FCA mortgage review: desires, predictions and cautions

0:03Hello and welcome to the FT Advisor podcast. I am your host for this episode, Senior Reporter Tom Dunstan, and I'm delighted to be joined by SJP Divisional Director of Third Party Products and Services, Tony Mudd, and AMI Head of Policy, Stacy Penn. A very warm welcome to you both. In May, the Financial Conduct Authority announced it was seeking a public conversation on the future of the mortgage markets as part of its work to help consumers navigate their financial lives and to support economic growth. This follows findings in 2024 that 68 % of first-time buyers borrow for terms of 30 years or longer.

0:39Feedback on the discussion paper will close on September 19th, 2025, and before recommending any changes to its rules, the FCA will focus on how consumers and the market are protected. But while this consultation is underway, there are questions concerning what the FCA will announce at its closure and how this will differ from industry expectations and wishes. Just to be clear today, we are specifically talking about the FCA's DP25-2 discussion paper, which is still collecting feedback, because I know a consultation paper on the view has already been closed, So we will be talking specifically about the discussion paper that is due to end in September.

1:15So just to start off with, maybe if I can come to you first, Tony, what changes are the FCA considering? If you give us a little bit of background on the on the issue. I think it's probably worth pointing out that actually it's the FCA and the Prudential Regulatory Authority. And this forward recommendation is from the Bank of England's Financial Policy Committee. So the big one is the review of the loan-to-income, what's called the loan-to-income flow limit, which has been in place since 2014, I think, which is a rule that caps the percentage of new mortgages that lenders can issue at four and a half times the borrower's income.

1:56Specifically, no more than 15 % of a loan book can be higher than this level. There's also a, they've raised the de minimis threshold from£100 million to£150 million in annual residential mortgage lending from the 11th of July. This just means smaller lenders issuing less than these amounts aren't subject to the loan-to-income capital, which again should boost competition and innovation in the market. And are these reforms you just mentioned, are they needed in the current climate? Because I know the FCA has talked a lot about the decrease in first-time buyer ownership recently. So is that to address this first-time buyer drop?

2:43Listen, I think it absolutely will help. I mean, it is clearly part of the government's larger growth agenda and, of course, their freedom to buy policy, which is looking at 95 % mortgages. But yes, I think the biggest cohort of individuals that will benefit from this is almost certainly first-time lenders who are struggling to get on the property ladder, particularly in areas where property is high. London obviously would be an example. Other areas in the southwest probably as well. But they're certainly not the only ones where actually changing the loan to income and allowing greater multiples will help people.

3:29It isn't just first-time buyers. It's probably anyone on the mortgage ladder who are trying to sort of upscode, if you like. But certainly, I think first-time lenders will see the biggest benefit. And it will also help people not have to spend so much time accruing money to put down as a deposit. I mean, we're now looking at sort of two and a half times income for minimum deposit, whereas even five years ago, I think it was down at 1.9. So I think these rules are welcome for me. Yeah, and I'd agree with Tony that it does go further than first-time buyers, because in the discussion paper, we've got this piece around later life lending, and that looks at that from two ends of the spectrum.

4:19people that are in later life now or exploring their options but also customers that at the moment first-time buyers at the start of their journey that are taking out these longer-term mortgages and seeing what role that plays and that later life will by its very nature because of what's happening in the market extend more into the the standard market so it very much goes the discussion paper goes a lot broader and deeper with a longer term lens than I think what we've seen from the FCA before. That's a really interesting point that Stacey raised there because a lot of, certainly not only, but a lot of the later life lending market is around sort of people borrowing to meet social care costs and we know that social care system been broken in the UK.

5:16So maybe this is the government's sort of backdoor way of trying to get more finance so that people can afford decent care in their later life. But again, these rules will absolutely help that area. I don't think we can underestimate the role of government, as Tony's touched on, in all of this, in that driving economic growth, supporting home ownership. So there's a fair amount of positivity around these proposals, specifically for first-time buyers and later life as well? Yeah, I think there is positivity in the sense that the FCA and other stakeholders are being brought together to discuss this.

