Speaking at the Personal Finance Society (PFS) conference in Birmingham, Lynda Blackwell mortgages and mutuals sector manager, Financial Conduct Authority (FCA), outlined the regulator’s concerns.
She said approximately the same number of lenders which were around before the financial crisis were still in operation today at 136, but are chasing a market 50% smaller.
The majority of that business, or 80%, is concentrated with the top six lenders.
Blackwell said: “To remain viable in a constrained market the pressure is on those smaller lenders to move into riskier sectors and products.”
She added: “[…] consumer appetite, the lender’s need to be profitable and the government’s ambitious growth targets gives rise to a number of conduct risks and these are the things we worry about in the post MMR world.”
Before the Mortgage Market Review (MMR) was implemented in April this year, lenders exploited a number of avenues to achieve growth in lending.
They allowed borrowers to self-certify income, stretch income through interest-only mortgages with no means of repaying the capital, and advanced loans to marginally credit worthy customers.
But Blackwell said there could be no return to ‘business as usual’, growth could no longer be sought in those areas.
“That means that many of today’s borrower’s choices are going to remain constrained because there is going to be a mis match between their risk characteristics today, which were perfectably acceptable to the lenders in the past, and what they are able to get today.”
She warned that impaired credit borrowers were particularly vulnerable to interest rate increases which meant they would struggle to make repayments and would likely look for other refinancing options from smaller lenders. There would also be pressures on firms to service those customers.
“We […] worry about firms trying to find a way of lending to the marginally credit worthy for example through Right to Buy, by developing impaired credit products and by targeting higher risk more profitable segments such as interest only, self employed, bridging and debt consolidation.”
Blackwell added: “There is nothing inherently wrong in those products what we worry about is the way that they are sold.”
