proposals, both of those consultations were open this summer and we're expecting the feedback statements in Q4 of this year. We fed back based on member input. It's important that regulators consider the feedback and the proposals for those consultations side by side, because if the LTI proposals aren't implemented in a way that considers the impacts on what the regulator is trying to do with their responsible lending rules, then it could impede the success. So that's something to be aware of at the regulator's end.

Dan: I think you can't go far in respect of having a conversation when it comes to retail financial services at the moment, and the regulatory changes without being accompanied with firms mentioning the need for greater certainty in respect of FOS decisions. Obviously, there's the wider FOS reform piece going on there. We won't delve into that too much. We could be here for a little bit longer. But you can't also go very far nowadays without discussing AI and tech enabled opportunities either. And Alex, what role can better data, what role can technology play in helping lenders make more tailored decisions at scale while continuing to deliver good outcomes for customers?

Alex: There're quite a few angles to this question. Customer expectations have shifted a lot faster than the typical mortgage journey today has. Lenders want more accurate, efficient credit decisioning, and complying with the regulatory demands, evidence and data. So, technology and data are a huge part of this change. You're quite right, we can't have a conversation in 2026 without referencing AI. In this topic in particular, it can be a powerful tool to support underwriting, to get decisions in principle faster, to speed up document reviews and support fraud detection. There're further opportunities to look at how AI can support analysis of insights and spot signs of vulnerability earlier in the customer journeys. This would be increasingly relevant in some of the underserved segments in the FCA's proposals as well. The key here with the use of AI in this space, given the focus on preventing consumer harm, is still going to be that while AI could be a really powerful accelerator here, and firms absolutely should be exploring that when properly combined with having the human in the loop and having really robust governance around this use in the outputs.

I'd also say customer expectations are always evolving, and particularly in today's on-demand culture, customers are savvy with slicker digital experiences on-boarding journeys. Brokers want an easier and slicker way of engaging with the lenders, and agentic models are therefore becoming increasingly relevant. Even my parents, both in their 60s, are becoming well versed with AI and how to use ChatGPT and agentic journeys. We've already started to see these deployed in some areas, some investments in annuities, customer service, chatbots, etc. We're starting to see adoption of AI in this space. And the lenders that do this well will have a clear differentiator alongside these reforms. And then just on data, data is going to be critically important. Collecting the right information across the customer journey to help evidence the decisions and judgments made and ultimately what outcomes have been delivered is going to be essential for firms. The FCA is an increasingly outcomes focused regulator. So, designing what good customer outcomes look like, having good outcomes, monitoring MI, these are all recurring themes that we see in supervisory interactions between our clients and the regulator. And we see it repeatedly in letters communicating difficult feedback to firms. For example, back in July on basic bank accounts, one of the things the regulator has agreed with the sector is increasing the outcomes monitoring and MI that firms are collecting to make sure customers get good outcomes. What the regulator is going to be looking for as it implements these regimes and the things that firms are going to need to fall back on is how they evidence good customer outcomes through their mortgage journeys.

Dan:  And as ever, customer outcomes and delivering positive customer outcomes at the forefront of everything we do and everything firms need to do in this market. And your parents certainly sound more advanced with AI than mine. It was only the other day I told my mum to ask Claude and she asked who he was. So, we'll turn away from AI now and move just generally, Karina, into some of the other major shifts that are impacting the market at the moment. And how well equipped is today's market for changes that will come with that, such as people increasingly carrying mortgage debt into retirement, borrowing for longer, and where do you see the opportunity for the market to evolve in respect of those?

Karina: This is a really exciting opportunity and it's not just one that the FCA is focused on, it's the government as well. They're looking at the growing ageing population that is having rented accommodation for longer than they used to be. And what they're not doing if you're stuck in renting is accumulating property wealth. This isn't something that everyday people think of, but if you own a property and you don't have a mortgage or you're paying back a mortgage, you're accumulating property wealth, that is your money, that is what you can use to support you in the future. If you've got changing needs, whether you need to adapt your home, you want to gift your kids money to help them get on the housing ladder, if you've got long term care needs, whatever you want. And what they see the new opportunity as is, as Alex said earlier, the Pension Commission is looking at this. A huge proportion of the public are under saving for their retirement, and if you look beyond pension income and look at a full complete financial picture, including savings and property wealth, then that's an opportunity to support people getting good outcomes in retirement. The FCA is looking at this, recognising that they've got a role to play in enabling their rules to support this potential growing need for later life lending, which will enable homeowners to access their property wealth in retirement. And we can see that there's a growing part of later life customers just by looking at the first-time buyers and how old they are and what mortgage term they take out. The FCA is currently running a market study and they're approaching it from a product focus of retirement interest only mortgages and lifetime mortgages. Now we've fed back that the FCA should broaden its focus and its scope and look at what standard mortgages do in this space as well because mortgage lenders recognise that people are working longer and therefore the maximum age that you can take a mortgage to in the mainstream market is increasing as well. And there's plenty of innovation in that space and there's appetite to do more. It's fantastic that the FCA is looking at this now to make sure that the market is ready for this growing need. What they're also looking at is holistic advice. It's not been defined right now, so I can't tell you what the definition of it is. But they're looking at how do customers and clients get their advice. How do they understand what options are available to them, how they can access their property wealth. And from a consumer duty perspective, can they make an informed decision on their options based on what they know. So, there's a few challenges in that space at the moment based on qualifications, but there's a lot going on and I'm very well engaged with this and interested in where it goes.

Dan: Amazing. Well, it sounds like you'll be busy over the next few months. Unfortunately, we're running out of time and coming towards the end of our useful conversation and lots of brilliant insights so far. But just to wrap it up, and before we go, if I could get one final thought from you both. If you were a lender at the moment, what's the one thing you would be thinking about and prioritising right now? Alex, do you want to kick us off?

Alex: This is really exciting. There's a lot to play for. Be in the debate, focus on the opportunities that naturally align with your purpose. And on the point around consumer duty, design what good outcomes are going to look like and how you're going to evidence those.

Dan: Amazing. Karina?

Karina: Challenge your current risk appetite. Can you support more creditworthy borrowers into sustainable home ownership by adopting these rules and by producing innovative solutions for them.

Dan: I think that's two fantastic points to end on there. Thank you both very much for your time today. Thank you, Karina, for joining us at PwC and bringing a wealth of knowledge and insights from UK Finance. It is really appreciated. And thank you very much to our listeners for joining us and listening along. If you'd like to find out more about regulatory developments in the mortgage market, please do get in touch. And if you have enjoyed this episode, please do subscribe and consider leaving a rating or review as it helps other listeners to find us. Thank you for listening and we'll be back again next month for another episode.