On 15 March 2018, the FCA published a speech given by Jonathan Davidson (Director of Supervision – Retail and Authorisations, FCA) at the Credit Summit in London. The speech is entitled Getting affordability right in consumer credit.
Key messages in Mr Davidson’s speech to consumer credit firms include:
- business models that are predicated on selling products to customers who can’t afford to repay them is not acceptable. The FCA will take action against firms who run their business this way;
- consumer credit firms should think strategically about the issues facing their customers. This is the right thing to do, not only for the firm’s customers but also for the firm itself;
- the financial situation for some borrowers is precarious and the potential for further rises in interest rates could have a significant impact on the cost of debt;
- given the potential rough weather that some borrowers may face in the future, a backward-looking credit check is not enough. A key question is will the customer be able to repay without causing them wider financial difficulties? The FCA’s rules set this out – firms need to consider the potential for credit to adversely impact the customer’s financial situation (i.e. that the debt will be affordable). The FCA is not overly prescriptive on how firms do this. The CONC handbook requires firms to consider likely changes to a customer’s situation during the duration of their credit. The FCA’s guidance to firms highlights areas to consider – including the future financial commitments of the customer, and the future changes in their circumstances;
- a firm’s successful business model also relies on having a healthy culture. Staff need to be encouraged to be curious and questioning. Without this, firms might not realise that their business models are unsustainable and can lead not only to reputational damage, but also to the kind of costly intervention that the FCA has been making; and
- in relation to unsustainable business models, a key observation and concern for the FCA is that there are some business models for which customers who cannot afford to repay the principal are profitable.