On 4 July 2017, we blogged that the PRA published a Dear Chair letter which follows up on its Statement on consumer credit. The PRA statement raised ten issues for firms to consider and firms with material consumer credit exposures were required to respond to the PRA by September 2017, with responses to be approved by the board.
The PRA has now published a follow-up statement to the PRA statement on consumer credit setting out the PRA’s key findings from the responses and setting out action points for firms. The PRA’s main finding concerns weaknesses in management information (MI) and governance, with other findings covering: (i) medium-term economic risk; (ii) affordability assessments; and (iii) some product specific points on 0% interest credit cards and on larger or longer-term personal loans and motor finance.
Key messages from the PRA include:
- some board risk committees do not routinely receive sufficient standardised MI on consumer credit to recognise when a shift in asset quality or portfolio performance is taking place;
- the PRA will consider in late 2018 a follow-up review of the adequacy of consumer credit risk monitoring MI to board and board risk committees;
- board risk committees should also consider whether there are more general lessons on MI for all other banking products (including mortgages and corporate lending);
- the PRA will assess the resilience of firms’ consumer credit books in 2018 (and beyond) as part of its annual cyclical stress (ACS) test and through firms’ ICAAPs;
- in line with the proposed changes to the FCA’s Consumer Credit sourcebook (CONC), unless a firm can demonstrate that it is obvious that the customer can repay in an affordable manner, the PRA expects firms’ affordability assessments to take account of income and expenditure, such as comparing net disposable income against monthly payments and considering the customer’s total indebtedness. In such cases, where it is not obvious that credit is affordable, firms should consider whether a customer’s housing payments are likely to increase over the period of the credit, and if so, whether this could have a material impact on credit affordability. The assessment should be proportionate to the costs and risks of the credit and the borrower’s circumstances, and in line with any updates to CONC;
- the PRA asks boards to ensure they are content with their firm’s effective interest rate (EIR) assumptions for 0% credit card offers, and understand the implications for income and potential income volatility if future customer balances amortise more quickly than expected. The PRA encourages firms to consider the use of interest income-at-risk limits, and to consider the contribution of credit card portfolios to interest rate risk when preparing their ICAAP;
- the PRA will undertake a broader review of EIR accounting across the industry, and beyond credit cards;
- for larger (˃£25,000) or longer (˃5 years) unsecured personal loans, the PRA recommends firms track the size and performance of these segments with regular MI. The PRA encourages ‘layering’ these features with higher-risk borrower attributes such as overall indebtedness, and also suggest firms consider introducing relevant concentration limits within their risk appetite metrics;
- the PRA will consider what guidance on used car price stress to communicate to affected firms as part of the 2018 ACS test or ICAAP process.
View PRA Dear Chair letter – follow-up to PRA Statement on consumer credit, 17 January 2018