FCA proposes changes to mortgage rules

Posted: 03/06/2025

On 7 May 2025, the FCA published a consultation paper (CP 25/11) on changes to its mortgage rules. The consultation is part of the FCA's plan to review its mortgage requirements through the Mortgage Rule Review, with a view to supporting economic growth. The consultation period ends on 4 June 2025 and a policy statement will be published in Q3 2025.

The FCA also plans to launch a discussion paper in June 2025 on the future of the mortgage market. This will consider what the market needs to deliver for different consumers at different stages in their lives and for the wider UK economy, and the role of regulation to deliver it.

The May 2025 consultations follow the FCA's announcement in March 2025, outlining flexibility for firms in applying the interest rate stress test rule in MCOB 11.6.18R and considering the effect of future rate rises on mortgage affordability. 

The objective of the proposed reforms in CP25/11 is to make it easier, faster and cheaper for consumers to speak to a mortgage provider about their mortgage needs, reduce their mortgage, and remortgage with a new lender. Consumers will be able to engage with their mortgage provider without the firm having to provide mortgage advice when not needed. They will also be able to reduce their mortgage term and access the cheapest products available when remortgaging.

Mortgage advice and interactive dialogue

The Mortgage Market Review set of rules introduced in 2014 contained a prohibition on execution-only sales where there is 'interactive dialogue', so that, subject to limited exceptions, a firm interacting with a customer in a mortgage sale or variation is required to give the customer regulated mortgage advice. Advised sales are subject to a suitability requirement, ie the firm must ensure the mortgage is suitable for the customer based on their needs and circumstances.

The FCA's Mortgage Market Study of 2020 found that the advice rules and guidance were unduly limiting consumer access to execution-only options. Accordingly, the rules and guidance were amended in 2020 to permit more customer interaction before firms are required to give advice. However, the FCA has now concluded that the changes made in 2020 were not sufficient, with firms still reporting low confidence in dealing with customers outside an advised process.

The FCA therefore proposes to remove the interaction trigger in MCOB 4.8A7R(3) which prohibits execution-only sales if there is spoken or other interactive dialogue with the consumer at any point during the sale. The FCA will also remove the requirement for customers to positively elect to proceed with an execution-only sale where there is interactive dialogue with the firm, whilst maintaining the requirement for customers to positively elect to proceed with an execution-only sale where they have rejected advice. The FCA believes these changes will improve customer journeys and give firms more freedom to interact with consumers during a sale or variation.

To mitigate any risk of poor customer outcomes, the FCA proposes to introduce a rule requiring firms to consider whether processes are appropriate to identify execution-only customers for whom advice, or other customer support, may be necessary to avoid foreseeable harm as part of meeting Consumer Duty obligations.

Affordability assessments when reducing a mortgage term

The FCA rules and guidance currently require lenders to assess affordability when making a change to the mortgage which is likely to be material to affordability. The FCA proposes to remove the requirement for a full affordability assessment when reducing the term of a mortgage. This is intended to facilitate customers wishing to reduce their mortgage term, where it is appropriate for them. By removing the prescriptive requirement, firms will be able to determine what form of assessment is appropriate in accordance with the Consumer Duty.

Amending affordability assessments when remortgaging

The FCA notes that there are many barriers to customers opting for external remortgaging, even if cheaper options are available. Borrowers prefer to use firms' internal product transfers. The FCA implemented a 'Modified Affordability Assessment' (MAA) in 2019 to help borrowers move to a cheaper mortgage deal. This allows lenders the flexibility to undertake a modified affordability assessment where the consumer has a current mortgage, is up to date with their mortgage payments, does not want to borrow more (other than to finance any relevant product arrangement or intermediary fee for the mortgage), and is looking to switch to a new mortgage deal on their current property. The lender is only allowed to enter into the proposed mortgage where that contract is more affordable for the customer than their existing mortgage. In a rising interest rate environment, the MAA is therefore unlikely to apply.

The FCA proposes to amend the MAA to permit lenders to enter into a new mortgage contract where it is more affordable than either a customer's current mortgage or a new mortgage that is available to that customer from their current lender.

Retiring FG 13/7 and FG 24/2

The FCA's non-Handbook guidance FG 13/7 was designed to improve industry standards and conduct in relation to interest-only mortgages. The FCA is proposing to retire this guidance on the basis that it has fulfilled its original purpose. The FCA notes that the standards under the Consumer Duty will provide continuing protection to consumers. The FCA will nevertheless introduce a rule and guidance to make it clear that firms must deal fairly with customers whose mortgage terms have expired and not take repossession action unless all other reasonable attempts to resolve the position have failed.

The FCA will also retire non-Handbook guidance FG 24/2 which was issued in March 2023 following the interest rate spikes at the end of 2022, on the basis that it is a restatement of Handbook requirements and does not create any additional protection for consumers.

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