Speech by Emily Shepperd, FCA Chief Operating Officer delivered at the Building Societies Annual Conference.
Emily Shepperd
- Speaker: Emily Shepperd, FCA Chief Operating Officer
- Event: The Building Societies Annual Conference
- Delivered: 9 May 2024
- Note: This is the published version of the speech which may differ to that delivered
Highlights
- Building societies have been a force for good, reaching under-served communities and customers, and turning risk into opportunity
- They must embrace technology and continue to evolve without losing their community-centred credentials
- Lenders need to continue to innovate to support their customers and watch that they, and their customers, do not take on too much risk
To paraphrase the 17th century lawyer, Sir Edward Coke, an Englishman’s home truly is his castle. And the reference limiting this ownership of a castle to an ‘English man’, rather than an English woman or any English person, was accurate for nearly 4 centuries.
For it was not until the 1975 Sex Discrimination Act[1] came into force across the whole of the United Kingdom, not just England, that lenders were forced to treat men and women equally.
Before then, which is just about within my lifetime – the 1970s, not the 17th century – financially secure women could be turned down for mortgages if they did not have a male guarantor and were often prohibited from opening accounts in their own name.
But mercifully, times have changed. And an institution that would have rejected an application in her own name from my high-earning, doctor grandmother would, I hope, accept my daughter once she graduates and has some career stability, whatever her marital status.
I know building societies are sometimes seen as being traditional, perhaps a bit old-school. This image however ignores the fact that building societies in particular have been a progressive force in personal finance, widening access to products and services to segments of society that would have been shut out in previous decades.
And as employers we see similar commitments to progress - including the BSA’s and many societies’ commitment to the Women in Finance Charter[2] and the targets you have set yourselves.
Stepping up at the right time
According to a poll taken during the pandemic, 70% of people[3] surveyed felt that building societies were an important part of the community, far more than other types of institutions. This was due in part to the legacy of building societies but also in reaction to the way they responded during this unsettling period.
When the FCA put out guidance to firms on how to treat customers at the start of Covid, building societies were quick to step up. They provided crucial support to customers facing financial difficulties. We even saw one building society delivering cash to vulnerable customers’ homes. Later, building societies embraced the government's Mortgage Charter[2] commitments with gusto, even when it meant taking on additional financial strain.
But it's not just about weathering the extraordinary storm of the pandemic; building societies have long been champions of under-served markets. They've reached out to more complex first-time buyers, the self-employed and other customers who often find themselves overlooked by other high street lenders.
They have supported borrowers with lower deposits and financial means to achieve their aspiration for home ownership.
They – and that includes you in the audience - have spotted opportunity where others just saw risk – and in doing so, you have also helped tackle financial exclusion. This commitment to inclusivity is commendable, but it also brings with it a responsibility to ensure that lending remains responsible and sustainable.
Mortgage market landscape
The housing market is one area where questions have been raised in terms of its sustainability and affordability – not least in the BSA’s own comprehensive recent report[4] on first time buyers.
Those of us with young adult children know the challenges they face in ever owning a property. It seems like less of a hill and more like a cliff, particularly if you throw student loans, rising rents and an unpredictable career journey into the mix. The BSA points out that becoming a first-time buyer is the most expensive it has been for 70 years or so.
With the cost-of-living challenges and renters having to spend a greater share of their income on housing, it is little wonder that it is getting harder to save for a deposit. And then there is the added blow of higher interest rates forcing up mortgage repayments.
The drive to own a property as a necessary first step has seen consumers putting off other lifetime milestones, including getting married or having children, according to several studies, including Yorkshire Building Society’s own research last year.
The latest Census[5] points to fewer households owning their home with a mortgage in 2021 – 4% lower compared than in 2011. This trend will continue as more mortgages mature - with older generations owning outright - and younger generations less able to buy their first home.
Yet there are some encouraging signs. First-time buyers continue to make up around half of all mortgage home movers. The FCA’s own sales data from 2023 shows that first time buyers made up 53% of all purchases with mortgages.
