Government should state risk tolerance for harm when easing regulation, says FCA chief

The UK government needs to give guidance on what an “acceptable outcome” would look like if the regulator eased borrowing standards or moved the line between advice and guidance, said Nikhil Rathi, Financial Conduct Authority (FCA) chief executive, last week. 

“One of the reasons we have opened the debate around mortgages, for example, is because it would be very valuable for the entire system — namely, for the government, who are of course accountable to Parliament — to give a view on risk appetite,” said Rathi. 

The FCA head was giving evidence to the House of Lords Financial Services Regulation Committee hearing into the UK financial regulator’s secondary competitiveness and growth objective.  

He asked the committee what it would consider to be an acceptable level of repossessions if relaxing rules for mortgage borrowing led to an increase in defaults. 

“If the numbers were to go up from 1,000 to 2,000 after we had relaxed lending standards, would that be considered an acceptable outcome here in Parliament?” he said, or would Parliament ask the FCA why it allowed defaults to go up by 100%? 

Mortgage Charter

The previous Conservative government had decided it wanted to keep people in their homes and so the Mortgage Charter was created, Rathi said, adding the decision had cross-party support. At the time, millions of borrowers faced significantly higher mortgage rates when their existing deals expired, while also feeling financial pressure from the cost-of-living crisis. 

The charter requires mortgage providers to give borrowers a grace period of one year from the date of a first missed mortgage payment before commencing repossession proceedings. It also gives borrowers the right to switch to an interest-only mortgage for up to six months. 

“When the mortgage charter came in last year, pretty much every major party told us to keep repossessions down — and we did. But that is not consistent with relaxing the lending standards. On the other hand, the benefit of [relaxing rules] is you could potentially allow a lot more first-time buyers into the market, who are paying very high rents right now,” Rathi said. 

“There are positive benefits for the economy, which we should articulate through cost-benefit analysis and so on. Ultimately, however, we need some political discussion on the risk calculus, which needs to stick over time.” 

Advice/guidance boundary

Rathi said there was a similar discussion needed on proposed changes to the advice guidance boundary. In December 2024, the FCA proposed a new targeted support regime for pensions. 

“We want to enable the industry to say, ‘For people like you, this is, broadly speaking, the kind of thing that you should be going for’, which could include investments. That will mean that, for some people, it will not be the perfect piece of rounded advice.

“Therefore, the risk appetite question for us, again, is: if it works for 95% of the people who take advantage of it, but not for 5%, is that an acceptable overall balance that will withstand scrutiny here in Parliament?” he said. 

Rathi previously set out a full list of regulatory areas the FCA could revise in the interests of meeting the government’s desire for economic growth, in a January 16 letter to Prime Minister Keir Starmer.