Speaking to lenders at this morning's Council of Mortgage Lenders conference in London, director of conduct policy, Sheila Nicoll, said the regulator was merely consulting with the industry and other stakeholders about their thoughts on the future of interest-only mortgages.
She said: "There's a myth around interest only. Our discussion paper simply suggested that affordability could be better assured if each assessment was made on a capital and interest basis and there was broad support for this. But a number of industry voices had indicated that the problem with interest only went further and they encouraged us to wave our magic wand and apply additional measures going as far as possibly making new interest-only lending disappear.
"So our July consultation asked in a very open way for further thoughts on what those measures might be including whether any action was necessary at all beyond our basic affordability requirement. So we were a little surprised that with these open questions, the magic wand seemed to be being turned into the regulator's big stick, threatening to beat interest only out of the market.
"You only have to read the consultation paper to see that a crude ban on interest only was never our view. We have always acknowledged that interest only can be a sensible option for some consumers. What does cause concern is where consumers have no visible means of payment, where no questions are asked about how they intend to repay, and where it is clear that stretching affordability is the main reason for choosing interest only."
Nicoll added that the move by several lenders to restrict interest-only lending was not a result of the FSA consultation.
She said: "The truth is that we can't take credit. Several lenders changed their policies [on interest only] before we even signalled that we wanted to look more closely at this subject."
Nicoll also said that the FSA had received "thousands of pages" of responses on its second Mortgage Market Review consultation paper on responsible lending and was very pleased with the level of engagement.
She also reiterated that any changes to regulation would not be imposed on the market in a rush.
"We're not proposing instant change," she said. "We have a real wish to bring about long term improvement."
