The FCA's latest Consultation Paper 26/18 marks an important moment for the mortgage market, and with under a month until the deadline for submissions closes, I thought it was worth reviewing in the context of what might come next for lenders.
While much of the ongoing discussion has understandably focused on the greater flexibility it could provide lenders, perhaps the more interesting question is what they choose to do with that flexibility once it is available.
For well over 15 years, the regulatory environment has encouraged lenders to adopt some notably cautious approaches to credit risk. Following the global financial crisis, that was entirely appropriate. Responsible lending rules, tighter affordability requirements and enhanced supervision have all played a significant role in creating a stable mortgage market, one that has performed remarkably well even through periods of economic uncertainty.
However, those same rules may well have contributed to a culture where many lenders have become accustomed to operating within highly-defined parameters. In many cases, internal lending policies have become even more conservative than regulation itself requires. The FCA is now signalling a willingness to place greater trust in lenders’ own judgement. That presents an opportunity, but it also raises an important challenge.
Flexibility does not automatically create confidence
One of the assumptions surrounding the CP is that greater regulatory flexibility will naturally lead to more lending. The reality may not be quite so straightforward.
Regulation is only one factor influencing lending decisions. Boards, shareholders, funding providers and credit committees all have their own expectations around risk appetite, and those expectations are unlikely to change overnight simply because the regulator has removed some of the constraints that have shaped lending over the past 15 years.
Every lender has developed its own approach to managing risk, and for many institutions that has become deeply embedded within their culture, governance and decision-making processes. It would therefore be unrealistic to expect lenders to suddenly become comfortable lending into areas they have traditionally viewed as sitting beyond their appetite.
The consultation creates more opportunity, but it does not remove the need for prudent risk management.
A different way of thinking about growth
This is where mortgage insurance deserves a place in the conversation. Too often, mortgage insurance is viewed simply as a way of supporting higher-risk lending. In reality, it is far more flexible than that.
The real value lies in helping lenders pursue carefully considered growth strategies without fundamentally changing their overall appetite for risk. Rather than asking lenders to become more aggressive, mortgage insurance allows them to transfer selected elements of risk while maintaining the underwriting standards and governance frameworks they are comfortable with.
That distinction is important because the FCA is not encouraging reckless lending. It is encouraging firms to exercise more nuanced judgement. Mortgage insurance can help lenders exercise that judgement with greater confidence.
No two lenders will have the same priorities
One of the strengths of working with a managing general agent (MGA) such as Qualis is that mortgage insurance solutions do not have to follow a rigid, one-size-fits-all model.
Every lender has different commercial objectives, funding structures and strategic priorities. Some may wish to expand lending to first-time buyers through higher loan-to-income lending, while others may see opportunities at higher loan-to-value ratios or within specialist borrower segments. Some may simply want additional reassurance as they explore lending scenarios that have become less common over recent years.
Those ambitions are unlikely to be identical, and neither should the associated risk mitigation. Working alongside insurers, an MGA can structure solutions that reflect an individual lender's objectives, allowing risk transfer to be aligned with the areas where the lender wants to grow rather than forcing every institution into the same framework. That flexibility becomes particularly valuable if the consultation succeeds in encouraging lenders to think differently about their credit policies.
A natural fit with the FCA's direction of travel?
Perhaps the most interesting aspect of the consultation is that it moves away from a prescriptive approach towards one that gives lenders greater responsibility for their own decisions.
If regulation is becoming less standardised, it seems logical that risk management should become more flexible as well. Mortgage insurance should not be viewed as a substitute for sound underwriting, nor as a mechanism for encouraging lenders to stretch beyond their comfort zone. Instead, it should be seen as another tool that enables lenders to pursue opportunities in a measured and controlled way, while ensuring any additional exposure remains consistent with their own appetite for risk.
The FCA is seeking, it would seem, to create a changed environment in which lenders have more freedom to determine how they lend. The challenge for the industry will be deciding how best to use that freedom.
For many lenders, the answer may not be to take materially greater risks, but to manage those risks differently. If that proves to be the case, flexible mortgage insurance solutions could become an increasingly valuable part of the lending toolkit as the market enters its next phase.
