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The UK financial watchdog has sent a shot across the bow of Sir Keir Starmer’s pro-growth push, warning that its plans to water down swaths of regulation will cause more failures that harm consumers.
Nikhil Rathi, chief executive of the Financial Conduct Authority, told the prime minister that its commitment to wind back rules over mortgages and anti-money laundering checks would work only if it had “enduring acceptance” by the government that “we need to prioritise resources and that there will be failures”.
Calling for the watchdog to be given “metrics for tolerable failures”, Rathi told Starmer in a letter released on Friday: “We will not stop all harm when making risk-based choices about the cases and intelligence we pursue.”
Rathi, in his response to the government’s call for more pro-growth measures, said the watchdog would consult on lifting some of the limits on riskier mortgage lending imposed on banks in response to the heavy losses of the 2008 financial crisis, when many lenders were bailed out by the state.
He said the FCA could “go even further” by relaxing anti-money laundering requirements for companies to carry out checks on the identity of customers for smaller transactions.
The letter, which was also sent to chancellor Rachel Reeves and business secretary Jonathan Reynolds, committed to “deep reforms” to make economic growth “a cornerstone of our strategy, through to 2030”.
The government last month called on the FCA and 16 other UK regulators to present ideas for rule changes that could increase risk-taking and investment in the economy, as Starmer seeks to deliver on his promise to boost growth — a core mission of his administration.
The Treasury 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 examine the regulator’s proposals and work closely with it to develop them further.
The FCA last year proposed a raft of pro-growth measures to make it easier for companies to go public, lighten rules on bankers’ pay, strip back the disclosure requirements to investors and streamline its 10,000-page rule book.
Other proposals in Rathi’s letter included plans to reduce reporting requirements that he said would benefit 16,000 companies, and to allow start-ups to partially launch before they have met all requirements for full authorisation.
Rob Hailey at hedge fund trade body MFA welcomed the plan to reduce transaction reporting requirements for asset managers, calling them “duplicative and burdensome”.
The FCA said it could raise the £100 spending limit on contactless card transactions, which was imposed because of fears of fraud but already does not apply to contactless payments via phones.
The watchdog also said it would “begin simplifying responsible lending and advice rules for mortgages, supporting home ownership and opening a discussion on the balance between access to lending and levels of defaults”.
UK mortgage lending is controlled by a mixture of rules from the FCA and the Bank of England. They restrict how much banks can lend as a multiple of a person’s income or the value of a property and require affordability tests to check if borrowers could cope with future interest rate rises.
The idea of easing mortgage rules was welcomed by Charles Roe, director of mortgages at trade body UK Finance. “Reviewing the mortgage lending rules would help with affordability issues, not just for first-time buyers but also those looking to move further up the housing ladder,” he said.
Richard Donnell, executive director at property portal Zoopla, said the “big hurdle” preventing more people from getting a mortgage was the stress test of affordability, which requires banks to test if borrowers can cope with a rise in borrowing costs.
“This has come at the cost of pricing more people out of the market,” said Donnell, adding that before the recent rise in interest rates, lenders typically stress-tested if borrowers could afford a rate of about 6 per cent and that had risen as high as 8-9 per cent.
But Sir Vince Cable, former Liberal Democrat business secretary in the 2010-2015 coalition government, said relaxing mortgage requirements could be highly risky.
“It seems ominously similar to trends two decades ago which culminated in the mad 125 per cent Northern Rock mortgages and self-certification, which did not end well,” he said. “Even if there is no systemic risk, this would add demand without supply — we know where that leads.”