UK Mortgage Rule Review: FCA discussion paper on future of market seeks views on ‘trade-offs and risks’ that changing its rules could entail

What's the background?

DP25/2 forms part of the FCA's continued focus on helping consumers navigate their financial lives and to support economic growth.

• In March 2025, the FCA reminded lenders of the flexibility in its stress testing rules. It notes that it has seen several lenders react to this, helping more borrowers to access additional credit.
• The FCA also received ‘significant feedback' on its mortgage rules as part of its Consumer Duty rule review call for input (see our related article here). Given these developments, and in light of the priorities in its new 5-year Strategy - most notably, to support sustained economic growth and help consumers navigate their financial lives) - the FCA is reviewing its mortgage requirements through its Mortgage Rule Review (MRR).
• The focus of its May 2025 consultation was on how its mortgage framework can be simplified to further support sustainable home ownership (see our related article here).

What are some of the key takeaways from this discussion paper?

The government's clear indication that it would like regulators to allow more risk in the system in order to support economic growth, and the FCA's exploration of potential mortgage market metrics of ‘tolerable harm', show that ensuring effective management of risk within your business should be top of your “to do” list.

Key issues on which the FCA is seeking feedback in the discussion paper include:  

• Ensuring the mortgage market remains fit for purpose:
  • MCOB interest rate stress test: Options for changes to the current test could be: creating a central stress rate; changing the 5 year timeframe; amending the 1% minimum stress margin; or introducing a product rate margin.
  • Affordability assessments: Potential alternative methods of affordability assessments include:
    • rent based affordability (e.g allowing past payment of rent alone to prove affordability where rental payments were consistently higher than the prospective mortgage payment); and
    • affordability based on expected career trajectories.
  • Interest-only / part and part mortgages: The FCA is seeking views on whether its rules could better support more interest-only mortgages, particularly part interest-only and part capital repayment mortgages (part and part), such as;
    •  potentially changing the need for a repayment vehicle where the LTV/interest only element is below defined threshold, making changes in relation to the requirement to have a repayment vehicle in place;
    • enabling borrowers to move between repayment and interest-only during the mortgage term without having to set up a repayment vehicle.
  • Vulnerable customers – joint mortgage abuse: The FCA wants to hear about any innovative approaches that are being used or could be used to do more in this area, highlighting studies that have indicated that joint mortgage abuse can prevent a victim from leaving an unsafe living arrangement or their current or ex-partner.
  • Bridging loans: Suggested rule changes that might help to support wider economic growth through facilitating building and construction works include adjusting the term limit, and introducing more flexibility to recognise self-build, development and refurbishments as standalone loans eligible for interest roll-up mortgages.
  • Climate change: The FCA is looking for input on whether there are any regulatory interventions to the mortgage market that could support approaches that aim to help address climate change challenges such as flood risk.

  The FCA also wants to know where the mortgage market can make best use of Open Banking, distributed ledger technology, and digitisation of activities, as well as other innovations, to support better outcomes for consumers and the market. This includes suggestions for areas that it should prioritise for TechSprints and/or Sandboxes.

• Consumer understanding, information needs and innovation:
  • Later life lending: Current rules may need to change to enable more holistic advice for older homeowners and to allow for easier access to products like RIOs and lifetime mortgages.
  • Innovation in advice: Current rules may need to change to facilitate innovation involving AI-assisted advice and sales.
  • Suitability: The FCA has indicated it has found poor practice in niche areas such as lifetime mortgages as well as in record-keeping, and that it's not sure the MCOB ‘cheapest option' rule is the best way to ensure the borrower understands why they are being recommended a certain product that is not the cheapest product for their needs.
  • Enhanced advice: The FCA is considering whether its rules should be changed to require ‘enhanced advice' in certain circumstances, for example where a consumer wants to use the equity in their home.
  • Disclosure requirements: Options that the FCA is considering are: moving to a more outcomes-based disclosure regime, underpinned by the Consumer Duty - potentially supplemented with a selection of event-driven disclosure requirements; or keeping some form of simplified standardised disclosure template. It is also considering whether there should be different requirements for borrowers who have received advice or ‘enhanced' advice.
• Rebalancing risk appetite in the mortgage market:
  • Permitting “tolerable harm”: Before embarking on any transformative changes to its responsible lending rules in support of the government's pro-growth agenda, the FCA needs to determine what it judges to be ‘tolerable' levels of harm. It is exploring potential mortgage market metrics (eg as set out in its written evidence to the House of Lords Regulation Committee), and asks for input on this.

Two particular areas of concern in rebalancing risk appetite that the FCA highlights are:

• house price inflation risk (if increased access to mortgages increases house prices where there is no corresponding increase in housing supply); and
• increased arrears and repossessions risk where the FCA seeks to promote greater risk taking on the part of lenders.

What should firms be thinking about and how can Hogan Lovells help?

The FCA is looking for a steer on what potential changes to its rules and guidance should be prioritised, and which ones could have the greatest impact and/or could be implemented quickly. This is an opportunity to respond strategically, ideally ensuring that any eventual regulatory reform addresses your current pain points and is aligned with your future plans for any new product offerings and/or service innovations.

More specifically:

• Given that changes may be needed to support sustainable home ownership and economic growth as well as to allow firms to tailor their products to consumers' evolving needs, firms should consider their current risk management approach, and how this might have to be adapted.
• The FCA's suggestion of moving to a more outcomes-based disclosure regime, underpinned by the Consumer Duty, could mean some considerable operational disruption and costs on the horizon in terms of required changes to your disclosure systems and processes.

Our combined legal and consulting teams can help you review your approach to risk and help you adapt to any new disclosure requirements, including considering how you could streamline your compliance processes if, indeed, the FCA settles on closer alignment between the MCOB rules and Consumer Duty.

What's next?

The discussion paper closes to comments on 19 September 2025. The FCA states that, before recommending and consulting on any changes to its rules and guidance, it will focus on how consumers and the market are protected. In the meantime, it will continue to engage with key stakeholders through forums, roundtables and individual meetings.

The FCA plans to publish a policy statement following its May 2025 ‘first steps' consultation in Q3 2025 and will consider relevant responses in conjunction with responses to the discussion paper. The FCA does not believe that an implementation period for the proposed changes to MCOB in the consultation (if adopted) is required. Firms would be able to apply the changes at their discretion once final rules are introduced into the FCA Handbook.

In a speech on 26 June 2025 and in the context of the current debate around how best to regulate for growth rather than risk, FCA CEO Nikhil Rathi mentioned that he has raised whether the Mortgage Charter, which was designed for a period of sharply rising interest rates, could be retired. He commented that with the ‘[Consumer] Duty in place, repossessions low, and a maturing risk mindset, do we need this duplicative approach with the added reporting burdens it brings?' Given the FCA's ongoing MRR, Mr Rathi further queries what signal is sent about ‘political risk tolerance' if the Mortgage Charter is retained.

If you would like to discuss how our combined legal and consulting teams can help you in relation to the FCA's Mortgage Rule Review, please reach out to any of the people listed in this article or your usual Hogan Lovells contact.

Authored by Charles Elliott and Virginia Montgomery.