The Prudential Regulation Authority and Financial Conduct Authority have published proposals setting out how mortgage lenders should approach higher levels of loan-to-income lending, following recommendations from the Financial Policy Committee.
The plans would remove the current 15% flow limit on high loan-to-income lending from the rulebook, replacing it with a more flexible, risk-based framework that allows firms to set their own appetite within defined governance structures.
Under the proposals, lenders would be given greater discretion to increase high loan-to-income lending where the overall market remains below the 15% threshold. However, this flexibility would be conditional on firms maintaining robust risk management systems, internal controls and clear governance arrangements.
The regulators said firms already active in this area should not need to make significant changes to existing practices, provided their current frameworks are sufficiently prudent.
Both regulators are placing emphasis on firms defining their own limits and ensuring they understand the impact of higher loan-to-income lending on their financial resilience. This includes embedding the risks into existing systems and controls, as well as ongoing monitoring of loan performance and exposure to higher-risk segments.
BOARD OVERSIGHT AND CONTROLS
A key element of the proposals is the role of senior management and boards in overseeing higher loan-to-income lending strategies.
Firms that choose to lend above the 15% level would be expected to demonstrate clear board oversight, including the ability to reduce volumes if required by regulators. This would involve regular monitoring of lending flows, credit concentrations and portfolio performance.
By contrast, firms operating below the threshold would not be subject to the same level of board scrutiny, although they would still need appropriate governance frameworks in place.
The regulators also expect lenders to be prepared to scale back high loan-to-income lending if the overall market exceeds acceptable levels, ensuring the aggregate flow remains aligned with policy expectations.
SUPERVISORY ENGAGEMENT
Lenders planning to increase their exposure to higher loan-to-income lending would be required to engage with supervisors and notify regulators of any material changes to their risk appetite or strategy.
This is intended to give regulators greater visibility over market trends and allow for intervention where necessary to maintain financial stability.
“lenders will need strong governance, monitoring and board oversight where high loan-to-income lending forms a significant part of their mortgage strategy”
Damien Burke, head of regulatory practice at Broadstone, said: “This consultation makes it clear that lenders will need strong governance, monitoring and board oversight where high loan-to-income lending forms a significant part of their mortgage strategy.
“Firms will need to carefully manage lending pipelines and risk appetite, particularly if the overall market approaches regulatory limits and individual lenders are required to slow high loan-to-income lending.
“Individual and ongoing affordability assessments will remain central, so this is less about encouraging riskier lending and more about ensuring firms have the controls, oversight and processes in place to manage higher LTI lending responsibly.”
The consultation signals a shift towards greater flexibility for lenders, but with a corresponding increase in accountability for how higher-risk lending is managed within firms.
