Good news for first home buyers and the upwardly mobile as strict lending rules could be about to be relaxed
FCA chief executive Nikhil Rathi’s ears are probably still smarting. A few short months ago, a cross-party group of MPs and Lords called the department “incompetent at best, dishonest at worst.” That came on the back of Chancellor Rachel Reeves’ speech at Mansion House a few days earlier that was followed by a ‘remit’ letter telling the regulator to stop regulating just for the sake of it, and to have an eye on economic growth.
Following on from its dressing down, the FCA has now announced that it is considering relaxing the strict mortgage lending rules introduced after the 2008 financial crisis, sparking a debate on balancing economic growth with consumer protection. The move comes as part of a broader government-led initiative to boost the economy by reducing regulatory barriers.
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In a letter to Prime Minister Sir Keir Starmer, Chancellor Rachel Reeves, and Business Secretary Jonathan Reynolds, FCA chief executive Nikhil Rathi highlighted the potential for “deep reforms” to support growth through 2030. The proposals include simplifying responsible lending rules and revisiting affordability stress tests for mortgages. These rules, implemented to curb risky lending practices, require banks to test whether borrowers can handle higher interest rates and limit loans as a multiple of income or property value.
Rathi acknowledged that loosening mortgage rules could increase the number of first-time buyers and help existing homeowners move up the property ladder. However, he emphasised the need for "enduring acceptance" of potential failures and harm as part of risk-based regulatory choices.
“The balance between consumer protection and promoting growth is not an easy one,” he said. In what may be an attempt to push back, he challenged the politicians to give him metrics for "tolerable failures", ensuring that the push for growth does not compromise financial stability. This is not the first warning he has given Reeves or other politicians. Shortly before Reeves’ Mansion House speech he said that these changes would inevitably lead to more failures. “The test will come when things go wrong, and it will be crucial to see how parliament responds,” he said.
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The mortgage industry has been quick to praise the moves, with Charles Roe, director of mortgages at UK Finance, welcoming the potential reforms, stating, "Reviewing the mortgage lending rules would help with affordability issues, not just for first-time buyers but also those looking to move further up the housing ladder."
While many in the industry have embraced the prospect of change, some experts remain cautious. Sir Vince Cable, former Liberal Democrat business secretary, warned against repeating the mistakes of the past. “This seems ominously similar to trends two decades ago which culminated in the mad 125% Northern Rock mortgages and self-certification, which did not end well,” he said to the FT. He also cautioned that relaxing rules without increasing housing supply could exacerbate affordability issues by driving up demand.
The FCA’s letter also floated the idea of scrapping the £100 limit on contactless card transactions, aligning them with digital wallets that set their own limits. Other proposals include streamlining anti-money laundering checks, reducing transaction reporting for companies, and enabling startups to launch with partial authorisation.
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The Treasury has expressed interest in the FCA's recommendations, with Chancellor Reeves pledging to examine them further.
While the FCA’s proposals are aimed at spurring economic growth, they must undergo rigorous consultation and review. The debate underscores the challenge of fostering an environment conducive to growth without compromising financial stability or consumer protection.
