The FCA has published Consultation Paper 17/27: Assessing credit worthiness in consumer credit: Proposed changes to FCA rules and guidance (CP17/27).
In CP17/27 the FCA sets out proposed changes to its rules and guidance on assessing creditworthiness, including affordability, in consumer credit to clarify its expectations of firms.
Whilst the FCA does not think that its basic approach to creditworthiness needs any fundamental changes it does feel that it is important to clarify in its rules:
- the distinction between affordability and credit risk;
- the factors that should be used when designing affordability checks that are appropriate and proportionate in relation to individual lending decisions;
- the appropriate role of income and expenditure information in lending decisions; and
- the regulator’s expectations around firms’ policies and procedures which should focus on outcomes, having regard to the risks of the credit and customer characteristics.
In particular, the FCA proposes new rules that introduce an explicit definition of ‘affordability risk’. This sets out the factors which firms should consider when assessing whether the credit is likely to be affordable for the borrower. The FCA does not define credit risk.
The layout of CP17/27 is as follows:
- chapter 1 – summary;
- chapter 2 – the wider context;
- chapter 3 – FCA approach to regulating consumer credit;
- chapter 4 – FCA credit worthiness assessment rules;
- chapter 5 – proposed changes; and
- chapter 6 – next steps.
In chapter 5 the FCA sets out its proposed changes to the Consumer Credit sourcebook (CONC) rules and guidance. In particular at para 5.3 the FCA sets out a table summarising the main proposed changes. These include an elaboration of the requirements relating to firms’ policies and procedures for creditworthiness assessments (new CONC 5.2A.33R and 5.2A.34G) and clarifying expectations in relation to the verification of information (new CONC 5.2A.21 and 22G). The FCA also seeks to clarify the meaning of proportionality and the factors to be taken into account by firms when deciding the extent and scope of an assessment and the types and sources of information to use or verify. The FCA is also proposing changes for peer-to-peer platforms, these changes generally parallel the position for lenders.
The FCA has also published Occasional Paper 28: Preventing financial distress by predicting unaffordable consumer credit agreements: an applied framework. This sets out an economic framework for understanding why unaffordable consumer credit debt can occur and how it might be prevented.
The deadline for comments on CP17/27 is 31 October 2017. The FCA aims to publish a policy statement in the first half of 2018.
View FCA consultation paper on assessing creditworthiness in consumer credit, 31 July 2017