Exclusive: Why now is the right time for FCA's mortgage review

0:12Emad Aladhal: Hello and welcome to the FT Advisor podcast. I'm Amy Austin, News Editor at FT Advisor. And today are we joined by Emad Aladhal, Director of Retail Banking at the FCA. So, Emad, thank you for joining us today. Thank you, Amy. Thank you for this opportunity to come speak to you and to speak to the FT advisor and your readers. I'm thoroughly looking forward to actually speaking about something that's really important to us. Well, recently, I think it was last week now, you've released your new consultation kind of looking at the mortgage market. And this is more looking at mortgage access for self-employed, older borrowers, maybe people that don't have your typical month-to-month salary.

0:52Emad Aladhal: So do you want to start by maybe just telling us what this latest consultation is all about and what you're kind of looking at? Thank you, Amy. This is a, as you said there, it's about the underserved in the mortgage market. It's part of a journey and maybe if this podcast allows us to, we can talk about the journey we took last year. But this consultation is trying to focus on those parts of the market where we think actually more can be done by your listeners and many others in the industry. You've just said it there. It's those who are on variable income, those who are self-employed, have a good track record, can show that they have good income, but may not be coming monthly.

1:33How do we get better, more cost-effective mortgages to those customers? And it's beyond that. It's looking at customers who may be wanting to buy in the UK, but happen to be earning money in a different currency. Take the example of those who are living in Northern Ireland but working in the Republic of Ireland. How can we get mortgages that work better for them? It's other aspects, and I'd love to go into some of that detail with you.

2:02Emad Aladhal: Yeah, 100%, because I think the self-employed, if we just take one of the groups, I know that that's been a problem with mortgages for a while now, and people have been, you know, we earn so much money in this, but it might not be so static, and then it's a problem trying to get a mortgage. Why are you kind of looking at it now? We're looking at it because we have, I think, if you take a kind of step back and look at the macro, since 2014, since the last material change in our regime, we have built a really strong foundation. Mortgages are largely the way we want them to be. And 99%, over 99%, are on track with their mortgages.

2:48Less than 1 % are not. I mean, that's just an amazing statistics. And we built on that regime with a consumer duty coming in the last couple of years. It means that we are in a position of strength. And actually, the industry has the right guardrails and the right culture. So that allows us now to say, actually, how can we rebalance risk? We balance it in the right way so that, as you said there, those individuals who are making a larger part of our economy, those who are working with variable income, who want to get on the, who can actually and should be able to get on the property ladder, how can we help them get their first home?

3:30Emad Aladhal: Sure. And is there, you know, you spoke about risk, is there any kind of risks with this? Because I'm assuming this hasn't been done before because of the risks surrounding, you know, self-employed income. And, you know, you might earn a lot in one month, but then nothing the next month. And there is that risk that could happen. So will there be kind of things in place to make sure that, you know, everyone can afford their mortgage? So we're still talking about responsible lending. We're still talking about firms making sure they did the right due diligence. But that should not come at cost of meaning little or no provision of products to these kind of consumers.

4:02No, an individual who can show you over the last few years that they've had good, strong income. Yes, it may have come in because of their type of work three times a year rather than every month. But actually, it's there and it's strong. But they are probably presenting a similar risk profile to those who are maybe monthly income, right? So it's not about reducing risk to the point where we're uncomfortable. Actually, it's about being proportionate and being fair.

4:32Emad Aladhal: Yeah. And what are you kind of introducing for older borrowers? I know you were looking at interest-only mortgages, for example. So older borrowers, I think in some ways we need to move away from some of that language. Yeah. Because what is an older borrower? Exactly. We've got individuals who are borrowing now for much into their retirement. It's about actually recognising that the world that the rules were previously written for has moved on. We've got people who are, as I said, who are borrowing maybe 30, 40 year mortgages. We need a way of actually catering for their needs. That's borrowing when they're working, but that's also borrowing when they hope to exit work into retirement.

5:13So retirement interest only mortgages is part of that journey. I was at the Later Life Summit this morning and it allowed me an opportunity to really have a conversation with this industry about what they are doing to change the perception of that industry. How individuals in retirement can access their housing wealth to better meet their needs in retirement. And that's a big challenge.

5:40Emad Aladhal: And are lenders, I'm assuming you're working with all the lenders out there and not having these conversations with them. Are you also talking to maybe mortgage brokers about how this could work? I'm speaking to the whole industry, including the mortgage. I think mortgage advisors, the brokers, the intermediaries play an incredibly important role. They are when, let's be honest, when an individual or a family want to buy their first home, they go to one of these brokers and they say, they don't necessarily say, I want a mortgage. They say, I want to buy my first home. Can you help me? That is an incredibly powerful moment in someone's life, right?

