In its first annual risk outlook, the FCA says a combination of uncertainty and increased changes means firms may not be making the right strategic choices and may be misinterpreting regulatory guidance.
It states: “[It] may make it difficult for firms to step back and strategically assess the adjustments they need to make to their business models and strategies to ensure future viability and sustainability.
“This could lead to precipitous withdrawal of firms from business areas and products without fully assessing how they could continue to operate within the boundaries of new regulation.
“For example, major firms restricting interest-only mortgages because of concerns about retrospective regulatory judgements on lending decisions.”
Last week, HSBC and Accord Mortgages became the latest to pull out of interest-only deals while the vast majority of other lenders have either withdrawn or restricted their offerings.
It states: “While withdrawal from a product or market creates an opportunity for niche firms, the gap between withdrawal and the establishment of the niche market can leave consumer choices limited.
“Our responsibility to ensure the proportionality of regulation and avoid regulatory failures will be particularly challenging where protracted economic and financial market stress may lead to changes in the timing of planned regulatory reforms.”
The mortgage market review rules, which come into forced next April, scale back the use of interest-only by demanding more stringent repayment plans while FCA chief executive-designate Martin Wheatley has described interest-only mortgages as a “ticking timebomb”.
The risk outlook also accuses bridging finance of “exploiting regulatory loopholes” and says the use of financial advice may decline after the RDR meaning consumers will need higher financial capability.
In its business plan, also published today, the FCA says it will publish the results of an initial review into interest-only mortgages in the near future. The FSA has been investigating interest-only mortgages and the risk of existing customers being unable to repay the amount due at the end of their mortgage term.