Video transcript: FCA Mortgage Rule Review

Transcript

Tessa Norman: The FCA published a discussion paper on the future of the mortgage market in late June, and this is part of the FCA’s commitment to simplify its mortgage rules in support of the Government's drive to enhance economic growth. As part of this work, the FCA also issued a consultation paper back in May and clarified its interest rate stress testing rule. The discussion paper really looks at quite broad questions around potential changes to the FCA’s mortgage rules to respond to evolving societal and consumer needs, and to better balance consumer protection with the Government's drive to support innovation and growth. It also looks at what trade-offs and risks that would entail.

Some of the areas that the paper looks at include affordability assessment rules, potential further changes to the interest rate stress test rule, product innovation and potentially relaxing the rules around interest only mortgages.

I'd say that first of all, it's important to acknowledge that this is of course a discussion paper, and so any of these proposals would be subject to a formal consultation before being taken forward. But that said, there's a lot of really interesting proposals in the paper, which I think it's important for lenders and intermediaries to reflect on because we could see them having a really important impact on risk appetite and competition dynamics in the market.

The first area that I would highlight is that the FCA is looking at potentially opening up more execution-only sales. So this is something that it looked at in its May consultation paper, and in the discussion paper the FCA is also exploring what more it could do to support AI-assisted sales. So I think it's important for lenders to be reflecting on these proposals as a part of their distribution strategies and considering whether they want to look at non-advised digital customer journeys.

Another really interesting area for lenders to reflect upon is their appetite for expanding lending for previously undeserved customer groups. So that might include, for example, older borrowers or the self-employed. And we might see some more intense competition opening up for those groups. But of course there's a number of really important considerations that lenders would need to work through as part of that, including credit risk, early warning systems and really robust risk management controls. And I think that risk management element is important for firms to reflect upon in light of the paper, regardless of whether or not the FCA takes forward any of these proposals.

The papers are an important reminder that some of these shifts and consumer trends which the FCA is responding to are already having an impact on the market. So for example, lenders are already having to think and work through at the moment, how do they effectively assess affordability for borrowers who wish to borrow into retirement.

In the discussion paper, the FCA explores requiring a level of enhanced advice for certain cohorts of customers or certain product types where its data shows a higher than average level of arrears. And so I think it's important for firms to really reflect on some of the data points and consider whether there's additional processes or controls that they may wish to put in place at the moment.

Overall, I'd say it's really welcome to see the FCA taking such a forward-looking approach and looking at how it can ensure that its mortgage rule regulatory framework is fit for the future. And of course that debate around the interaction between risk, consumer protection and growth is a really challenging one. And I think it's fair to say that we haven't yet quite seen that debate fully and play out in terms of all of its implications, but I really encourage firms to fully engage in that debate now and to start to consider what some of these questions and proposals mean for their business.