6:19And these advisors, these brokers have a role, a really important role. And what we want to do is make sure that that role is fulfilled to its maximum. It's not just discussing that particular mortgage or that product that's in front of the individual. It's about actually how they help provide a more holistic approach to the customer, talking about their wider financial arrangements and then having that conversation, especially if they're still young, about what they're doing in terms of their pension, what they're doing in terms of how they could use their housing wealth later on to provide for borrowing.

6:50Emad Aladhal: Yeah, and that's the thing. For most people, a mortgage broker is your first step into the advice profession anyway because you kind of need a mortgage broker to buy a house, whereas people don't take it for pensions and investments. So it's your kind of first dabble, if you're young, into what the advice market looks like. Exactly that. I remember my first time when I went to that. And I remember my conversation. And I didn't know when I was young. And thankfully, at that point, I had saved money. I was living at home, at my parents' home. And having that conversation with a broker and saying, I want to buy this house.

7:24How can I buy it? And then actually them being part of the solution,

7:27Emad Aladhal: that's where we want them to be. Yeah, 100%. And obviously, this informs part of a wider mortgage review that you're looking at. So do you want to maybe... Thank you. and I said I want to kind of talk about the journey we've taken and we're still midway to that journey. Last year, the first half of last year, we went forward with a clarification on stress testing. That clarification went to effectively the mortgage lenders. It was to set out that there is existing flexibility in their regime and they should take that flexibility to expand lending, to expand the ability of individuals to borrow more.

8:08We worked further, we worked with the industry and we introduced changes to our rules to allow better conversations with lenders and mortgage borrowers to allow for remortgaging more easily to allow for term reductions potentially. And then importantly, following the FPC revised guidance, that allowed us working with the PRA to allow lenders to increase the number of individuals who can borrow at higher loan-to-income values. What does that mean? That has meant last year 85 % of the lending market has responded with greater lending. On average, they are lending more than$30 ,000 per customer, which is a really material figure.

9:02that has given us confidence, given us confidence to move forward. We opened a discussion with the whole industry, the advisors, the lenders and consumer groups to get their views of what happens next with a clear ambition that we want to change the whole regime to be fit for future needs. And in December, we published a roadmap off the back of feedback. The industry wanted to understand what's coming in the timetable, and hence the roadmap. And the roadmap sets out four priorities. And we set out that we will work with, as I said, underserved customers, which is the first step was last week's consultation.

9:47We will work on later life lending. We will work with the industry and provide space for greater innovation. And then the fourth pillar is really about making sure that we work with government, with other partners, with the third sector as well as industry on customers who find themselves in vulnerable situations. Those are the four pillars. And it's an exciting, I think, incredibly exciting opportunity now to help reshape the regime for the future.

10:16Emad Aladhal: Yeah. And we've talked like kind of touching on innovation. Do you think that the lenders are getting more innovative? Because we are seeing different products now coming out, you know, to help specifically first time buyers. I think so. So as I said a few moments earlier, I was at the Later Life Summit and I was a part. And if I can plug my speech, it's online. You can find it. We covered it as well. It was part a challenge to the industry. It was saying we want to see you innovate. We want to see innovation in both in terms of the products you provide that meet customer needs, as well as how you fund yourselves, as well as how you engage the customers.

10:58That's a better challenge. And I think the challenge is coming. Whether firms step up through it or they don't, it's coming because others will do so. And technology must be part of that conversation. So it's not just about products and funding, but it has to be about also how we utilize technology to help achieve better outcomes for customers.

11:19Emad Aladhal: Yeah. And where do you see tech kind of fitting in this? Is it with the communication side? Do you think that it's easy to get information? We're currently hosting over the summer on policy sprints associated with advice. And we are asking questions in those sprints over the summer with industry about how technology can be part of that solution. How can technology be utilised to better engage the customer, to get a more holistic view of the customer, but also give them more holistic advice? So it's part of that story. It's not the only part. And in some ways, I think we'll all be in trouble if you're looking at the regulator to give you the answers.

12:06So actually what my job here is, and I think the FCA's job really is about creating the space for innovation and creating the space for those who understand their market, who understand their customers to come forward and work with us about how we can help them build that regime.

12:23Emad Aladhal: Yeah. And with, you know, communications, do you think it is important then that, you know, lenders are talking to maybe, you know, more via mortgage brokers, you know, talking to the customers about, you know, what is going on with specifically mortgage rates? I know that people are always like, quick, we've got to lock in there. Once it drops below four, run, run, run or whatever. You know, nowadays they are pretty high compared to what they were a few years back. And we saw that jump to locking in rates, as you said, in the last few months, given the wider geopolitical situation and the impact it has on the mortgage market.

