UK Finance’s latest must–read blogs?

A snapshot of the industry that captures more every year?

The results of the 2024 Mortgage Efficiency Survey have now been published.

This year we had conversations with a?record 46 lenders?to gain an understanding of how they use technology across the mortgage origination journey.

The insight it offers spans topics from the Financial Conduct Authority’s Consumer Duty rules, net zero targets and environmental regulation, to affordability trends and political context.

Consumer Duty is one of the most significant regulatory changes for the mortgage lending industry in recent times and we were keen to understand how it had impacted the lenders’ business.?

The feedback we received from this was interesting with many lenders seeing Consumer Duty simply as an extension of their current practices and culture, with others agreeing that its processes had been sharpened up since its introduction.?

However, one thing they all agreed on was that implementation of Consumer Duty was not without its challenges. Almost without exception, lenders remarked that the operational burden of measuring and evidencing compliance with the new rules had been considerable and, in some cases, far greater than had been originally anticipated. Outstanding areas of uncertainty revolved around those parts of the process that are external to lenders’ core business such as broker fees and vulnerability. Areas like these are clearly evolving and will prove fascinating to revisit as processes, expectations and regulatory requirements bed in.

We also gathered insights from lenders about their green policies, such as incentives for green home purchases or retrofit/improvement loans. The general consensus is that consumers have little appetite for investing in retrofitting property at the moment, and that this is largely driven due to recent increases in the cost of living. Due to this, lenders remain sceptical about what they could do to spur homeowners on to ‘do more’, since the costs involved may not provide the necessary return. However, there is a positive feeling among some that there is value in sign-posting borrowers to better behaviors. For the most part this year, the focus of green activity has been on understanding back book performance and the liabilities of Scope 3 emissions risks.

Read the full blog post from Steve Carruthers , Business Development Director, Mortgages, Iress .

What is the right size for the central bank balance sheet?

Unwinding quantitative easing (QE) was going well until the pandemic and Russia invaded Ukraine, so what should central banks do now?

After the Global Financial Crisis (GFC) of 2007-9, the world’s largest central banks – including the US Federal Reserve, the ECB, the Bank of Japan and the Bank of England - undertook new policies of QE.?

The asset-buying spree was intended primarily to counter deflationary tendencies. Although there were differences in which assets were bought, each central bank expanded the supply of narrow money, a liquidity injection which drove up financial asset prices, reduced interest rates across the yield curve and squeezed credit and liquidity spreads.?

Except for Japan, inflation was largely back to target by early 2017, asset purchases were largely slowed or stopped and the US even began a reversal in 2018. But in 2020 the pandemic struck, and the expansions started anew.

By the end of 2021, each central bank had massively increased the size of its balance sheet – by multiples of between 5 and 10 of their end-2006 levels. During 2021 inflationary pressures started to build, exacerbated by the consequences of the Russian invasion of Ukraine and monetary policy was suddenly about-turn, trying to bring inflation down from levels not experienced for decades.

With inflation, not deflation the main challenge, what happens to expanded central bank balance sheets. Does QE get unwound completely, partly or not at all? How big should the central bank balance sheet be?

The text book answer is if the central bank wants to implement monetary policy by setting an interest rate - the price of central bank money – then the quantity of that money has to be consistent with the demand for it at the set price.?

The total demand for central bank money is driven by the desired level of commercial bank reserve accounts held at the central bank. The central bank controls the supply by expanding or contracting its assets – a mixture of purchased assets held outright and its secured loans to the banking system.

The demand for reserve accounts by commercial banks appears to have shifted. Demand has increased in part because of new, post-GFC prudential requirements for banks to hold more liquid assets. And, especially in the US, many smaller banks have built business models on attracting the deposits created by the central bank cash injection.?

Read the full blog post from Paul Fisher OBE , Honorary Professor, 英国华威大学 - 华威商学院 .

Time for action – EU Digital Operational Resilience Act (DORA)

The EU Digital Operational Resilience Act (DORA) will come into force on 17 January 2025. By that date, financial institutions with an EU (and/or EEA) presence will be expected to have taken significant steps to comply.

These steps include reviewing ICT service contracts for compliance with two sets of mandatory contractual requirements. One set applies only to contracts for services provided for critical or important functions of financial institutions. It includes requirements for unrestricted access and audit rights, detailed subcontracting provisions and commitments to participate in threat-led penetration testing which financial institutions undertake.?

Many financial institutions will recognise these requirements from other similar regimes such as the Prudential Regulation Authority’s recent SS2/21 and the earlier EBA Guidelines on Outsourcing. While similar, the requirements are not all the same, and therefore even contracts which have been reviewed to comply with these regulatory frameworks should be assessed for compliance with DORA.

1. A second broader set of requirements applies to?all?contracts?for ICT services regardless of whether they are provided for critical or important functions. These requirements include the notification of all service and data processing locations, provisions on availability, authenticity, integrity and confidentiality of data and a requirement to assist if the financial institution experiences an ICT incident.
2. Unlike many of the previous third-party risk regulatory regimes, DORA goes beyond outsourcing, and brings all “data and digital services” provided to financial institutions through ICT systems within its scope. The starting point for many financial institutions has been to consider whether their existing contract registers sufficiently capture all contracts and not just those that relate to outsourcing or subsets such as cloud contracts.?

Read the full blog post from Pinsent Masons LLP's Head of Fintech Propositions Luke Scanlon , and Partner, TMT Team Edwin Baker .

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