On 19 April 2023, the FCA published a speech by its Director of Retail Banking, David Geale, delivered at the London Institute of Banking and Finance mortgage conference at Congress Centre, London. The speech discusses the FCA’s view of green mortgages.

Mr Geale begins by defining a green mortgage, as a mortgage which includes an incentive for people to either purchase an energy-efficient property, or improve the energy efficiency of an existing property. The incentives vary but typically involve a discount to the fixed rate, or cashback payable after completion of the improvement.

The speech notes that green mortgages are relevant to each of the FCA’s primary objectives, i.e. to protect consumers, promote market integrity and promote competition in the interests of consumers, and that the Chancellor’s remit letter to the FCA in December 2022 also stated that it should consider the government’s net zero ambitions in its regulation. The FCA therefore wants to see mortgage lenders delivering on their net zero pledges, and consumers benefitting from homes with enhanced energy efficiency. Mr Geale flags that brokers have a pivotal role to play in matchmaking those lenders with those consumers, and the FCA will do what it can to support and encourage the industry in this relatively new and rapidly evolving space.

The speech then covers the advantages of green mortgages, highlighting their ability to help the decarbonisation of residential homes in the UK, which account for around a fifth of the country’s greenhouse gas emissions.

Mr Geale also discusses the risks involved in green mortgages. He warns that if lenders fail to develop credible plans to meet their stated decarbonisation targets, the FCA will take ‘a very dim view’ and it could be perceived by the market as greenwashing. In addition, lenders targeting only the most efficient properties would have the unintended consequence of making it difficult, or very expensive, to secure a mortgage for properties with lower energy efficiency, even if those properties could be significantly upgraded. It could also penalise those homeowners who are not currently able to make those improvement without help, and many become – or already be – vulnerable. There is also a separate risk that innovation in products and incentives could run ahead of consumer demand.

The FCA wants to see ongoing innovation from lenders in relation to green mortgages, with compelling incentives that will influence consumer decisions as they seek to improve the energy efficiency of their homes. Mr Geale notes that the FCA’s Innovation Sandbox can provide support and guidance for eligible firms seeking to innovate in this way. He also states that the FCA will continue to monitor the sector, making sure that where lenders have set out decarbonisation targets for the homes they provide mortgages for, they have a credible plan to achieve them.

The regulator also wants brokers to be empowered to support consumers in making appropriate decisions, tailored to their express needs and preferences, and in this context Mr Geale highlights the role of the new Consumer Duty. When lenders make claims that products are ‘ethical’, ‘socially responsible’, or ‘green’, they will need to make sure they are genuinely designed and run as such and match up with any claims made in promotions. If they do not then it is likely to be a breach of the Duty’s cross-cutting rule on acting in good faith, in addition to the need to consider greenwashing risks. Mr Geale also sets out various other examples of Consumer Duty considerations for firms in relation to ESG products.