FCA opens debate on mortgage risk and innovation

What does this mean?

The FCA is exploring reforms across the following areas: responsible lending and affordability, later life lending, advice, disclosure, innovation, and rebalancing risk appetite. Any changes would be subject to further consultation. 

Responsible lending and affordability

The FCA is reconsidering its responsible lending rules – particularly affordability assessments – to support wider access to home ownership. It focuses on underserved groups such as: first-time buyers, the self-employed, and those with variable incomes. The FCA discusses:

• Potential changes to its interest rate stress test – such as changing the five-year timeframe, or adjusting the fixed 1% stress margin to better reflect prevailing conditions. 

• Alternative methods of affordability assessments - including the possibility of allowing past payment of rent to prove affordability without further assessment of income and expenditure. 

• Further support for interest-only mortgages - for example, revisiting the requirement to have a 

  repayment vehicle in place in certain circumstances.

The FCA also explores options to improve outcomes for victims of joint mortgage-based economic abuse, such as providing greater clarity on when affordability assessments are necessary.  

Later life lending

The FCA explores the implications of trends such as lengthening mortgage terms and growing demand from homeowners to access the equity in their homes. 

The regulator wants to explore how its rules can support product innovation in this space (such as low-start mortgages with reduced initial payments, and equity release products that allow borrowers to draw down on a monthly basis, rather than in a lump sum). It also states its rules may need to change to enable more holistic advice. 

Advice and innovation

The FCA is examining whether its mortgage advice and sales rules remain fit for purpose in light of technological innovation and evolving consumer preferences. 

Since the Mortgage Market Review in 2014, the default has been an advised sales model. The FCA recently consulted (CP25/11) on removing the ‘interaction trigger’ that mandates advice when there is dialogue with a customer, which could enable more execution-only sales. In the DP, the FCA asks whether regulation can do more to enable innovation, in terms of AI‑assisted sales, and tools for consumers and intermediaries to assess product eligibility and the likelihood of acceptance. 

The regulator also seeks views on innovation more broadly, including how the mortgage market can make best use of developments such as Open Banking and distributed ledger technology. 

In addition, the FCA wants to explore requiring a level of ‘enhanced advice’ in certain circumstances - for cohorts of consumers, products, or repayment type where there are higher rates of arrears (such as interest-only mortgages, and lending over 85% LTV). 

Disclosure

The FCA wants to streamline and simplify its mortgage disclosure requirements. One option would be to move to a more outcomes‑based disclosure regime, underpinned by the Consumer Duty and supplemented with event‑driven specific requirements. Another option would be to retain some form of simplified standardised disclosure template.

Rebalancing risk appetite

The FCA observes that current lending standards, shaped by post-financial crisis prudence, may now be “too cautious for the future in some areas”, particularly if policymakers want to encourage innovation and support homeownership. It explores the trade‑offs to be considered if risk appetite were to shift, between increased mortgage access, and possible house price inflation and greater defaults. 

The regulator reiterates its view that, in order to introduce greater risk into the system, it needs to determine metrics of ‘tolerable’ levels of harm. It asks for views on the metrics which could be used, such as arrears rates, but acknowledges many metrics have limitations and can lag underlying issues.

What do firms need to do?

Many of the ideas discussed in the DP could, if taken forward, result in a marked shift in risk appetite and market dynamics. Mortgage lenders and intermediaries should proactively engage as the debate evolves. 

Lenders should reflect on the themes of the DP within their strategic planning. For those looking to grow market share, there is a strategic opportunity to reach underserved customer segments (such as renters, older borrowers and the self-employed) with tailored products if rules become more flexible. This could impact market dynamics, with potentially more intense competition for first-time buyers and other marginal borrowers. Banks and building societies will need to decide how far to stretch their risk appetite in response. This will require careful calibration of credit risk and early-warning systems to detect signs of borrower strain under new models, and robust risk management controls.

Firms should ensure their risk management practices are reflective of the market and consumer trends which the FCA analyses in the DP. For example, lenders may wish to consider additional processes for customer and product cohorts where the FCA highlights greater rates of arrears. Growing demand for later life lending may also require lenders and intermediaries to introduce additional controls and processes to ensure they are meeting the needs of older borrowers, and adequately assessing affordability. Lenders should also consider whether there is more they can do to support vulnerable customers who are subject to economic abuse, noting the FCA highlights this as an area where there is potential to improve customer outcomes. 

The FCA’s focus on supporting digitisation, product innovation and AI-assisted tools and processes demonstrates its more ‘tech-positive’ approach as outlined in its latest strategy. Firms should be ready to leverage the benefits of technology-driven efficiencies - for example, by using data analytics to streamline income verification, or AI to personalise customer communications, or assess product eligibility. Firms should also carefully consider how they identify and mitigate risks associated with the use of technologies such as AI whilst delivering good outcomes for all customers.

In addition, lenders should examine the implications of a potential relaxation of rules to allow more execution-only sales. This could open up opportunities to develop direct-to-consumer online platforms, offering guided digital journeys or decision support tools.

Next steps

The discussion paper closes on 19 September 2025. Any changes would be subject to further consultation.