With the recent rise in the cost of borrowing, lenders have innovated to help a new generation of borrowers – recognising rental payments, enabling trusted family or friends to improve recognised income, even using monthly subscription payments to boost creditworthiness.
This is where investment in data and investment in technology can reap benefits.
Exploring innovative solutions such as Open Finance, can also validate income and expenditure for all potential borrowers.
Technology in general can be a challenge for building societies, particularly those with legacy systems.
Integrating these with APIs (Application Programming Interfaces) to access data can be expensive and difficult, feeling at times impossible.
Added to this of course are the risks and opportunities of AI and moves to cloud technology. There is little choice about becoming more digital: younger customers, raised on a diet of entertainment and shopping on demand, expect financial services to be available in one or two clicks.
Building societies must not let their hard-won reputations for integrity – a value that is in tune with younger generations - be overlooked in favour of challenger banks and their whizzier technology.
By leveraging innovations such as Open Finance, AI, and digitalisation, building societies can streamline operations, boost resilience, and enhance the customer experience. Perhaps one way for smaller societies to do this is through collaboration with start-ups, tech firms or other building societies.
In doing so, they will not only survive but thrive in an increasingly competitive landscape.
In it for the long-term
We have recently witnessed a rise in longer mortgage terms: mortgages lasting longer than 30 years made up 35% of sales last year.
There are of course trade-offs; borrowers can reduce their monthly repayments and access the property market - but pay more overall, potentially at the expense of other important parts of their financial life, such as paying into their pension, and have fewer options when facing financial difficulty.
Extending mortgage terms, while appropriate for some, is a symptom rather than a solution to today’s affordability challenge.
It is not surprising that the BSA and others are asking regulators to consider the outcomes of trade-offs made through tightening regulation following the financial crisis.
While we all want home ownership to be as accessible to as many people as possible, we must always ensure that lending is responsible and in the long-term interests of the consumer.
Unaffordable mortgage debt is not just a financial or balance sheet problem. It leads to wider and deeper problems for individuals and society.
We need to consider what the appropriate level of risk for individuals and institutions should be in the trade-off between homeownership and long-term debt.
Our Mortgage Market Review, which came into force 10 years ago last month, ensured there could be no return to practices that led to a proliferation of unaffordable mortgages being offered.
Key requirements – evidenced income and expenditure, consideration of future changes to a customer’s finances and interest rates, establishing a credible repayment vehicle for interest-only loans – have all demonstrated their value in recent years. Fewer borrowers are now facing repayment levels which could push them into financial difficulty.
Comparative arrears levels, between pre and post the Mortgage Market Review lending are stark. Of mortgages originated in 2007, after 10 years 4% were in arrears. Of those originated post the review, that figure falls to 0.8%.
Repossessions, an outcome we all work to avoid, but nonetheless a necessary aspect of the market - are at their lowest since 1980. A considerable change, especially when you consider the market is 40% larger.
As an outcome-focused regulator, we reflect on how our standards are applied and the impact they have on different customer groups.
Our current rules provide lenders with flexibility to adapt lending criteria and design a range of mortgages. In a higher interest rate environment innovation and creativity, aligned with our rules and in the interest of consumers is something we are open to engage with and support.
Our supervisory and policy teams, alongside our Innovation Hub and Regulatory Sandbox are open to discuss any propositions. I would encourage all societies to consider these options as part of their product design process.
And if there are unjustifiable barriers to responsible lending, leading to poor outcomes, we will act.
Lending into retirement
Alongside longer terms we also see a greater proportion of mortgages projected to mature around state retirement age. The projected median age of a first-time buyer at maturity is now 65 years old, up from 56 in 2005.
The proportion of mortgage customers over 67 is currently less than 2% of all loans. By 2040 this rises to 5%, and by 2050 it is almost 10%.
Lending into retirement is moving from a niche to a norm.
