The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) proposed these amendments to the Financial Policy Committee’s (FPC’s) guidance, which restricts lending at more than four-and-a-half times income to 15% of a lender’s book if they lend more than £100m in residential mortgages each year.
This guidance was set in 2014, and in November last year, the FPC recommended this be changed.
The PRA and FCA said the proposed change would “contribute to the regulators’ objectives on competition, and therefore competitiveness and growth”.
The original limit was introduced to prevent excessive levels of household indebtedness while exempting smaller challenger banks from the restriction.
The consultation paper said the nominal threshold had not changed since 2014 and, over time, the threshold had “tightened” as inflation and other factors increased the economy.
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“This leads to firms being captured by thresholds that were not originally intended to be,” it added.
The paper said as the economy had grown, small firms had started to meet the threshold and this reduced the market share of mortgages under the limit.
When the PRA first implemented the FPC’s recommendation, around 2.3% of all mortgage lending was exempt from the rule, but currently, around 1.5% is exempt.
The paper said the higher threshold would be in line with the increase in nominal GDP since Q4 2014 and bring the proportion back to its original calibration, exempting around 2.2% or 80 lenders.
“This would continue to support lending by smaller firms in line with the FPC’s original risk appetite,” it added.
The PRA said the proposal would continue to protect households from excessive indebtedness as well as the safety of firms.
