What’s it all about?

The FCA has been tasked with making the UK a competitive financial services market. Although many rules were introduced to enforce responsible behaviour following the global financial crisis, some rules – particularly those concerning affordability – are now restricting access to mortgages and excluding classes of consumer from getting the products they need.

The FCA paper explores a number of issues. Key amongst them are:

•  Whether the responsible lending rules need to be reviewed. In particular, whether they should be changed to allow greater access for first time buyers, the self-employed and customers with variable incomes, and whether current rules are stifling innovation.
•  How other methods of assessing affordability could be introduced.
• Whether the interest rate “stress test” rules need changing, and take-up of longer term fixed rate products supporting.
• Anticipating demand for later life lending, particularly access to retirement interest-only products and making the advisory journey more effective.
• A reassessment of customer information requirements – what customers need to know, whether a “one size fits all” approach is sustainable and whether more complex products require a higher standard.
• Simplifying the rules to support vulnerable customers, particularly concerning economic abuse and coercion.
• Rebalancing risk appetite in the mortgage market, if levels of financial distress and arrears & repossessions does not increase beyond specified levels, and whether mortgage products not taken out for purchasing property (e.g. for debt consolidation) should be treated differently.

Some practical considerations when responding

Ultimately this discussion is about risk, and where an acceptable balance lies, both in terms of what level of risk (and where) the industry is willing to accept, and what level it is appropriate to expose retail customers to. Whilst understandable, regulation dictated by economic climate and the agenda of the government of the day is to be viewed with caution. Those of us who worked through the Credit Crunch and its aftermath have seen the results of taking the brakes off completely. With the introduction of Consumer Duty, there’s always going to be a tension between what is permissible under the MCOB rules, and what firms ought to be doing. To the extent that reforms are at odds with the aims of the Duty (assessment of affordability, for example), respondents might like to consider how that should be catered for. What is needed is a consideration of where we believe that the regulatory framework places undue constraint and where the is a real need for reform.

The impact of regulatory fatigue should not be underestimated. Firms have just got to grips with the implementation of Consumer Duty, and many of the responses we saw to July 2024’s Call for Input on review of the retail conduct rules flagged that lenders wanted to fix what’s already there, rather than introducing wholesale reforms.

The law of unintended consequences needs to be considered. When discretion is opened up and leeway given, many will lean automatically toward the more cautious approach, given recent history in the market. Might deregulation accidentally restrict access to credit?

There’s also the debt capital markets aspect. It’s become standard practice for lenders to securitise or warehouse their books, or else fund their lending through forward flow arrangements. Pricing of those structures is based on risk. Part of risk perception comes from the default risk presented by the target customer base. Part is based on certainty around product compliance with regulatory requirements. The higher the potential for default, and the less certainty there is on what a lender or broker is required to do when mortgages are entered into, the more risk funders will perceive, and the higher the pricing will be. That in turn will directly impact prices received by consumers.

Innovation is definitely required. With a finite housing stock and a decline in those wishing, or able, to purchase a home, the more thought needs to be given to how to make mortgage products accessible. But that, too, needs to be viewed through the lens of consumer detriment. Innovative products are invariably more complex, and the implications and consequences need to be spelled out up front to consumers. Great strides have been made in developing, for example, joint-borrower sole-proprietor mortgages and shared equity products. One only has to look at the recent Supreme Court cases on commissions and undue influence to see where the potential pitfalls lie in failing to proactively management of customer needs and expectations.

Finally, the Call for Input also highlighted a need for greater discretion when complying with the rules. The problem with the “one size fits all” approach under MCOB 5 and 6 (in particular), as well as other sections of the Handbook, is that inevitably there are cases which don’t fit within form and content requirements. In those circumstances, it would be helpful to have confirmation that Consumer Duty acts as an override to the rules which permits the production of something which is factually correct and suited to the customer’s circumstances.

Conclusions

There’s no doubt that the time for a long, hard look at the restrictive nature of the mortgage conduct rules has arrived. Balance is required, however, and it needs to be borne in mind that one size most definitely not fit all. Now is the opportunity for you to express your views on risk appetite and where the market is not working. It would be a great pity to miss out.

Richard Clark is a legal director at TLT LLP