Building societies are well acquainted with the risks and needs of customers looking to borrow in later life. The BSA’s work and building society activity in, for example, retirement interest-only markets are a testament to this.
You recognise the need to consider different income and expenditure sources and needs, different lifestyle risks, different capacity to weather financial shocks.
With borrowers projected to hold debt for longer, now is the time to ask yourself about the products and services you will provide to those borrowers to meet their needs responsibly and help them meet their financial goals - what will you need to do to support this growing population of customers and deliver good outcomes?
Getting this right will of course benefit those individual customers, enabling them to meet their housing needs in later life, and move if that is their aim. It may also support first-time buyers with an increase in the supply of homes.
Saving the savings market
One area where, after an initial prompt, we have seen building societies taking action to benefit consumers is on easy access savings accounts. We have seen building societies taking robust action to make savings rates more competitive.
Last year, we sent out a 14-point plan to ensure banks and building societies were passing on interest rate rises to savers in a timely manner. We had found that while interest rate rises were being passed onto savers, these were at a significantly slower pace for easy access accounts.
Progress has been made in this area: in April, there were more than 300 instant access accounts paying over 3%, and more than 170 paying over 4%. But there remains room for improvement.
It’s clear from our work that some firms have found the assessment of fair value challenging and we will continue to work with the sector to ensure that assessments are robust and effective. Although it is not our intention to regulate savings pricing, we know there are some accounts paying very low rates, particularly on closed products and we continue to encourage savers to shop around for a better deal on their savings. We also remind everyone that in July, the Consumer Duty[6] will also be applicable to closed financial services products including savings accounts.
We know from our work with some of the larger societies that most are prepared for this deadline, having learned the lessons of the first phase of the Consumer Duty.
The main challenge – in line with other sectors – has been how to evidence good customer outcomes through data and how to improve management information systems (MI).
Overall though, progress is positive. We have also been pleased to see building societies appointing Consumer Duty champions at the right level, with good engagement with internal audit and compliance teams.
Any gaps on implementing the Duty have also been effectively prioritised, with ownership taken at director level. Clear deadlines have been set early in the process, with steering committees made of the right individuals. And your use of third-party consultants to carry out gap analysis has also been effective.
We know that more than half of savers have switched, or were considering switching, their savings accounts to take advantage of better rates. And 2 out of 3 savers said they would switch accounts but have not yet done so. That is why in February, we embarked on an advertising blitz to encourage savers to switch to more attractive rates.
By the end of April, building societies’ median rate for an easy access account was 3.4%. For banks, it was 3.125%. And the lowest on-sale rate we could find for an easy-access savings account from a building society was 1.5% - more than double that of the lowest rate from a bank for the same type of product.
Building societies play a vital role in promoting a savings culture and must continue to engage with initiatives aimed at building greater consumer resilience.
And of course, the more we help people save, the more likely it is they are to become your future mortgage customers. We know in the past through our data that firms were very quick to pass on base rate increases swiftly and in full for variable rate mortgage customers, and slower with respect to savers.
With expectations that the base rate will start to be reduced this year, we will be looking closely at institutions and firms that have taken a rocket and feather approach to pricing, on either side of their balance sheet.
Conclusion
In conclusion, building societies have demonstrated their resilience and adaptability. They have also helped consumers build their resilience, not giving up on them when the going got tough, reaching out to under-served groups and turning risks into opportunities.
As regulators, industry stakeholders, and consumers, it is incumbent upon us to ensure that they continue to lend responsibly, provide value, and innovate for the future. Together, we can build a financial ecosystem that serves the needs of all, both now and for generations to come.
We must not let longer lending or lending into retirement become the next big financial risk. No one – not lenders, not consumers nor regulators - want this to be the problem of 20 years' time. Now is the time to recognise and manage these risks responsibly.
Building societies must embrace technology as a means of enhancing - not supplanting their community-centred credentials. Their very humane response to the local and global challenges of the last three years have shown us that they are on course to do just that.