FCA's Proposed New 'Creditworthiness' Rules: What You Need To Know

With Q4 well under way, it’s a good idea to have any upcoming FCA policy statements at the forefront of your planning for 2018. Consumer credit firms should have the FCA’s ‘Assessing Creditworthiness in Consumer Credit’ proposed changes in mind. The consultation closed in October, and the policy statement is due for release in Q2 2018.

So, what are the FCA proposing?

The consultation suggests that research conducted by the FCA discovered that while most firms adequately consider affordability, and that this is reflected in their processes and procedures, practices vary considerably and there is evidence of both under- and over-compliance. As a result, the FCA intend to write in a number of new rules and guidelines across the Handbook aimed at providing a clearer definition of creditworthiness, and giving firms more information about the FCA’s expectations.

While the FCA are keen to highlight that the basic approach isn’t going to change, the aim is to clarify the distinction between affordability and credit risk, and provide information on factors and methods for designing appropriate checks.

The proposed new rules introduce an explicit definition of 'affordability risk’; the risk that the customer will not make one or more repayments under the agreement by the due date, and the risk to the customer of not being able to make repayments under the agreement (as they fall due and wholly out of the customer’s income, and without the customer having to borrow to meet the repayments and without failing to make any other payment the customer has an obligation to make, and without the repayments having a significant adverse impact on the customer’s financial situation).

Importantly for consumer credit firms, there is a suggested amendment to SYSC that ‘where a firm grants credit, or significantly increases the amount of credit, or the credit limit, it will be required to maintain a sufficient record of the transaction to demonstrate that it carried out an adequate creditworthiness assessment’. The proposed definition of ‘creditworthiness’ is broad, and depends on a qualitative consideration of both the credit risk (risk to the lender that the customer will not repay the credit) and affordability (how difficult it may be for the customer to repay).

The FCA recognises that there may be overlap between credit risk and affordability, and that some firms may wish to combine these aspects into a single assessment.

In carrying out the assessment, firms must consider:

• the potential for the commitments to negatively affect the customer’s financial situation, and

• the customer’s ability to make repayments as they fall due.

The consultation makes clear that the FCA do not intend to set out a prescriptive list of particular checks or suggest what information firms should seek, highlighting instead that outcomes matter more than process and that proportionality is key. For example, the FCA may expect to see fewer checks for an individual who applies for a low amount of credit and is in receipt of a regular high salary, but more extensive checks where a high amount of credit is applied for by someone who had defaulted before. In short, the firm should have processes and procedures in place to ensure that they have taken account of the definition of affordability risk set out above. Whilst they do not prescribe the types of checks they would expect to see evidenced, they do offer examples of Income & Expenditure checks, and verifying of CRA information.

Another clarification to be added to the Consumer Credit Sourcebook is that policies and procedures to make a reasonable creditworthiness assessment must be in writing, they must set out the principal factors to be taken into account in assessing creditworthiness and they must be approved by the firm’s senior personnel or governing body. This is supported by a proposed addition to SYSC that firms would be required to assess and periodically review the effectiveness of their policies and procedures for creditworthiness assessments and the firms’ compliance with both these and relevant CONC requirements. Firms would be expected to take appropriate measures to address any deficiencies.

The FCA are currently considering feedback received during the consultation, and expect to publish a Policy Statement, along with final rules and guidance, in the first half of 2018. Why not check that your firm has everything covered by using our audit template.

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