Rules protecting consumers will mean fewer mortgage applications, finance leader warns

A new consumer duty placed on financial firms could lead to lenders being more cautious and fewer people able to access a mortgage, the chief executive of trade association UK Finance has told an industry gathering.

David Postings told UK Finance’s annual mortgage lunch in London that the measure is a “well-meaning idea”.

He said: “We should be thoughtful about the application of the new consumer duty.”

Overseen by the Financial Conduct Authority (FCA), the duty will set clearer and higher standards of consumer protection across financial services, requiring firms to put customers at the heart of what they do.

The rules come into force on July 31 for new and existing products or services that are open to sale or renewal, and from July 31 next year for closed products or services.

Mr Postings comments follow warnings from the city regulator that an extra 356,000 mortgage borrowers could face payment difficulties by the end of June 2024, in addition to those who are already behind.

This has been reduced from a previous estimate made last September that an additional 570,000 mortgage borrowers could become financially stretched by the end of June 2024, the Financial Conduct Authority (FCA) said.

Mr Postings told lunch attendees: “Who could possibly argue that lenders shouldn’t have a duty to ensure a good outcome for their customers?

“I discussed this with senior members of the clergy recently and I pointed out that the term ‘good’ is not defined and it is likely to be in the eye of the beholder at a point in time. For a product like a mortgage, that could be at any time during its life.

“For example, would you choose a fixed or variable rate today? Which produces a good outcome?

“A fixed rate taken in September last year might have been seen as a prudential hedge against a rising rate environment; it looks less prudent just six months later.

“If you lost your job and moved to interest only or had a term extension, does that ultimately produce a good outcome if you pay more over the life of the mortgage? Who decides?

“In the absence of clarity, lenders are likely to take a cautious approach.

“That will almost certainly result in fewer people being able to access mortgage products and it will impact people’s sense of security and ability to own their own home or improve the home they already have.

“It is the feeling of retrospection that is most concerning, in my view. People make decisions based upon the prevailing rules and regulations. More and more we see these rules change.”

Mr Postings also said there is a need to remain vigilant as the housing stock changes to meet environmental objectives.

He said: “I worry that the easy policy option – pushing lenders to go green at a pace that essentially just greens balance sheets and not the housing stock – might prove hard to resist optically.

“This approach could have the unintended consequence of either creating energy-inefficient properties that are un-mortgageable or penalising those homeowners who cannot make the change easily, through the imposition of higher interest rates or local eco-taxes.”

“Both will result in the creation of a new cohort of property prisoners; something that as lenders you would not wish to happen.

“Consequently, we need to remain vigilant and stress the need to provide incentives that promote the feeling of security and inclusivity. The alternative undermines people’s confidence in housing.”

Mortgage lending criteria

Toughened mortgage lending rules have already been introduced after the 2008 financial crisis, to make sure lenders offer loans which are affordable.

The FCA has been carrying out a range of work, including issuing guidance, roundtable sessions and podcasts, to help firms to prepare for the new consumer duty.

At a UK Finance dinner last year, FCA chief executive Nikhil Rathi said: “The (consumer) duty puts the onus on firms to act to deliver good outcomes for consumers: to act in good faith, avoid causing foreseeable harm and support customers to pursue their financial objectives.

“We know that the consumer duty does not guarantee a good outcome. It leads firms to consider what that looks like and to take decisions in good faith.

“Firms must also give customers information that they can understand, point customers to products, services and post-sales support that meet their needs and offer fair value. These principles are not controversial.”

An FCA spokesperson said on Friday: “The consumer duty simply requires firms to make useful products, sell them honestly, price them fairly and provide decent customer service.”

Vicky Shaw, Press Association