FCA's mortgage rewrite shifts risk back onto lender judgement
The FCA has opened a consultation on rules that would loosen affordability assessments for first-time buyers, the self-employed and older borrowers, with responses due by 28 July 2026. The regulator is explicitly rebalancing risk, and boards at lenders need to decide quickly how much of that newly granted discretion they actually want to use.
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.
Sources
What this reveals
When a regulator explicitly transfers judgement back to firms, the burden of proof shifts from rule-following to reasoned decision-making, and many lender boards will discover their existing governance was built to execute prescriptive rules rather than to defend discretionary calls. The failed assumption is that principles-based flexibility is a gift; in practice it is a liability transfer, because outcomes that go wrong will be tested against what the firm should have known at the time. Other leadership teams may wrongly believe their Consumer Duty frameworks already carry this weight, when in fact those frameworks were calibrated against tighter affordability guardrails that are now loosening. This matters beyond mortgages because the same pattern, regulator loosens prescription while retaining outcomes accountability, is now the default across UK financial services.
Questions accountable leaders should ask
- 01If we used the new discretion tomorrow on a marginal case and it went into arrears in eighteen months, could we produce a contemporaneous record showing our 'rounded view' was reasoned rather than commercial?
- 02Where in our underwriting framework are we still relying on prescriptive FCA guardrails to do work that our own judgement should now be doing?
- 03Have we tested whether our Consumer Duty evidence, calibrated under the old regime, actually withstands challenge under a wider-access lending stance with predictably higher arrears?
- 04Do we know which of our competitors will move first, and have we decided whether ceding the underserved segment is a deliberate choice or a default one?
- 05Who inside the firm has the authority to say the discretion has been stretched too far, and is that voice structurally protected from commercial pressure?
What accountable leaders should do now
- 1Before the 28 July 2026 consultation close, map exactly which parts of your current affordability, interest-only and later-life lending policies rely on the FCA's prescriptive floor rather than your own reasoned framework, and identify where the gap will open when that floor moves.
- 2Commission a board-level paper that sets an explicit risk appetite for the new discretion, including the level of arrears volatility the board is willing to absorb in exchange for wider access, and record the reasoning in a form that would survive later scrutiny.
- 3Rebuild the evidence architecture for Consumer Duty outcomes so it captures the reasoning behind individual discretionary decisions, not just aggregate outcomes, because that is where the residual liability now sits.
- 4Pressure-test the proposed policy shift with a small number of external voices, including supervisors, intermediaries and consumer bodies, to check whether your internal read of 'defensible discretion' matches how it will be judged externally.
- 5Set a formal review point twelve months after implementation to test whether early arrears data is tracking the board's stated appetite, and pre-commit to the trigger conditions that would cause you to tighten again.
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