13:03All I can say is if customers should be engaging their advisors, that's what they're there for. I'll talk about actually what makes sense in terms of the client situation. But it's very hard to work out what the future is. It's about getting that level of certainty and security that you can operate with. I would underline that arrea rates are less than 1%. And that's something that should give us confidence about the period. Even in this period of high-stressed environment, the market is still resilient.

13:37Emad Aladhal: And with the kind of conflicts in the Middle East, because obviously you kind of done your bigger, wider review back in December. But now we've had that happen since like the world changes quite quickly, as we've seen. Is it kind of changing any of your thinking or is it like full speed ahead? It's a resilient market. It's showing that it can operate even under the stressful conditions. That should give us confidence to carry on. So we are carrying on. So the roadmap is the roadmap. And I look forward to working and my teams look forward to working with the whole industry, advisors, lenders and beyond.

14:13to help build the regime for the future.

14:15Emad Aladhal: Yeah. And what has been kind of the response? You know, how have lenders been engaged with you? You know, is it quite a positive thing that you're hearing back about this review? Generally, yes. I mean, there's always feedback and I always welcome that feedback. I'm sure you know me. But the feedback has been largely positive. Yeah. As I said, the positive, not only in the kind of conversations back or the written responses, but positive at how the industry is reacting. So it's about how we make sure that the changes the industry implemented last year are not the only changes they implement. Actually, we push forward.

14:55We make more change. We make it for consumers and for the market. I think I would underline one thing here, that the FCA last year published its five-year strategy. is purposely five years to show a sense of commitment here. And within that five-year strategy, we set out priorities that included helping consumers navigate their financial life and for growth. This work is part of both of those. And you've got our commitment and we want the industry to come join us in this.

15:32Emad Aladhal: Yeah. And do you think that, you know, it seems to me that every time I've spoken to the FCA recently that, you know, engagement is going up, like firms are talking to other firms and to the fca and everyone seems to be kind of like working together is that kind of a general thing that you've found yes and beyond and we're working with consumer groups and we're hearing consumer voices but yeah absolutely um as at summit this morning as i said on later life uh and i have i and my team have have met a number of engagements and summits and conferences and bilaterals and it's and it's and it's a healthy position we're not always going to see eye to eye but that's not the point actually what we all want is the same thing and that is our that consumers are getting better outcomes that the market is healthily growing sustainably growing yeah i bet you were swarmed i know every time i go to an fca speaking they're like straight firm i think people just like to see that there's a human behind you know the fca which is hopefully i'm i'm i'm uh i'm showing this in this in this podcast but we are human and actually what we want is very much similar to actually I suspect majority of your listeners.

16:38Emad Aladhal: Yeah to make it work. And what are the next steps you know what are we going to be seeing next? So let me plug in a date the 28th of July is when the consultation closes so I would love it if all your listeners after this podcast go read it if they haven't read or read it, respond to it, give us their views about the idea, they have views about the consultation proposals. We've done it so that firms can respond. We've also done it in a way so that consumers can respond directly as well. And then post the 28th of July, we will listen to the feedback, we'll read it, we'll absorb it, and then later this autumn we'll come back, hopefully with the final rules.

17:25We've got a market study looking at later life lending. That market study is currently live. It is seeking to understand the drivers for that market forward. It's not backwards looking. It's trying to see how we can improve that market. Subject to the findings from that, which again complete roughly in this autumn, we will then push forward with hopefully changes that will drive better outcomes in later life lending in terms of its growth, in terms of its scale, in terms of sustainability. and then we will we have ongoing work on in the innovative advisory field as i mentioned the sprints this summer we aim to come back maybe end of this year early next year to talk about advice specifically and disclosure and how we utilize innovation and we have ongoing engagement on on consumers in vulnerable circumstances and how we help those for example who are suffering economic abuse we help them in that situation working with those in government and elsewhere it's a really packed agenda I was going to say you're busy we're busy but it's as hopefully you've noted in my voice we are passionate about what we're doing here

18:36Emad Aladhal: yeah that all sounds brilliant I mean we're going to have to look forward and see what happens now with this review and you know what the FCA puts out but it sounds like it's going to be a really busy next couple of years for you slot but Imad thank you so much for joining us today it's been a really great discussion thank you Amy And everyone else, you can tune in next week where we'll be discussing other goings-on in the industry. Thank you for joining us today.

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