When 'perfect’ isn’t good enough – the strange case of the regulator and mortgage risk
27 June 2025
Bob Hunt
27 June 2025For over 15 years, we have operated in a lending environment shaped by the hard lessons of the credit crunch. One in which the FCA, and its predecessor the FSA, set clear expectations: lenders must lend responsibly, affordability must be robustly assessed, arrears and possessions must be kept to a minimum, and the mortgage market must avoid the pitfalls of the pre-2008 era.
This era created what many now regard as a ‘model’ mortgage market, where firms have developed and maintained high-quality loan books, with consistently low arrears levels and strong customer outcomes. Add into this the still relatively new Consumer Duty focus and you might think this is a model worth maintaining.
And yet? Well, now the tone from the top seems to be changing, with a large degree of government interference apparently forcing something of a recalibration at the regulator level.
Nikhil Rathi, the FCA’s chief executive, has been quite candid in his recent remarks: if the UK wants to stimulate growth and improve access to homeownership, it may have to accept that “one or two things are going to go wrong”, that some defaults and even some fraud may be an inevitable part of a more “balanced” risk environment. The FCA’s new five-year strategy talks about “rebalancing risk” and encouraging growth, suggesting, quite explicitly, that lenders might need to move away from the risk appetite that has defined the market since 2008.
It’s an odd moment to be having this conversation. We have, through painstaking effort and cultural change, arrived at a mortgage market that is widely viewed as functioning pretty well.
Lenders have become more comfortable in their decisions, albeit as always you sense that some are less than comfortable with such huge percentages of their business coming via the adviser channel, product innovation still exists within the boundaries of responsible lending, and even in segments considered higher risk – higher loan to values (LTVs), later life lending, adverse credit – the market has found ways to operate effectively and safely. Which begs the question: why this sudden push to introduce more risk?
What troubles me most is the implied suggestion that lenders’ books might be somehow too good. That they are, in effect, too ‘perfect’ as if low arrears rates are somehow a sign of underperformance or missed opportunity. That seems an incredibly odd place for a regulator to start.
Are we now in an environment where having too few defaults is cause for regulatory concern? Where not enough people failing to repay their mortgage is seen as a market failing? I think most of us would agree that this is a slippery slope, and one that is hard to reconcile with either the FCA’s statutory objectives or the broader responsibilities of Consumer Duty.
Encouraging riskier mortgage lending seems unwise
We are not talking about mobile phone contracts or car loans here. We are talking about people’s homes, their largest financial commitment, often spanning 25-35 years, and an area where poor decisions, whether by lenders or borrowers, have far-reaching consequences. It seems perverse to risk undermining the very stability the regulator has championed for over a decade in the name of stimulating short-term market activity.
Compounding this concern is the FCA’s CP25/11 consultation. In my blog last month, I warned the proposals in the CP represent yet another attempt to diminish the value of advice in the mortgage process.
In effect, the regulator appears to be suggesting: let’s allow more people to proceed without advice, let’s ask lenders to accept more risk, and let’s acknowledge that defaults might rise, but that’s okay because it’s all in the name of growth.
Again, I come back to the same question: is this really the FCA’s role? To encourage riskier lending, in a market where the consequences of failure are not minor or peripheral but central to people’s financial wellbeing and stability?
And what of those lenders who have chosen not to follow that path in recent years, who have made strategic decisions to remain responsible, to avoid the more volatile areas of the market, or to limit their exposure to loans they perceive to be higher risk?
Should they now feel pressured to increase their risk appetite simply to align with a new regulatory mood music? That feels dangerously close to overreach. And for a regulator that has spent years stressing the importance of culture, governance and prudent decision-making, it would be an unfortunate and confusing reversal.
Ultimately, lenders are already making positive lending decisions, those that balance commercial needs with responsible underwriting and good customer outcomes. Add in the strength of advice in our market, where the vast majority of recommendations – and, therefore, mortgage decisions – come through regulated professionals, and it feels like we have a very strong foundation on which to develop further.
To suggest lenders should now consider making riskier decisions, simply because things are working ‘too well’, seems not only unwise, but also potentially damaging to the long-term health of the market.
