The Financial Conduct Authority (FCA) is exploring the possibility of loosening mortgage regulations to aid home ownership in the United Kingdom. This move comes in response to a request from the Chancellor and the Labour leader, who have urged 17 UK regulators to propose measures that could stimulate economic growth. The FCA aims to simplify responsible lending and advisory rules concerning mortgages, while also ensuring that future mass consumer compensation schemes, reminiscent of the PPI scandal, are avoided.
The Payment Protection Insurance (PPI) scandal previously cost UK banks a staggering £50 billion in compensation. To prevent similar occurrences, the FCA is consulting on how to identify and address potential issues more swiftly. The goal is to avoid the necessity for large-scale compensation programs in the future. The regulator is actively working to eliminate unnecessary regulations and considers revising borrowing limits for first-time home buyers.
Currently, borrowers can only secure loans at least 4.5 times their annual salary, with a 15% cap on loans based on annual income of the total mortgage loan book. By potentially increasing the borrowing limits, the FCA is considering issuing more loans to customers with smaller deposits. However, this proposal carries inherent risks. Jonathan Moser commented:
“There is a risk that enabling people to borrow more will once again send house prices skyrocketing,” – Jonathan Moser
The FCA's initiative also aims to prevent future expensive consumer redress exercises. The regulator is addressing concerns from businesses and investors regarding the costs associated with the car finance commission scandal, which could result in a £30 billion bill for lenders. To tackle this issue, the FCA is collaborating with the Financial Ombudsman Service to prevent significant FCA-led consumer redress exercises. Nikhil Rathi, Chief Executive of the FCA, stated:
“We can never rule out firms having to pay redress for serious misconduct,” – Nikhil Rathi
Rathi emphasized the importance of proactive management of issues, aiming to minimize the potential for large-scale compensation efforts in the future:
“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.” – Nikhil Rathi
The regulator's consideration to relax mortgage rules aligns with its objective of supporting sustainable home ownership without repeating past mistakes. However, experts caution against potential unintended consequences:
“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.” – Jonathan Moser