Consumer credit affordability: clarity at last?

03 August 2017

Consumer credit firms have been eagerly awaiting the Financial Conduct Authority’s (FCA) consultation on changes to its rules and guidance on assessing creditworthiness in consumer credit, published this week. The FCA states that its main aim is to provide greater clarity for firms in how they should assess affordability and income. So are the proposed changes likely to achieve this?

After reviewing existing affordability processes, the FCA found that most are appropriate, but that practices vary considerably. It also found evidence both of practices that were too lenient and those that were overly stringent. So it seems firms are having difficulties in interpreting the rules.

Many firms will therefore have been hoping for more prescriptive rules from the regulator to help clarify areas of ambiguity. However, set against this the FCA is in an unenviable position of trying to create more clarity, while still maintaining its principles-based approach to consumer credit. The regulator says that its overall approach to affordability is based on proportionality and this remains unchanged. It recognises that the scope and nature of creditworthiness assessments will depend on individual customer circumstances – and is even proposing further rules to make this principle clearer.

So it’s of course challenging to introduce more prescriptive rules while still giving firms enough flexibility to take an individual approach – and one that also protects consumers. Just one example of the challenges faced by both firms and the regulator is how to assess affordability for low-risk customers in a way that is not burdensome but ensures loans are affordable. In its consultation, the FCA proposes to make it clear that where a firm can demonstrate it is ‘obvious’ that credit is affordable for a customer, the firm does not need to estimate or establish a customer’s income. For instance, it says affordability may be clear from a credit rating check or from the customer’s employment. This seems a sensible approach, but it could create a risk that firms interpret this too broadly, and as a result fail to adequately assess affordability for some customers. Because how can a firm be sure that a customer can afford a loan if it has not even estimated their level of income? And how do firms mitigate the risk of applying this approach to inappropriate groups of customers?

I think the consultation therefore does open up some difficult questions for firms. So overall the FCA has not made it easy for lenders and they will need to dedicate a significant amount of time to analysing what these proposed changes mean for their policies, processes and most importantly, their customers. The paper puts even more of an onus on firms to really think about what affordability means for their customers, how to assess it, and how to ensure their processes can properly stand up to scrutiny.

Moreover, this consultation is just one strand of the FCA’s packed consumer credit agenda. It comes after the regulator consulted on measures to address risks from staff incentives and remuneration practices in consumer credit firms at the start of July. And on the same day it issued the affordability proposals, the FCA also published a review of the high-cost short-term credit cap, in which it highlighted concerns in a number of areas: unarranged overdrafts, and the rent-to-own, home-collected credit and catalogue credit sectors. The FCA plans to issue an update on work in these sectors in the first quarter of next year, making it clear that for unarranged overdrafts ‘maintaining the status quo is not an option’.

All of this creates a very busy in-tray for consumer credit firms. And while the balance between clarity and proportionality is not an easy one, the FCA will be expecting firms to interpret its proposed rules and guidance in a way that above all leads to the right outcomes for customers.

Please see our hot topic for more details on what the proposals will mean for firms.
John Coley | Director
Profile | Email | +44 (0)20 7213 8075


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