Mortgage rules could be loosened by the City regulator as it comes under government pressure to increase economic growth and home ownership across the UK.
The move to “simplify responsible lending” for property purchases is part of a range of proposals put forward by the Financial Conduct Authority in an attempt to prove that the watchdog is not standing in the way of the Labour cabinet’s “growth mission”.
The FCA also aims to change the law to try to prevent a repeat of expensive mass compensation schemes for consumers, such as the payment protection insurance (PPI) scandal.
It follows complaints from investors and businesses over the potential costs of the car finance commission scandal, which could result in a combined £30bn bill for lenders such as Lloyds and Santander.
Regulators could end up reviewing how much first-time buyers are allowed to borrow and issue more loans to customers with smaller deposits, according to the Times, which first reported the changes. At the moment, banks are only allowed to lend 15% of their total mortgage loan book to people who are borrowing at least 4.5 times their annual salary.
The City watchdog said it was also considering removing the £100 contactless spending limit, “allowing firms and customers greater flexibility, drawing on US experience, and levelling the playing field with digital wallets.”
In a letter addressed to Keir Starmer and the chancellor, Rachel Reeves, the FCA chief executive, Nikhil Rathi, said the regulator was “already working to remove unnecessary regulation”. However, he promised to go further, including by helping give homebuyers a better chance of securing a mortgage.
Rathi said the FCA would start “simplifying responsible lending and advice rules for mortgages” in a way that would support home ownership. He added that this would involve “opening a discussion on the balance between access to lending and levels of defaults”.
The Bank of England scrapped rules that required lenders to check whether homeowners could afford mortgage payments at higher interest rates in 2022. While the affordability check was designed to avoid another 2007-style credit crunch, the Bank said at the time that other rules, including the current cap on loans based on annual income, was likely to play a stronger role in guarding against an increase in household debt.
Some members of the property industry have argued that looser mortgage rules are the only feasible way to get more first-time buyers on the housing ladder. But others say it could lead to a further jump in house prices and result in borrowers taking on more debt than they can afford.
“There is a risk that enabling people to borrow more will once again send house prices skyrocketing,” said Jonathan Moser, the chief executive of the London-based property management company Mo’Living. “That arguably risks leaving people exposed as they may have overborrowed and potentially overpaid. The government, along with regulators, should tread carefully. The theory is good but the practice could have unintended consequences.”
The FCA said it wanted to avoid future mass consumer compensation schemes such as the one rolled out as a result of PPI mis-selling, which cost UK banks £50bn.
Meanwhile, businesses fret over the looming costs of the car finance commission scandal, which City firms claim is dampening foreign investors’ appetite for UK company shares. The scandal, which relates to the way commission was disclosed to consumers, could cost lenders up to £30bn in compensation.
While the FCA aims to prevent wrongdoing in the first place, the regulator is consulting on how it can identify and address problems more swiftly, to avoid a need for massive compensation programmes in future.
“We can never rule out firms having to pay redress for serious misconduct,” Rathi’s letter said. “However, through proactive management of issues, and improved coordination with the Financial Ombudsman Service, we aim to prevent further significant FCA-led consumer redress exercises. As part of that, we are considering reforms to the redress framework which may need legislation.”
The FCA was responding to a letter from Reeves and Starmer, who contacted 17 UK regulators on Christmas Eve to tell them to put forward pro-growth proposals. Ministers are now summoning regulators to Downing Street for check-ins, in order to review their proposed plans and progress.
The FCA will be among those hauled into No 11 in the coming weeks.
