The PRA has published a statement on consumer credit following its review of consumer credit lending, which examined PRA-regulated firms’ asset quality and underwriting practices for credit cards, unsecured personal loans and motor finance. The statement summarises the findings from the PRA review and outlines issues arising for PRA-authorised firms that provide consumer credit to consider and act upon.
Following its review, the PRA is requesting evidence from all firms with material exposures to consumer credit of how they will, across consumer credit portfolios, ensure that:
- credit-scoring adequately captures medium-term risk;
- stress-testing approached do not under-estimate potential downturn risk;
- any loss leader segments are explicitly reported and monitored;
- consideration is given to whether, at the cut-off point for new business, a prudent add-on is or should be applied;
- the Consumer Credit Sourcebook has been interpreted prudently in underwriting;
- a borrower’s total debt, including secured debt, is taken into account in the underwriting process; and
- firms’ risk appetite, management information and governance frameworks are sufficient to oversee consumer credit portfolios, including controls embedded to prevent unintended drift in underwriting, overall asset quality or pricing-for-risk standards, and board oversight of this.
Firms should also ensure that the following potential issues on specific consumer credit products have been addressed and mitigated appropriately, and be in a position to provide the following evidence to their supervisor:
- for 0% interest credit card offers, firms should be able to justify the assumptions and time periods used for forecasting the net present value of new business;
- for unsecured personal loans, firms should provide evidence of how their underwriting assessment and pricing of long-tenor or higher-amount loans take into account consumers’ motivation for borrowing, and borrowers’ overall indebtedness; and
- for motor finance, guaranteed future values should be set in a prudent manner compared with the expected future value of the car.
For firms with materials consumer credit portfolios, supervisors are requesting evidence of how they are addressing risk and concerns, and assurance that firms’ own boards are satisfied with how the PRA’s concerns are being addressed. Firms should cover the three consumer credit products, with a level of detail for each product proportionate to their importance to the firm’s business model and the level of exposure, and include quantifiable evidence to the support statements and assertions.
The statement also reports that the Bank of England will bring forward the assessment of stressed losses on consumer credit lending in its annual cyclical stress (ACS) test for the major firms. In addition, the PRA will work with firms not captured by the ACS stress test, but with relatively high exposures to consumer credit, to review their resilience against the 2017, or similar, stress scenario and provide feedback privately.
View PRA statement on consumer credit, 4 July 2017