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The head of the UK financial watchdog has called for politicians to define an acceptable level of harm to consumers as he warned more would “go wrong” as a result of Sir Keir Starmer’s demands to slash regulation.
Nikhil Rathi, chief executive of the Financial Conduct Authority, said on Wednesday the agency’s recent proposal for easing controls on mortgage lending could increase defaults and repossessions of homes.
“On mortgages, [what] if there are more defaults if we relax [rules]?” he told the House of Lords financial regulation committee. “One or two things are going to go wrong here and not everybody is going to play completely by the rule book, and is there acceptance of that?”
The FCA has also proposed cutting requirements for banks to check customers’ identities in an attempt to prevent money laundering through smaller transactions, after the prime minister called on regulators to suggest rule changes that could increase risk-taking and investment in Britain’s stagnating economy.
But Rathi said the change could lead to an increase in fraud, warning that “there could be more money mules that get through the system”. He asked how far “we want to trade off lower compliance costs with the fact that some people might abuse the relaxations that come”.
He called for the FCA to be given a “metric for tolerable failure” by parliament that defines how much consumer harm and financial wrongdoing is acceptable in its push to cut regulation in support of growth and competitiveness.
Accepting this was “hard” to achieve, he asked whether there would be “a range that would be seen as broadly politically acceptable in parliament and we would be able to be held to account on”.
Pressure to ease the regulatory burden on the City of London has prompted fears of a return to the “light touch” approach to financial supervision that was blamed for enabling the 2008 banking crisis.
But FCA chair Ashley Alder told peers that “we are not reverting to light touch”, while also accepting the need to ensure regulations were “proportionate” and properly “calibrated” to their risks.
The FCA said in its letter to the prime minister, published on Friday, that 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”.
The chancellor has backed the proposal, telling the Financial Times this week that she was “absolutely open to looking at ideas that can boost home ownership and help working families get on the housing ladder”.
Rathi reminded peers that in 2023 the previous Conservative government had encouraged banks to allow borrowers to reduce their mortgage payments to avoid defaults and home repossessions after interest rates shot up. “That is not going to be compatible with relaxing lending standards,” he said.
“We can see the enormous challenge the country is facing on growth,” he said. “There are any number of things we can do. What we have struggled with in the past is to have a really open conversation about what the risks may be if we go in a particular direction.”
Mark Turner, a former official at the watchdog now working at consultants Kroll, said the government’s push to prioritise growth over soundness put the FCA in a “difficult situation” because it was “increasingly ‘damned if they do, damned if they don’t’.”
