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The UK's financial watchdog has dealt a major blow to Sir Keir Starmer's pro-growth efforts, warning that its plans to ease large swaths of regulation will cause more failures that hurt consumers.
Nikhil Rathi, chief executive of the Financial Conduct Authority, told the Prime Minister the authority's commitment to scrap rules on mortgages and anti-money laundering checks would only succeed if it received a “sustainable acceptance” by the government “that we need to prioritize resources”. And there will be failures.”
Rathi called for the watchdog to be given “measures of acceptable failure”, telling Starmer in a letter issued on Friday: “We will not stop all the damage by making risk-based choices on the issues and intelligence we track.”
In response to the government's call for more pro-growth measures, Rathi said the watchdog would consult on lifting some restrictions on the most dangerous products. Mortgage loan Lending was imposed on banks in response to huge losses incurred by the 2008 financial crisis, when the state bailed out many lenders.
He said the FCA could “go further” by relaxing anti-money laundering requirements for companies to conduct customer identity checks for small transactions.
The letter, which was also sent to Chancellor Rachel Reeves and Business Secretary Jonathan Reynolds, committed to “deep reforms” to make economic growth “the cornerstone of our strategy, through to 2030”.
The government last month called on the Financial Conduct Authority and 16 other UK regulators to submit ideas for rule changes that could increase risk-taking and investment in the economy, as Starmer seeks to make good on his promise to boost growth – a core mission of his administration.
The Treasury Department did not immediately respond to a request for comment.
In response to an earlier Financial Times report that the FCA had proposed allowing banks to lend more mortgages to first-time buyers with smaller deposits and lower incomes, the Treasury said Reeves would study the regulator's proposals and work closely with it to develop them further.
The financial watchdog last year proposed a raft of pro-growth measures to make it easier for companies to go public, relaxing rules on bankers' pay, stripping disclosure requirements for investors and simplifying the 10,000-page rulebook.
Other proposals in Rathi's letter included plans to reduce reporting requirements that he said would benefit 16,000 companies, and allow startups to partially launch before meeting all requirements for a full license.
Rob Healy, of hedge fund trading body MFA, welcomed the plan to reduce transaction reporting requirements for asset managers, describing it as “duplicative and burdensome”.
The FCA said it could lift the £100 spending limit on contactless card transactions, which was imposed over fraud fears but does not already apply to contactless payments via phones.
The watchdog also said it “will begin to simplify the rules for responsible lending and mortgage advice, support home ownership and open a discussion on the balance between access to lending and default levels.”
Mortgage lending in the UK is controlled by a combination of rules issued by the Financial Conduct Authority (FCA) and the Bank of England. They restrict how much banks can lend as a multiple of a person's income or property value and require affordability tests to check whether borrowers are able to adapt to higher interest rates in the future.
Charles Rowe, director of mortgages at the UK Finance Authority, welcomed the idea of easing mortgage rules. “A review of mortgage lending rules would help solve affordability issues, not only for first-time buyers but also for those looking to get on the housing ladder,” he said.
Richard Donnell, chief executive at property portal Zoopla, said the “big hurdle” preventing more people from taking out a mortgage was the affordability stress test, which requires banks to test whether borrowers can adapt to higher borrowing costs. .
“This has come at the cost of pricing more people out of the market,” Donnell said, adding that before the recent rise in interest rates, lenders would typically stress test if borrowers could afford an interest rate of around 6 per cent, and that has risen. Up to 8-9 percent.
But Sir Vince Cable, a former Liberal Democrat business secretary in the 2010-2015 coalition government, said relaxing mortgage requirements could be too risky.
“It looks ominously similar to the trends of two decades ago, which culminated in the crazy 125 percent mortgages in Northern Rock and self-certifications, which did not end well,” he said. “Even if there were no systemic risks, this would add demand without supply – and we know where that leads.”
