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UK financial regulators have proposed allowing banks to lend more mortgages to first-time buyers with smaller deposits and lower incomes, as they respond to government calls for more risk-taking to stimulate the economy.
The proposals could see restrictions lifted for the riskier mortgage lending imposed on banks in response to the heavy losses of the 2008 financial crisis, when many lenders had to be bailed out by the government.
Nikhil Rathi, chief executive of the Financial Conduct Authority, told Keir Starmer this week that the watchdog was considering easing some of those restrictions to allow banks to increase their “responsible risk-taking” in the mortgage market, according to a person briefed on the letter.
A response was also sent to chancellor Rachel Reeves and business secretary Jonathan Reynolds.
The government has called on the FCA and other UK regulators to come up with ideas for rule changes that could increase risk-taking and investment in the economy, as the prime minister seeks to deliver on his promise to boost growth.
Starmer told investors last year that he would “tear apart the red tape that is blocking investment” in the UK, and Reeves this week called on regulators to explain how they intend to work to boost growth.
The FCA’s proposals, first reported by the Times, do not include specific details of any planned rule changes, but suggest consulting on whether mortgage lending rules could be relaxed to help more people own their homes now that they are in arrears rates fell to low levels.
Mortgage lending in the UK is controlled by a combination of FCA and Bank of England rules. They limit banks from having more than 15 percent of their mortgage loan book in loans worth more than 4.5 times the borrower’s income.
The FCA could also relax affordability tests to see if borrowers can cope with future interest rate rises and allow them to use evidence of past rent payments to borrow more.
Another area that could be examined is the amount of capital banks need to back mortgages worth at least 90 percent of the value of the assets they are backed by.
The Treasury said Reeves would examine the FCA’s proposals and work closely with the financial regulator to develop them further.
Reeves is said to believe that since the financial crisis there has been overly heavy-handed intervention by regulators to reduce risk at the expense of economic growth.
“The chancellor has said she will not return to the excessive risk of a financial crisis, but is committed to rebalancing the system over time,” the Treasury added.
The idea of easing mortgage rules was welcomed by Charles Roe, director of mortgages at trade body UK Finance. “A review of mortgage lending rules would help address the issue of affordability, not only for first-time buyers, but also for those looking to move further up the residential property ladder,” he said.
Some in the City of London warn that forcing regulators to prioritize growth over financial stability could be risky.
“Mitigating the build-up of risk within individual firms in financial markets in general without stifling growth has always been the role of regulators,” said Romin Dabir, financial regulatory partner at law firm Reed Smith.
“Some might say that an unrelenting focus on one of these goals could lead to the undermining of the other,” he added.
Another idea mooted by the FCA is to scrap the £100 spending limit on contactless card transactions, which was introduced over fears it could open the door to fraudsters.
The FCA declined to comment.
Starmer, Reeves and Reynolds wrote to 17 regulators before Christmas, telling them to outline potential growth measures that could help boost the economy, with a January 16 deadline for a response.
On Thursday, Reeves met with a half-dozen of those watchdogs, telling them they needed to make a “change in thinking about regulation” instead of an “excessive focus on risk.”
The FCA was not at that meeting but is expected to meet with Reeves in the coming days.
