On 30 July 2018, the FCA published Policy Statement 18/19: Assessing creditworthiness in consumer credit – Feedback on CP17/27 and final rules and guidance (PS18/19). In PS18/19 the FCA summarises and responds to feedback to Consultation Paper 17/27: Assessing creditworthiness in consumer credit (CP17/27). It also publishes final rules and guidance in its Consumer Credit sourcebook (CONC). However, PS18/19 does not affect how affordability is considered for regulated mortgage contracts, which are subject to a separate regulatory regime.
The FCA states that it wants firms to make a reasonable assessment, not just of whether the customer will repay, but also of their ability to repay affordably and without this significantly affecting their wider financial situation. At the same time the regulator wants to avoid being too prescriptive and wants firms to take a proportionate approach, taking into account the costs and risks of the credit for the individual customer.
The new rules and guidance in Appendix 1 of PS18/19 come into effect on 1 November 2018. The changes seek to clarify existing rules and guidance in CONC 5 (Responsible lending) and 6 (Post contractual requirements), and the application of the general requirements on firms in the Senior Management Arrangements, Systems and Controls sourcebook (SYSC). There are also some minor consequential changes to other parts of CONC, and the Handbook Glossary.
In following the new rules and guidance, the FCA states that firms should use their judgement to decide what is appropriate in the circumstances. There may be multiple ways in which firms can comply with the new rules, and it wants firms to have a reasonable degree of flexibility according to the nature of the product and customer base, provided that they can demonstrate the basis of their decisions, if challenged.
The FCA wants firms to establish, implement and maintain clear and effective policies and procedures for assessing creditworthiness, including affordability. These should set out the principal factors to be taken into account, and should be approved by the firm’s senior management. The effectiveness of the policies and procedures, and the firm’s compliance with the FCA’s rules, should be reviewed periodically, with changes made to address any deficiencies. The firm should also keep a record of each transaction where credit is granted, to enable the FCA to monitor the firm’s compliance.
The FCA has included in chapter 3 of PS18/19 some answers to common misconceptions that arose as a result of CP17/27, and some illustrative examples on proportionality. These are not exhaustive or definitive but highlight how different factors can affect the nature and extent of an assessment.
Feedback to CP17/27
As a result of the feedback to CP17/27, the FCA has made changes to:
- make clearer the distinction between credit risk and affordability risk, and that a firm should not grant credit (or increase the credit limit significantly) unless it has carried out a creditworthiness assessment in accordance with the FCA’s rules and had proper regard to the outcome of that assessment in respect of affordability;
- allow household or other income to be taken into account in the assessment, provided that the firm can reasonably expect such income to be available to the borrower for repayment of the credit;
- clarify that income is not limited to earned income;
- clarify the meaning of non-discretionary expenditure, and that where another person’s income is taken into account in the assessment, account must also be taken of that person’s non-discretionary expenditure;
- identify the factors that should inform the scope, extent and proportionality of an assessment, and that different factors may influence this in different directions (and that the purpose of the loan may be taken into account where appropriate);
- the treatment of business lending, where the FCA’s rules allow flexibility for firms to tailor the assessment to the nature of the product and customer; and
- the assumptions to be used for assessing affordability in relation to credit cards and other running-account credit.
What to do
Firms affected by the changes in PS18/19 should review their policies and procedures in light of the new rules and guidance, and make changes where needed. Firms should also ensure that they keep their policies and procedures under review to monitor compliance with the requirements on an ongoing basis.
The FCA also asks firms to get in touch with it if they have views on whether the regulator should publish further guidance with examples of good and bad practice in assessing affordability, and on where such guidance might be particularly helpful (or alternatively, where the risks may outweigh the potential benefits).