The FCA’s Discussion Paper 25/2 (DP25/2) could be one of the most consequential reviews of mortgage regulation since the Mortgage Market Review a decade ago. The regulator’s aim is bold: to widen access to sustainable homeownership and encourage innovation - while maintaining adequate consumer protection and market resilience. For building societies, this represents both a growth opportunity and a call to reassess how risk is managed.

 

A policy backdrop with a greater focus on growth

DP25/2 reflects the Government’s wider growth and competitiveness agenda, with regulators explicitly tasked by the Chancellor to “regulate for growth and not just for risk”. For the FCA, this means asking whether today’s rules unintentionally constrain otherwise creditworthy borrowers - first-time buyers, the self-employed, those with variable incomes, and later-life borrowers.

The FCA’s proposals are also clearly driven by the need to ensure the regulatory framework keeps pace with changing demographics, technology, and customer needs and expectations.

It’s also important to consider the DP in the context of various other recent or in-train reforms - including targeted mortgage rule flexibilities in the FCA’s PS25/11 (which could open up more non-advised lending), as well as PRA initiatives such as the proposed removal of the Building Societies Sourcebook.
 

Where the opportunities lie

For lenders, the proposals highlight a number of potential areas of change and opportunity:

• Targeted changes to affordability tests. The FCA invites exploration of alternative approaches, for example by utilising Open Banking or AI, which could open up access for groups such as the self-employed, and targeted changes to rules on assessing affordability into retirement.
• Greater flexibilities for interest-only. Greater use of interest-only or part-and-part mortgages could help first-time buyers bridge affordability barriers (for example, through low-start products which transition from interest-only to capital-and-interest repayment). While careful consideration of appropriate safeguards and risk considerations would be needed, greater flexibility in this space could be a responsible solution to the challenges facing some borrowers.
• Later-life lending. With £9 trillion in UK housing wealth, and trends such as longer mortgage terms and the rising average age of first‑time buyers, demand is growing to access housing equity, and to borrow into retirement. Increasingly, there is likely to be a need to break down both product and customer journey siloes in order to deliver good customer outcomes. We may therefore see greater flexibility for lenders, for example in enabling interest-only mortgages to convert to retirement interest-only where a borrower has no repayment vehicle in place, or changes to sole survivor affordability assessment requirements for retirement interest-only.

Many of these areas align with societies’ strengths: local knowledge, flexibility, and a willingness to innovate where big banks often cannot.
 

Risk: The other side of the coin

Yet all of these potential reforms bring important risk management considerations. Expanding access means accepting the potential for higher arrears or possessions rates than we have seen in recent years. The FCA’s concept of “tolerable harm” explored in the DP seeks to build consensus with Government on the acceptable trade-offs between risk and growth.
While the debate surrounding tolerable harm is yet to fully play out, it’s clear that lenders with appetite to take up the flexibilities explored in the paper will need to carefully calibrate risk appetite and enhance risk management capabilities. Key considerations include:

• Setting a clear board-level risk appetite - document what combinations of risk you are comfortable with, and where your red lines lie.
• Affordability models must remain proportionate - lenders considering taking up new approaches will need to ensure they continue to meet Consumer Duty expectations; effective MI to monitor outcomes and foreseeable harm will become more important than ever.
• Arrears and forbearance strategies will need investment - a more inclusive market means more households at risk of shocks.

Beyond regulation

It’s also worth recognising that regulation alone cannot solve structural housing market issues. Without more affordable homes being built, expanding access risks fuelling house price inflation rather than delivering good outcomes. Taxation, planning, and housing supply are every bit as critical as mortgage rules. Climate risks add further complexity - the end of Flood Re in 2039, for instance, could create uninsurable properties and a new class of “mortgage prisoners”.
 

What societies should do now

Even before the FCA moves to consultation, there are some practical steps building societies should consider:

• Carefully monitor the impact of any changes which lenders have already made in response to implemented reforms (such as the PRA’s loan-to-income limit change), with a focus on leading indicators and appropriate guardrails.
• Reflect upon risk appetite statements and strategic planning in light of the potential reforms - lenders should consider their appetite to grow in underserved segments of the market, and how far they are willing to stretch their risk appetite to do so.
• Engage actively in the debate, ensuring mutual values help shape the regulator’s stance.
• Pilot and sequence reforms carefully - start with small-scale pilots and align adoption of early flexibilities with the longer-term direction in DP25/2. 

The FCA’s proposals signal a shift: from a regime built for post-crisis resilience to one that also prioritises access and growth. For building societies, this is a natural fit. Their history and purpose put them at the heart of widening homeownership, but they will need to lean into the risk management challenge with equal conviction.

Handled well, these reforms could enable societies to do more of what they do best: help more people own a home, while safeguarding members’ long-term interests.

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