FCA's mortgage rewrite shifts risk back onto lender judgement

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The FCA has put lender judgement back at the centre of mortgage underwriting. In proposals published on 9 June 2026, the regulator wants firms to take a rounded view of affordability, offer more interest-only lending where suitable, and stop dismissing borrowers over minor or past credit issues (FCA). The consultation, CP26/18, closes on 28 July 2026 (FCA). David Geale, executive director for payments and digital finance, framed it bluntly: 'Stronger protections mean we can now safely widen access to mortgage borrowing for those that may be underserved' (FCA).

The striking feature is the regulator's tone. In an accompanying blog, retail banking director Emad Aladhal concedes the trade-off in unusually direct terms, acknowledging that wider access 'inevitably brings with it the risk that they may be less able to deal with unexpected impact on their finances' (FCA). That admission matters. It signals that the FCA is no longer treating affordability conservatism as a free option, and is willing to absorb a measurable increase in arrears in exchange for access. The supporting statistic, that 99% of mortgages taken out since 2014 are on track (FCA), is being used to justify spending some of that buffer.

For lender boards, the harder question is not whether to welcome the flexibility but how to govern it. The Consumer Duty has not been switched off. Aladhal is explicit that the Duty 'continues to raise standards' and that lenders 'must still make responsible decisions on who to lend to' (FCA). In practice that means any firm that uses the new discretion to stretch interest-only, retirement interest-only, or variable-income lending will need a defensible internal framework for what 'rounded view' means, how foreign-currency income is treated, and how repayment strategies are evidenced. The risk transfer is real: the FCA has moved from prescriptive guardrails to principles plus outcomes, and the residual liability for misjudgement sits with the firm.

The competitive implications cut in two directions. Challenger lenders and specialist firms that already underwrite self-employed and later-life borrowers gain regulatory cover to scale propositions they have been running cautiously. Larger high-street lenders face a positioning choice: move first and accept higher arrears volatility, or hold the existing template and cede the underserved segments. Distribution will tilt towards brokers who can document suitability against the new flexibility, which in turn raises the bar on broker oversight under the Duty. Boards should also read the proposals alongside the broader direction of travel, including the FCA's December 2025 mortgage market reform plans (FCA) and the government's parallel push to reduce regulatory burdens on smaller firms through the Small Business Regulatory Taskforce launched the same day (HM Treasury).

The implication is straightforward. The FCA has handed lenders discretion it has not offered in over a decade, and the firms that build the governance to use it deliberately, rather than reactively, will set the pricing and the precedents for the next cycle.