Jonathan Davidson (pictured) today said lenders need to recognise that affordability and creditworthiness may not be the same thing, when he addressed the London Credit Summit.
“The interdependence of debt markets throws up some big questions for the industry about the meaning and definition of affordability and appropriate forbearance, none of which have easy answers,” he said.
“Consumers will often prioritise paying back a loan on a home or car, even if this makes meeting obligations on other forms of debt challenging.
“This essentially makes these assets look more affordable than they are, yet this won’t necessarily become obvious until it translates into the poor credit performance of other debts.”
Davidson said if the value of homes or cars falls into negative equity the seeming creditworthiness could shift “quite quickly and dramatically”.
He referred to StepChange estimates that over 2.5 million people are now using credit cards just to meet everyday living costs and emergency expenses. Also, 16 million people in the UK have savings of less than £100.
Firms are making encouraging progress on forbearance, Davidson told the sector, but much of this comes down to culture. The FCA plans to say more on the assessment of affordability in the coming months.
“Those firms that put consumer wellbeing front and centre of their business models are not only more likely to be compliant, they will also be better business propositions.”
However, he said the FCA was more interested in customer good outcomes than in seeking technical breaches or minor errors to punish. Firms that focus on doing the bare minimum are more likely to be targets than those who have TCF at the heart of their business.
He pointed to the upcoming Senior Managers and Certification Regime as a way of holding individuals to account.
Ultimately, he said the credit industry must work together with the regulator.
“The FCA will continue to be a proactive regulator, demanding high standards of conduct from industry and never flinching from our responsibility to protect consumers and enhance the integrity of the market. But this has to be a conversation, not a monologue.”