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The head of Britain’s financial watchdog has called on politicians to define an acceptable level of harm for consumers, as he warned more could “go wrong” due to Sir Keir Starmer’s demands to cut regulation.
Nikhil Rathi, chief executive of the Financial Conduct Authority, said on Wednesday that the agency’s recent proposal to relax mortgage lending controls could increase defaults and home repossessions.
“In the field of mortgages [what] if more defaults come as we relax [rules]?” he told the House of Lords financial regulation committee. “One or two things will go wrong here and not everyone will fully adhere to the rules, and will that be accepted?”
The FCA has also proposed relaxing requirements for banks to check customer identities in a bid to prevent money laundering through smaller transactions, after the Prime Minister called on regulators to propose rule changes to curb risk-taking and could increase investment in the stagnant British economy.
But Rathi said the change could lead to an increase in fraud and warned that “there could be more money mules coming through the system”. He asked to what extent “we want to weigh lower compliance costs against the fact that some people could abuse the relaxations that are coming”.
He called for the FCA to be given a ‘measure of acceptable failure’ by Parliament that defines how much consumer harm and financial misconduct is acceptable in its drive to reduce regulation to support growth and competitiveness.
Accepting that this was ‘difficult’ to achieve, he asked whether there would be ‘a range that would be seen as generally politically acceptable in Parliament and for which we could be held to account’.
The push to ease the regulatory burden on the City of London has led to fears of a return to the “lightweight” approach to financial supervision that made the 2008 banking crisis possible.
But FCA chairman Ashley Alder told colleagues that “we are not returning to light touch”, while also accepting the need to ensure regulations are “proportionate” and appropriately “calibrated” to their risks.
The FCA reports this his letter to the Prime Minister, published on Friday, that it would “start simplifying responsible lending rules and mortgage advice, support home ownership and open a discussion on the balance between access to loans and the level of defaults”.
The Chancellor has backed the proposal, telling the Financial Times this week that she was “absolutely open to ideas that could boost home ownership and help working families get into the housing market”.
Rathi reminded colleagues that the previous Conservative government had encouraged banks in 2023 to allow borrowers to reduce their mortgage payments to avoid defaults and home repossessions after interest rates soared. “That will not be compatible with easing credit standards,” he said.
“We see the enormous challenge the country faces in terms of growth,” he said. “There are a number of things we can do. What we have struggled with in the past is having a very open conversation about what the risks might be if we go in a certain direction.”
Mark Turner, a former official at the watchdog who now works at consultants Kroll, said the government’s push to prioritize growth over soundness has put the FCA in a “difficult situation” because it is “increasingly damned if they do, damned if they don’t. ‘.”