Assessing creditworthiness in consumer credit

Policy Statement 18/19
Earlier this week, the FCA published Policy Statement 18/19 setting out new rules relating to creditworthiness assessments in consumer credit. The new rules mainly consist of clarifications of guidance which exists in the present CONC regime.
Consumer Harm
The FCA’s supervisory work identified that most borrowers repay their credit commitments without financial distress. However, there are particular risks associated with high-cost credit, non-prime borrowers and borrowers in vulnerable circumstances. In response, the FCA proposes to clarify its creditworthiness rules to facilitate compliance which should ultimately protect consumers from harm that can arise when they are granted credit that is predictably unaffordable at the point it is taken out.
Proportionality
The FCA observe a misunderstanding amongst consumer credit lenders about the practical application of its creditworthiness rules. Some lenders have processes that under-comply with the current creditworthiness rules and result in false positives (i.e. credit advanced that will turn out to be unaffordable) causing consumer harm. On the other hand, some lenders have processes that over-comply and resulted in false negatives (i.e. applications declined when the credit would be affordable) which also can cause consumer harm.
The FCA’s objective in clarifying the existing rules is to provide firms with a clearer framework which they can use to operate creditworthiness assessment processes that are proportionate to each individual case and which reduces false positives and false negatives.
Creditworthiness Assessment
The FCA clarify that a creditworthiness assessment must include an affordability assessment. Creditworthiness should not just focus on the potential credit risk to the lender, from a commercial perspective, but should also assess the affordability risk to the potential borrower.
The FCA does not prescribe how an affordability assessment should be carried out. This can be carried out manually or automatically (or both), sequential or simultaneous to the credit risk assessment.
Income and Expenditure
The FCA set out that firms would not need to establish or estimate a customer’s income where it is obvious in the circumstances that the credit is affordable. For example, this could be obvious from an applicant’s employment or CRA data. Where it is not obvious that the applicant can afford the credit the firm would need to establish income. This can be an exact amount, verified independently, or an estimate (e.g. a minimum amount or a range).
Likewise, firms would not be required to establish or estimate non-discretionary expenditure unless it is obvious that this is likely to impact affordability. Where the firm is required to take into account non-discretionary expenditure, it may estimate this. It may also take into account statistical data (e.g. Office for National Statistics data) unless it knows or has reasonable cause to suspect that the customer’s non-discretionary expenditure is significantly higher than that described in the data, or that the data are unlikely to be reasonably representative of the customer’s situation.
Open-end and running-account credit
The new rules set out that open-end and running-account credit providers would have to conduct a creditworthiness assessment based on whether the applicant would be able to afford the credit in the ‘worst case scenario’ assumption that the borrower will take a full drawdown on day one and repay by equal instalments over a reasonable period of time. A reasonable period of time for these purposes is a typical repayment period under a fixed sum loan of an equivalent credit amount.
Guarantor loans
The FCA clarify that a creditworthiness assessment for a guarantor loan should include an assessment of the borrower as well as the guarantor’s affordability. Guarantor loan providers should not assess creditworthiness by reference to the security provided by the guarantor.
Applicability
The creditworthiness rule changes will apply to:
• Unsecured consumer credit lenders;
• Guarantor loan providers;
• Open-end and running-account credit providers; and
• P2P platforms.

Action Points
The FCA clarify that firms are expected to have written policies and procedures setting out the principal factors that are considered in assessing creditworthiness, including affordability.
The rules are due to come into effect on 1 November 2018. This gives firms three months to review their creditworthiness assessment processes and update their written policies and procedures to mirror changes in processes (where appropriate).
Please feel free to contact us if you require any further information on the new rules and/or if you require any assistance with a review of your processes, policies and procedures.
Thank you

Jourdain Tambo
Senior Compliance Consultant