The FCA is expecting firms to establish, implement and maintain clear and effective policies and procedures for assessing creditworthiness, including affordability.
The key changes concern responsible lending and post contractual requirements, as well as the application of the general requirements on firms in the regulator’s senior management arrangements, systems and control sourcebook.
With these new rules the regulator aims to make its expectations clear in relation to the assessment of creditworthiness in consumer credit, in response to evidence both of under-compliance with its rules but also of firms having procedures which may be unnecessarily costly or restrictive.
In particular, the FCA has made changes to clarify the distinction between credit risk and affordability risk. From 1 November 2018, a firm should not grant credit or increase the credit limit significantly unless it has carried out a creditworthiness assessment and had proper regard to the outcome of that assessment in respect of affordability.
According to the changes, household or other income will be taken into account in the assessment, provided that the firm can reasonably expect such income to be available to the borrower for repayment of the credit.
The regulator has also clarified that income is not limited to earned income, as well as the meaning of non-discretionary expenditure, and that where another person’s income is taken into account in the assessment, a provider should also look at non-discretionary expenditure.
The regulator has recognised that the provision of consumer credit has a key economic function and is a largely beneficial activity, enabling borrowers to purchase goods and services and spread repayments over time.
Even though most borrowers repay without difficulty and without financial distress, there are particular risks associated with high-cost credit or where customers may be non-prime, which means those without a good credit history, or in vulnerable circumstances.
Creditworthiness comprises credit risk to the firm and affordability for the borrower. Most firms have a strong commercial incentive to assess credit risk, including the probability of default, but may have less incentive to assess the risk that the credit will impact negatively on the customer’s wider financial situation in particular where these customers will still be profitable for the firm.
“We want to protect consumers from the harm that can arise when they are granted credit that is predictably unaffordable at the point it is taken out. At the same time, we want consumers to be able to access credit where it is affordable. We undertook research to establish how firms were interpreting and applying our existing rules and guidance on creditworthiness assessment,” the FCA said.
Outcome the FCA is seeking
Firms may use a variety of methods and processes to assess credit risk and affordability. These may be automated or manual, or a combination of these. Firms may assess credit risk and affordability together, or separately, and processes may be integrated or sequential.
The effectiveness of the policies and procedures, and the firm’s compliance with our rules, should be reviewed periodically, with changes made to address any deficiencies. The firm should also keep a record of each transaction where credit is granted, to enable the FCA to monitor the firm’s compliance.
The FCA suggests firms make a reasonable assessment of creditworthiness before making a regulated credit agreement or significantly increasing the amount of credit or the credit limit.
The firm would also need to take account of any likely reduction in income during the period of the credit, where this is reasonably foreseeable and could have a material impact on affordability risk.