5:54And I think it's a good signal that this area of the market is really important. There are some pockets that Amy has concern around, some of the bits around the advising and selling standards. the FCA has touched upon this concept of enhanced versus standard advice and that does concern us because I think customers need to have choice on the type of advisor or the type of advice service that they're getting and I think anything that does look to potentially maybe not restrict that but label it is not great for competition. Tony if I can ask you if you have any concerns like Stacey's or anything about the proposals that worries you slightly?

6:42Yes I think any change will always result in risk there's always going to be risks when you ease lending roles it's important not to gloss over them the main one probably is an increase in household debt higher loan to income mortgages mean borrowers are stretching themselves more, which could lead to repayment struggles if interest rates rises or income drops, or life events like job losses or long-term sickness occurs. And we've seen from past cycles that over-leveraged households can actually sort of amplify economic downturns. So yes, it does come with its risk, but thanks for the of those risks can be managed.

7:33I can't overstate the importance of people taking out appropriate levels of protection, whether that's life assurance, good and wellness, or in particular income protection. But you can't always de-risk these issues. Yeah, and protection is the part for me that's actually missing from this wider discussion paper, which is something that we have been pointing out to the regulator particularly they're doing their market study on the pure protection market and we know from our own research at amy that a mortgage is the top trigger for a protection purchase so it's important for the different parts of the fca to work together and not in silos because they could make one change over here that then has an impact over here particularly as the fca acknowledges itself that there is a protection gap so i definitely echo tony's point around that role of protection it's just how we can bring that into this conversation it's also worth pointing out that you know the PRN this year have been at sort of pains to sort of build in some mitigations like basically the temporary nature of the modifications and ongoing review um and also we shouldn't forget that the lenders must still do rigorous affordability checks um so So yes, risks exist, but there is some mitigating factors as well.

8:58Yeah, I do think there is something to be said around taking an iterative approach. So we've already spoken a bit around what we've seen on the LTI flow limit. We had the FCA come out earlier this year to give their statement around stress testing flexibility, which has resulted in positive changes within the market. and it's not about going back to where we were before pre-financial crisis but I do think there is something to be learned from what came before and perhaps an approach where you are making small tweaks like we've seen at the moment seeing the impact reviewing where there might be other areas of regulation that's hindering rather than supporting I think is a sensible approach.

9:43And what would be your I suppose your dream outcome from this what would you like to see happen versus what do you think will happen? Expectation versus ambition. Are you asking us to put our cynical hat in?

10:03I think these changes they are temporary. It does, in theory, they only last until the middle of next year but I think that's undoubtedly because there's this review going on at the same time. I think this will absolutely represent a boost to the housing market and probably to a certain extent in the economy as well. The increased flexibility for lenders is almost certainly likely to stimulate the housing market by enabling more transactions. It's pretty sort of linear in that respect. I think it does also support, as I said previously, the sort of Chancellor's Freedom to Buy scheme. What do I expect to happen?

10:51I actually expect all those things to happen. And as I said, the risks are there, but there's enough mitigation for us, I don't think, to be overly worried about it. I mean, the reaction from the industry has been overwhelmingly positive. Building Society Association, I think, called it a step in the right direction. I've seen a number of lenders already jumping on board, nationwide in particular. So, yeah, I'm very positive, but interested in the status of you. Yeah, what I'd like to see happen, because the discussion paper is so broad, I think the next steps will be the FCA will consider the feedback, decide upon which areas they're really going to hone in on, and then we'll see a consultation with a bit more detail around this is what the rule changes look like.

