Last updated: 31 May 2017
At a glance
- In addition to the regulation of individual lenders by both the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), lenders have to have regard to additional macro-prudential regulation in the form of directions and recommendations made by the Financial Policy Committee (FPC).
- On 25 March 2015, Parliament approved regulations granting powers of direction for the FPC over housing tools - specifically limits on residential mortgage lending by reference to loan-to-value (LTV) and Debt-to Income (DTI) ratios. The measures came into force on 6 April 2015. (The FPC has published two draft policy statements on FPC powers over leverage ratio tools and FPC powers over housing tools.)
- Following on from the consultation, on 16 November 2016, HM Treasury made the announcement that it was granting the Bank of England’s Financial Policy Committee (FPC) powers of direction in the buy-to-let market.
- This will mean that from early 2017, the FPC will be able to direct the PRA and FCA to require regulated lenders to place limits on buy-to-let mortgage lending in relation to:
- loan-to-value (LTV) ratios
- interest coverage ratios (ICRs)
- On 29 September 2016, the Prudential Regulation Authority (PRA) published a consultation on underwriting standards for buy-to-let mortgages, following a period of consultation. We will publish the results of the consultation on this page when they become available.
We support the strengthening of the regulatory architecture of the UK financial system, to create a more robust and stable system.
Given the number of recent additions to the macro-prudential regime, we would like a period of review and consolidation to evaluate how these developments operate in the market; and how macro-prudential regulation interacts with the concurrent developments in prudential and conduct regulation.
We question the use of FPC powers of direction and prefer the use of recommendations, where the relevant regulatory bodies (PRA and FPC) can engage in a consultation process with the industry.
Why this is important for lenders
Following the financial crisis, various stakeholders in the debate on the regulatory control of the UK financial system argued that a new approach was required. In particular, it was proposed that as well as the regulation of individual firms by the FCA and PRA, it was necessary to impose regulatory oversight of the financial system as a whole. As a result, the FPC was created to implement macro-prudential regulation designed to maintain the stability of the financial system.
So far, macro-prudential regulation has focussed on measures affecting the UK housing market, owing to the size of the UK housing market in relation to the UK economy and the impact that issues in the housing market could have on lenders and the wider economy.