Mortgages and the UK government’s pro-growth agenda: FCA outlines plans to refine and simplify regulatory regime

What’s happened?

In a press release and a letter to the Economic Secretary to the Treasury on 7 March, the FCA has set out the steps it is taking to improve access to mortgages as part of its work to support economic growth, a key priority of the government. 

These include: 

• Reminding firms of the flexibility available in current rules on interest rate stress testing and considering further changes in due course; 
• Working with experts through Open Finance to explore how smart data can enhance mortgage products and services; 
• Consulting in May on changes to simplify its mortgage rules; 
• Launching in June a public discussion on the future of the mortgage market. 

We have set out further details about each of these initiatives below. 

Consumer protection versus streamlined regulation: A delicate balancing act? 

In its letter to the Economic Secretary, the FCA emphasises that consumer protection and responsible lending will remain ‘core principles’ as it looks to refine and simplify current mortgage standards in line with an outcomes-based approach underpinned by the Consumer Duty. The FCA acknowledges that firm conduct and culture are ‘far stronger’ than at the time of the 2008-09 financial crisis. 

However, as the FCA works to simplify existing mortgage rules largely put in place following the financial crises,. it will be interesting to see how the FCA balances the competing demands of ensuring a ‘vibrant [mortgage] market’ that supports economic growth, maintaining consumer protection and protecting against wider risks to the UK financial system. 

The FCA’s announcements on its plans for streamlining mortgage regulation form part of its short-term pledges (ie implementable within the next 12 months) under the government’s policy paper containing a three-point action plan for ‘A new approach to ensure regulators and regulation support growth’ (Action Plan) which has now also been published. The government has couched the Action Plan in terms of reducing uncertainty and complexity across the UK regulatory system. For retail financial services, this appears to herald an increasing reliance on Consumer Duty outcomes.

As with the FCA’s now closed July 2024 call for input on how far it may be appropriate and beneficial to place greater reliance on the Consumer Duty instead of its specific rules and guidance, there will be an opportunity here for firms to help in shaping a leaner, less complex conduct regime for retail financial services more conducive to effective innovation and competition both nationally and internationally. 

However, firms should also bear in mind that a move towards more principles-based financial services regulation could also lead to more regulatory risk. As more prescribed rules are replaced with required outcomes, this could lead to an increased level of uncertainty as to where relevant regulatory boundaries lie and how to stay within them. For more on the July 2024 call for input, take a look at this Our thinking article. 

If you would like to discuss what this change of approach could mean for your business, please reach out to any of the people listed in this article or your usual Hogan Lovells contact. 

Mortgage interest rate stress test rule: reminder of flexibility and launch of call for evidence 

With interest rates falling, the FCA is concerned that the current market approach to interest rate stress testing may be unduly restricting access to otherwise affordable mortgages. For example, the FCA notes that many lenders currently stress test affordability by adding a margin to their current reversion rate. Where that reversion rate does not take account of future market expectations, this can result in an unnecessarily high stress test. 

To address its concerns, the FCA has published a reminder of the flexibility within its existing rules (specifically, MCOB 11.6.18R). The FCA highlights that MCOB 11.6.18R does not prescribe which rate(s) a lender should take account of when designing a stress test. It expects firms to apply an appropriate approach, considering the impact of expected interest rates on the customer’s ability to make payments. 

There is also a reminder of the Consumer Duty requirement for firms to deliver good outcomes for customers, including ensuring that products (which includes reversion products) provide fair value. 

The FCA is carrying out a broader review of its mortgage rules, including those relating to responsible lending (see also below). MCOB 11.6.18R will be evaluated as part of that review. To consider further improvements quickly, the FCA has issued a call for evidence on the impact of this rule. It takes the form of an online questionnaire and is open until 11 April 2025. There is also the option to upload a written response, data and evidence at the end of the questionnaire. 

Open Finance Sprint – March 2025 

In its press release and letter to the Economic Secretary to the Treasury, the FCA flags that later in March it will work with a wide range of experts, including from the mortgage sector, as part of its Open Finance Sprint. It will consider how improved smart data sharing can enhance products and services and inform its thinking on the future technological and regulatory framework. It will then work with industry, consumer groups and others to explore how regulation can be adapted to enable better digital journeys. The FCA anticipates that this will leverage the benefits of digital identity services and property information, in alignment with the government’s plan to digitalise the house buying process. 

Consultation on rules simplification – May 2025 

In May 2025, the FCA will consult on proposals to make it easier for consumers to: 

• remortgage with a new lender; 
• reduce their overall cost of borrowing through term reductions; and 
• discuss their options with a firm outside a regulated advice process. 

The FCA will also consult on retiring guidance where it considers that the Consumer Duty now ensures consumers are protected, such as its maturing interest-only mortgage guidance. 

Future of the mortgage market public discussion – June 2025 

In June 2025, the FCA will launch a public discussion on the future of the mortgage market. This will include consideration of: 

• risk appetite and responsible risk-taking; 
• alternative affordability testing and product innovation; 
• lending into later life; and 
• consumer information needs. 

As part of these initiatives, the FCA will continue to work closely with HM Treasury and the Bank of England, including the Financial Policy Committee and the PRA. 

Next steps 

As mentioned above, the FCA’s call for evidence on MCOB 11.6.18R closes on 11 April 2025. We will be keeping a close eye out for the other forthcoming mortgages related publications and will be providing further updates and insights in due course. 

In the meantime, if you would like to discuss any of the areas mentioned above or other aspects of the regulatory regime for mortgages or the government’s Action Plan for regulators and regulation (which also includes planned next steps for the government’s work on reviewing the current FOS framework), please get in touch with one of the people listed above or your usual Hogan Lovells contact. 

Authored by Stephen Timbrell and Virginia Montgomery.