Last month I wrote about our preparations for the Building Societies Association (BSA) Annual Mortgage Meet-up, which was held in London a couple of weeks ago. We were delighted to welcome over 60 professionals who work in lending, credit risk and mortgage customer service to the event, where we had some thought-provoking conversations on housing, regulation, environment and innovation.
The event provided a rare opportunity for me to talk candidly with Thomas Francis, mortgage policy manager at the Financial Conduct Authority (FCA), who was happy to clarify the regulators thinking and future plans.
It was refreshing to hear Tom say that the FCA is becoming more proactive, and less reactive. Evidence of this approach is shown in their recent Call for Input where the industry is invited to provide insight on where the mortgage conduct rules and guidance can be simplified and where there are potential areas of complexity, duplication, confusion, or over-prescription, which create regulatory costs with limited or no consumer benefit, or where competition and innovation could be enhanced.
Naturally we talked about alignment of the rules within Mortgage Conduct of Business (MCOB) and Consumer Duty and how radical we might want to be. Should we tear up the MCOB rulebook or is there a middle ground where we identify tweaks that will provide quick wins and ultimately lead to a simpler rulebook.
Tom explained that whilst both the Consumer Duty and MCOB can work as they currently stand, there are efficiencies and improvements that could be made to MCOB. He also outlined that, whilst there were benefits from higher-level standards, it would be daunting to remove the whole mortgage rulebook. My sense is that the lending community agrees. The Consumer Duty sets high-level, outcomes focused requirements and gives firms a lot more discretion. The challenge for the FCA is how does MCOB step up to create a similar outcomes-based approach. There is an appetite to be bold, and it is therefore important that compliance and operations teams highlight, with evidence, the problems they are experiencing and potential solutions.
Turning to first-time buyers, our latest Property Tracker Report showed that affording mortgage payments and raising a deposit prevents a large proportion of would-be homebuyers from getting on the property ladder. However, there is a societal impact if people are unable to afford their first home – a report from Standard Life revealed those who rent into retirement could need almost £400,000 more in savings than those who own their home in retirement. It’s unlikely that an individual or family who can’t afford to save a deposit today could save an extra £400,000 into their pension to cover their rental costs in retirement, meaning Government support will undoubtedly be necessary.
So I was keen to quiz Tom on how regulation can adapt to help address the barriers facing first-time buyers, and it was good to hear that the FCA has the appetite to change unduly prohibitive rules if appropriate. An open invitation was given for evidence to be provided of instances where firms are unable to lend to creditworthy customers because the rules hinder it, and where a change could support innovation and good customer outcomes. Early this year, in our report which looked at the changes needed to help current and future first-time buyers, we highlighted some potential rule changes that could support this group of would-be homeowners. We now need lenders to provide examples of the rules that are preventing them from making a mortgage offer to someone who in all probability can afford to maintain it.
Unsurprisingly, Tom moved the conversation to lending into retirement. As longer mortgage terms are being offered to aid affordability, a greater proportion of mortgages are expected to mature around the current state pension age. The projected median age of a first-time buyer at maturity is now 65 years old, up from 56 years in 2005 – moving lending into retirement from niche to norm.
The regulator’s message was clear – we must not let longer lending terms and lending into retirement become the next big financial risk.
Now is the time to recognise and manage these risks responsibly and prevent it becoming a big financial problem in 20 years. Where an affordability assessment is required, the FCA expects firms to consider changes to income and expenditure when the term of a regulated contract extends beyond a customer’s expected retirement date, or if that date is not known, the state pension age.
In summary, I would say this was one of the most positive conversations we have had with the conduct regulator. There is clearly appetite to update the rulebook to one that is more appropriate for today’s environment. There is an open invitation to all involved in the mortgage process to submit evidence of where regulation is hindering lending decisions. With all of the change in recent years, it is unsurprising to sense some regulatory fatigue from firms, but I believe we have one shot to ensure that the rulebook is fit for the future and encourages innovation rather than stifles it.
The deadline for submissions to the Call for Input is 31 October 2024.
Paul Broadhead is head of mortgage & housing policy, BSA
