I want to share some reflections from my colleague Alex Ellerton - Regulatory Partner at Grant Thornton - on the FCA's recent consultation on "creditworthiness in consumer credit". Well worth a read...
Since the FCA assumed responsibility for the regulation of consumer credit in 2014, lenders in this sector have had to wrestle with the language of the relevant part of the Handbook (CONC) in order to satisfy themselves - and more often than not a tenacious regulator - that key requirements regarding creditworthiness and affordability are being met.
The range of business models, customer demographics and, frankly, occasional appetite to ‘wing it’, have resulted in a huge variation in standards being adopted across the industry. It has been a time of exploration, intrigue and occasional despair, as everyone involved has sought clarity on regulatory expectations, whilst also responding to unprecedented economic circumstances and inevitable public and political scrutiny.
So we have all welcomed the arrival of CP17/27 (Assessing creditworthiness in consumer credit) with hope that it can be a beacon that shines a clear way forward, away from confusion and towards proportionate and pragmatic reason. And that it provides the right balance to allow responsible borrowers to benefit from a competitive market of responsible lenders.
The CP contains some useful points of clarity. To take one, the dynamic (and difference) between credit risk and affordability risk is brought to the fore. Whilst some firms have already been subject to challenge on the relative weight of the latter in more classic (and very tech-smart) credit risk-centric lending approaches, setting clearer expectations should help to level the playing field.
A clear overarching theme of the consultation continues the supervisory line adopted since 2014: that the more vulnerable the borrower, the higher the regulatory expectation in terms of creditworthiness and affordability assessments. With occasional anecdotal, but helpful, indicators of circumstances that are likely to present a higher affordability risk, the CP provides a useful steer that lenders must be able to articulate how they have factored key aspects into their assessments. These include customer demographic, cost of credit, repayment profile, product features, and total indebtedness.
What bothers me, is the manner in which the proportionate approach to income and expenditure assessments is pitched within the consultation. It’s absolutely the right thing to provide flexibility that enables lenders to make the best use of their data, and to focus more detailed assessment and validation work on borrowers that present with higher affordability risks. However, the language currently employed within the draft rules effectively permits the removal of the requirement to determine a customer’s income and expenditure where the lender can demonstrate that it is ‘obvious’ the customer can make repayments, and that non-discretionary expenditure is unlikely to materially impact affordability risk.
Now, I acknowledge that I have picked out one particular area of the draft rules, and it is important to note that the whole of draft CONC 5.2A needs to be read to obtain the full context. ‘Obvious’ does seem to me to be a curious word to use though, and one which I urge lenders and the regulator to consider carefully. Other than in a few scenarios where repayments are objectively low, I would venture that what is ‘obvious’ could be subject to very different points of view from at least four key stakeholders: (i) the lender; (ii) the borrower; (iii) the FCA; and (iv) the FOS.
Lenders need to think very carefully how they will fully demonstrate why they deemed it obvious that a more detailed assessment of the borrower’s circumstances was disproportionate. This general evidential challenge has prevailed across all of my work in financial services for 20 years and it’s important to note that many of my conversations with lenders since 2014 have featured this very subject.
The bottom line is this: what is ‘obvious’ to you, may not be obvious to a regulator, and you shouldn’t necessarily expect consistency with the FCA’s current view and the view from FOS in a few years’ time. Think carefully about what evidence you are going to amass to support your decision: I think you’re going to need it.
We are consulting on proposed changes to our rules and guidance on assessing creditworthiness in consumer credit.