11:43So I think it's hard to say at this stage. I think what's really encouraging within the discussion paper is this bit around innovation. How can we expand on that? Something we've been floating as an idea when we've been having discussions within Amy is this piece around we've got the types of family springboard mortgages where first-time buyers can get help from parents or it might be grandparents and that deposit is used as a guarantee and I know that Nikhil Rathi at the FCA has explored this as well but is there a piece around not pulling out your pension to use towards a deposit but in the similar vein of the springboard mortgage concept using your pension as a guarantee so i think the discussion paper is a great starting point to help get people talking about these ideas so we can actually make meaningful change yeah the flip side of that uh actually i don't disagree some of those things that you already mentioned you know could be you know quite you know really valuable innovations but but the flip side is that because of the changing in rules and the ability to take a greater multiple income might actually stifle innovations because i mean back to england estimates already that there's unused capacity and this change in the in the loan to income lending rules trans will already translate to approximately 36 000 additional mortgages well if that alone provides greater access to mortgages for first-time borrowers and others on the looking to purchase property then providers might think that we actually don't need to innovate so i think there's that possibility as well so it sounds like please correct me if i'm wrong but uh there is a lot of positivity around the idea of this is a starting point is a that will blossom into other areas of innovation and protection and move and spread throughout the industry is that about correct but the the seo have shown in many aspects and not just the mortgage industry there if they don't get the desired result they are very quick to step in and change things so if this loan um to income ratio changes and all they see is you know sort of straightforward will just allow you to have greater um multiples and we don't and the fca don't get the innovation that they clearly are looking for i think they'll um i think they'll sort of step in and make further changes?

14:21I think for me it's also around this is just one piece of the puzzle and I know a lot of this is beyond the remit of the FCA but there is this whole housing ecosystem that needs to function well and it's how we bring everyone together. We know that there's huge pressure on social housing, there's not enough housing stock as it is so that's one area that needs to come into the conversation. We talk a lot about the government's house building target. It's not just about the numbers, but how are we building homes that are not just affordable? But, and this touches upon an earlier point, I think Tony made around movement in that secondhand market, movement for those looking to downsize, to free up more of those family homes.

15:09So I think, yes, it's positive as a starting point, but there needs to be this coordination through lots of different parts of the system. So we have talked a lot about consumers and customers so far. I just wanted to laser focus on advisors and ask how this will affect them, really, because obviously they're quite a large part of this consultation. Yeah. So I mentioned our concern around this enhanced versus standard advice, and that's something we will be discussing with the regulator this week we're having meetings with them to talk through some of our concerns from our members perspective and there is a piece in the discussion paper that also looks at the idea of qualifications whether advisors should be required to hold a level four rather than level three um and i think our view on that is that what the fca is perhaps looking to achieve in that area could be done less formally through cpd routes rather than qualifications um so there's a lot in there that um could impact advisors i think what i've seen in this discussion paper which is more encouraging than perhaps what we've seen in consultation paper that came back in May is more of a recognition from the FCA on the role of advisors, the value they provide.

16:43They are, from what we're seeing coming out of the regulator in this paper, they are being considered as a central core part of this home buying process. Our view is certainly, as Stacey says, we would much rather see if the FCA wants to look at further if you like accreditation we prefer CPD, we think that's a much more appropriate way of ensuring advisors are kept up to date but I think these changes have to be welcomed by advisors ultimately it means more people will be able to actually take out mortgages more people will actually require advice because it's going to be absolutely essential that they understand that where they do need a higher income multiple, they need to take advice so they understand what the risks of doing so are involved.

17:43And as we've discussed already, the need, the importance that protection can play in that. This absolutely has to be very positive for advisors. I'm sure they will all see it as such. yeah and I think a lot of this what we've seen from the changes that have been made to the LTI flow limit and the flexibility that has made the headlines and it all feeds into that consumer sentiment and I think it does help there may be potential first-time buyers reading those headlines that thought home ownership was so far out of their reach and that might encourage them to get in touch with an advisor, explore some of their options and have that advisor there to hold their hand throughout that process.

