FCA issues mortgage rule review feedback statement

Transcript

Tessa Norman: The FCA published a feedback statement in December to its earlier discussion paper as part of its mortgage rule review. As a reminder, the discussion paper forms part of the FCA's commitment made around a year ago to do more to support home ownership, as part of the wider shift we're seeing towards making the regulatory environment more competitive and more supportive of growth. The discussion paper was quite wide-ranging, asking some broad questions around how do we widen access to home ownership while still protecting consumers and maintaining adequate resilience.

In the feedback statement, the FCA summarises the feedback it received and sets out a roadmap of next steps. So it's not yet consulting on changes, but what the feedback statement does give us is a narrowing down of the quite wide range of options that the FCA initially set out in the discussion paper.

And so we now have a clearer idea of where the FCA is likely to take forward changes, and a clear timeline for when those changes will be consulted on. So the FCA sets out that it plans to publish a consultation paper in the first half of this year on options to expand access for first time buyers and underserved groups. The FCA plans to look at as part of that interest only lending, including reviewing what constitutes a credible repayment strategy. It will also look at affordability for part and part mortgages and low start mortgages.

And the FCA and PRA have also committed to publishing a consultation paper in the first quarter of this year on loan to income ratio requirements. So this would make permanent potential changes to that ratio, following an FPC recommendation last year, and in response to which the PRA introduced some temporary changes last year. The final area that the FCA plans to look at under this topic is reviewing the definition of credit-impaired customers.

And the FCA is also likely to look at reforms to later life lending, but that will be on a longer timeframe, so the FCA plans to carry out a market study this year looking at the readiness of the market to deliver for evolving consumer needs in this space. It will then consult on any changes next year. The FCA also plans to look at potential changes to mortgage disclosure. Again it plans to carry out some additional work this year and then consult on any changes next year. So changes in this space would potentially make the disclosure framework more outcomes focused and more flexible and better able to support digital journeys.

Finally, the feedback statement also confirms that respondents were broadly supportive of the FCA’s framing around rebalancing risk that it set out in the discussion paper. And so broadly there is support for the idea that there may now be scope to rebalance collective risk appetite in the mortgage market, and the FCA says it plans to further refine its approach to tolerable harm, which was a concept it initially explored through the discussion paper. The FCA does make an important clarification here that this is distinct from the concept of foreseeable harm under the Consumer Duty. So reiterating that firms very much will still need to meet their obligations under Consumer Duty, and clarifying that tolerable harm is a concept that it, as a regulator, plans to use when it's developing policy.

So while the feedback itself isn't introducing any changes yet, what it is doing is adding further momentum to the broader shift towards a more flexible and growth focused mortgage regulatory regime and that direction of travel is already influencing lenders to think about their mortgage strategies, including risk appetite, portfolio mix and underwriting approach. For many lenders, they're increasingly focusing on higher risk and previously underserved segments of the market, such as higher LTV or higher LTI lending. And I think now with the feedback statement and clarity on the FCA's plan for upcoming consultations there's a greater imperative for firms to really consider how far and do they want to move into any of those segments and the areas that the FCA plans to look at, such as interest only. And if they choose to do so, really thinking through, what does that mean for price for example, and for risk management. I think that risk management aspect is absolutely crucial because whilst the FCA is signalling greater flexibility, it's not signalling a lower standard. So having a well-governed risk appetite, strong controls and monitoring and being able to evidence that the firm continues to meet the high standards of Consumer Duty will remain key.