The FCA discussed at its December board meeting a recommendation by the Financial Policy Committee for further mortgage stress testing on top of new Mortgage Market Review requirements.
The MMR comes into force in April and requires firms to test affordability against five-year interest rate projections.
The FCA’s December board minutes, published last week, reveal the Bank of England’s FPC has recommended to the regulator that it require mortgage lenders to have regard to any of its future stress test recommendations over and above the MMR requirements.
The minutes say: “This would be discussed at the next board meeting in detail.”
Minutes of the FPC’s November meeting show it believes the MMR interest rate affordability test “might not always be sufficiently prudent.”
The minutes say: “The committee agreed it would be appropriate to take action now to introduce a policy tool that could be adjusted, if needed, to guide changes in the stress-test interest rate used in MMR affordability assessments.”
The FPC minutes also note that according to FCA chief executive Martin Wheatley, it would be possible to introduce a rule shortly after the implementation of the MMR that meant any FPC recommendation on stress testing would come into effect with firms “in a timely manner”. The rule would need to be subject to a consultation.
Separately, the regulator plans to issue a discussion paper early this year relating to fairness in mortgage contracts.
From 26 April lenders will have to stress test borrowers’ affordability to take into account the impact of expected future interest rate increases with reference to market expectations over the next five years.
Under the MMR, lenders will have to stress borrowers against their existing SVR plus an additional percentage to take into account future base rate movements.
The FCA wants lenders to take into account market expectations of base rate movements in the first five years, with lenders’ SVR plus the forward sterling rate a suggested measure. Currently the forward sterling rate is over 3.5 per cent.
Lenders recently raised concerns that the measures could cause decline rates to rocket.