18:31So I agree with Tony that advice remains key. It's a point I've not really thought about before of its very existence of increasing optimism amongst buyers and driving more business towards advisors. Yeah, and I think the government's been very vocal around this as well. we saw the Chancellor speaking last week around some of these changes Tony's mentioned the freedom to buy which is what they're renaming the mortgage guarantee scheme so I think it's just there's lots of different outlets that are talking about what's going on in this sector which can only be good. So I wanted to pick up on a point that Tony made earlier in terms of industry reaction I believe, Tony, you said that it's been fairly positive so far.

19:23Certainly for everything I've seen and read, it's overwhelmingly positive. As I said, the Boone Association called it a step in the right direction. They will help first-time buyers access home ownership. I think the UK finance themselves described it as a pragmatic move. And I would say we've already seen a number of banks and building societies make positive change. and I think if you even go on to things like X you'll see a number of experts talking about big news and creating 36 ,000 more mortgages for first-time buyers etc so yeah I mean I have not yet seen anything particularly negative.

20:05Yeah I think from our perspective we're in the initial stages of because there's so much in the discussion paper talking that through with our members we're setting up some working groups because it spans later life disclosures selling standards we're drilling down really into some of the proposals um but i think generally just to reiterate what i'd said before is that it is encouraging how much focus and time is being spent on this um which is definitely encouraging so it's good uh there's not been any vocal i suppose detractors to this so far um i think there's like i've said there are pockets that do concern us at amy um which we will be be reviewing and uh focusing on within our response um yeah i think in terms of a a package of ideas and concepts it's it's a good starting point yeah i think i think you also have to bear in mind that there's no reason to believe that all enders will choose to um to increase their uh their loan to income lending um some lenders risk appetites will vary some may prioritize financial stability ever expanding their loan books and we are also talking about this really having greatest prominence in in high cost areas borrowers in lower cost regions may see less impact um that we could even see it worst case scenario exacerbating regional inequalities in housing affordability and if you're looking for sort of potential sort of negatives but um for me the positives outweigh the negatives the only other thing i was going to say is that it's it's not going to be the silver bullet but um yeah we welcome the discussion i'm sure it's very frustrating financial services that there never seems to be a silver bullet it's always incremental improvements but uh yeah uh so i wanted to go back to the question i asked the staff there are questions concerning the fcas uh what it will announce that it's a closure how it will differ from industry expectations and wishes so i just wanted to get uh your uh opinions really on this what you think they're going to announce and how it will differ from industry expectations really it's quite a hard one to answer and that's not a cop-out response but just because there is so much in there and we're at i think we need to remember it is a discussion paper so it is this start where the fca really is throwing out lots of ideas then it will look at the feedback see where there's support where's their where where is their opposition are there areas that maybe they'll shelve completely are there parts that they will run with um so i do think it is too early to to answer that question i think the only thing i would comment is that um having had that that cap and i naturally sort of artificially reduced the amount of retail borrowing that was available um you sort of you sort of let the genie out the bottle i think it would be really hard in june of next year which is when this sort of temporary facility is is due to expire it'd be really hard for the fca to say i'm kidding um no the reality is that once they've done this they would have to have really strong reasons to believe this was to the consumer detriment for them to say no we're going back to a 15 % limit.

23:51And as I said earlier, don't forget this is not just the FCA and PRA, it ultimately came as a recommendation from the Bank of England as well which, okay, it's almost certainly sort of prevailed by government and their growth agenda but I'd go back to the same point it would be very difficult if not I think impossible for them to to go to 15 % they may introduce a different number but but I think this ability to allow more to be lent in a higher multiple than 4.5 I think is here to stay so it's a bit too early to say anything concrete right now but there's a lot of positivity and anticipation that it's going to be something soon Is that about right?

24:41Absolutely. For me. Yeah, I think it is a good driver for change as long as that change happens in the right areas. And I know I'm repeating it again, but the meaningful change part. So, yeah, I think overall it's positive for the sector, but the devil is always in the detail. And that's what will come later on in the year once this discussion paper closes in September. I always enjoy finding a very nice, positive note to end on. So thank you very much, both of you, for joining me. That's all we have time for on this edition of the FT Advisor podcast. But please join us on the next episode. Thank you very much for listening.

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