The chief executive of the Financial Conduct Authority (FCA) has confirmed a decisive shift away from writing new rules, as he acknowledged the trade-offs of looser mortgage lending and signalled a more supervisory approach across markets including later life and protection.

In a wide-ranging interview on the Fairer Finance podcast, Nikhil Rathi, the FCA’s chief executive, said the regulator would increasingly rely on the Consumer Duty and supervisory powers rather than fresh regulation to tackle market failings.

His remarks come at a time when the mortgage market has been adjusting to changes in affordability expectations that have increased average borrowing capacity by around £30,000, with the majority of lenders responding.

MORTGAGE MARKET: ACKNOWLEDGING THE TRADE-OFFS

Addressing the impact of loosened mortgage lending rules, Rathi was clear that policy shifts come with risks as well as benefits.

He said: “Over the cycle, over an interest rate cycle, that might mean a modest amount of additional distress if interest rates rise significantly. You can’t do both, but there are benefits and there are costs of any policy shift.”

The changes have made an average £30,000 more available for mortgages, with 85% of the market responding and a “huge increase in first-time buyers last year.” Rathi expects “tens of thousands and potentially hundreds of thousands over the life of this parliament” to benefit.

For brokers and lenders, the comments amount to a public recognition that affordability flexibilities are not without consequence, even as they support access to home ownership and transaction volumes.

LATER LIFE LENDING AND HOUSING WEALTH

Rathi also pointed to structural pressures in later life finance, citing research from Fairer Finance suggesting that more than half of retirees will need to draw on housing wealth to meet expected living standards.

He said: “over half the population in retirement will need to access some of their housing wealth to get the living standards” they expect.

“But it’s also not good for society that people are retiring with incomes that are insufficient for the living standards they expect. And they’ve got housing wealth that’s locked up that they could access.”

The comments are likely to add weight to calls for further development of the later life lending market, including equity release and retirement interest-only mortgages, particularly as demographic pressures intensify.

A FUNDAMENTAL SHIFT IN REGULATORY APPROACH

More broadly, Rathi confirmed what many firms have sensed over the past 18 months – a move away from prescriptive rule-making towards an outcomes-based model underpinned by the Consumer Duty.

He said: “not every problem is going to be solved quickly by doing big interventions, more rules, bans, guidance.”

“I think that there’s a whole range of influences that are informing our willingness to write lots of new rules…. we’re moving to an outcomes-based approach, and that will mean less rules in the future because we think the Consumer Duty will do a lot of the work for us.”

In a candid reference to political pressure, Rathi added: “The Treasury, I think, weren’t pretty secret about their view that they weren’t a big fan of transparency, about our actions when it came to firms. They were very persuaded by some of the lobbying they received on that topic. Nonetheless, we are stepping up the way in which we communicate through our enforcement watch.”

He also suggested that questions around cross-subsidy in products such as credit cards and premium finance fall outside the regulator’s core remit.

“What is not within our mandate to decide on is some of the distributional questions that you’re pointing towards.”

“…there can be some areas of our work which intersect with social policy. And the issue that certain products may be more expensive for certain parts of society is not going to be directly something a regulator deals with. It becomes something that becomes a matter for government.”

James Daley, managing director of Fairer Finance, said: “This was a remarkably candid interview, and credit to Nikhil for being so open about the pressures the FCA is under and the trade-offs they’re making.

“We are of course disappointed to see confirmation that the FCA is stepping back from tackling problems with new regulation. While the Consumer Duty provides a useful framework for the FCA to tackle poor conduct on a firm-by-firm basis, there are a number of wider market failures that won’t be addressed without new rules or much clearer guidance.

“Nikhil’s comments will also be hard reading for those who are campaigning to eliminate the poverty premium. While there are certainly some social policy issues where the FCA may need the Government to take the lead, there are a number of areas that are within the FCA’s remit to address.”

The interview also touched on the forthcoming motor finance redress scheme, which Rathi described as likely to differ from the consultation following industry feedback, and on the regulator’s enforcement activity, with 40 outcomes in 2024 compared with 30 in 2023 and six Consumer Duty cases underway.

For the mortgage and later life sectors, however, the clearest message is that the FCA’s emphasis is shifting. Rather than further waves of detailed rule changes, firms should expect closer supervisory scrutiny under the Consumer Duty – and a regulator more openly weighing growth, access and consumer protection against one another.