A more flexible mortgage market makes the case for advice even stronger – Murphy

For some time now, there has been broad agreement that certain groups of borrowers have struggled to access mortgage finance, not because they are incapable of sustaining mortgage repayments, but because they do not fit neatly within traditional lending models.

First-time buyers, self-employed borrowers, those with variable income streams, later life borrowers and individuals with historical credit blips have all found themselves facing barriers that can often appear disproportionate to the actual risks involved.

Against that backdrop, many of the proposals put forward by the FCA appear sensible. They recognise modern working lives, income patterns and borrowing needs have evolved considerably over the past decade and regulation must evolve alongside them.

A notable shift in regulatory thinking

This feels like a shift. For many years, the regulatory focus has understandably been on reducing risk and preventing a repeat of the lending practices that contributed to the financial crisis. What we are now seeing is a regulator that appears more willing to accept some degree of risk is unavoidable if we are serious about improving access to homeownership.

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Indeed, the consultation states in point 1.12: “Most poor mortgage outcomes arise due to events external to the mortgage contract (e.g., unemployment, illness, or relationship breakdown). Alternate products can increase exposure to other risks (e.g., house prices). We believe that the regulatory changes proposed alongside higher underwriting standards, and expectations on firms to support consumer understanding before entering into a mortgage, provide appropriate protection to mitigate excessive risks to consumers. However, we cannot eliminate all risk.”

Most advisers would agree with that assessment. There will always be an element of uncertainty when lending over decades rather than months, particularly when life events can have such a significant impact on a borrower’s circumstances. The question is not whether risk exists, but how consumers are best helped to understand and manage it.

The growing reliance on Consumer Duty

Earlier this month, in a piece for Mortgage Solutions, I argued that recent market volatility had demonstrated exactly why professional advice should continue to play such a vital role in helping borrowers make informed decisions.

This latest consultation paper raises a related but arguably even more important point – indeed, as you read the proposals, there is almost an assumption of adviser involvement in getting consumers through a more flexible array of options.

While market conditions may fluctuate, the FCA is now proposing a mortgage framework that would give lenders greater flexibility when assessing affordability, considering future repayment strategies, dealing with historical adverse credit and serving borrowers with non-traditional income patterns. In other words, complexity is not simply being created by market conditions. It is a natural part of the mortgage proposition itself.

Throughout the consultation, the FCA places considerable emphasis on Consumer Duty as one of the safeguards that will allow these changes to happen safely. To a large extent, that is reassuring.

However, it also raises an important question. If lenders are being encouraged to take a more flexible and individualised approach to affordability, repayment strategies and risk assessment, then surely the need for quality advice becomes even greater?

The contradiction that remains

This is where the consultation sits somewhat uncomfortably alongside previous reforms that made it easier for consumers to discuss options with firms without automatically triggering the need for advice.

Because the FCA is now proposing a market that may include greater use of interest-only borrowing, more nuanced assessments of adverse credit, broader acceptance of variable income and a wider array of potential later life lending solutions. These are not straightforward decisions for any individual.

Many rely on assumptions about future earnings, future affordability, future housing needs or future repayment strategies. The more flexibility that exists within the market, the more important it becomes that borrowers fully understand the risks and consequences of the decisions they make.

Consumer Duty can help firms support understanding and avoid foreseeable harm. What it cannot do is make up for a consumer journey that does not include personalised advice.

Advice remains the strongest protection

The argument I made last month was that periods of uncertainty expose the limitations of treating mortgages as a transactional purchase. This consultation strengthens that view.

A borrower considering a part interest-only mortgage, relying on future earnings growth, planning to use a follow-on product as a repayment strategy, or seeking a mortgage after recovering from adverse credit is making decisions that require complex judgements as much as product selection.

Which is why advice remains so vital. And why a consultation paper that continues to champion the removal of the advice interaction trigger as a positive feels completely contradictory. If the regulator genuinely believes that a more flexible mortgage market is the right direction of travel, then it should also recognise that flexibility strengthens rather than weakens the case for advice.

The more tailored the solution, the more important the adviser becomes. Yet if the FCA is prepared to accept a little more risk in order to improve access, then it should also be prepared to recognise that professional advice remains one of the most effective protections available to consumers when life inevitably fails to follow the plan they originally set out on a mortgage application form. I’m still not sure it does.