On 30 July 2018, the Financial Conduct Authority (FCA) published a policy statement (PS 18/19) containing the final rules and guidance on assessing creditworthiness for consumer credit products.
The FCA had two concerns: (a) whether firms were complying with the rules and (b) whether firms had procedures which were unnecessarily costly or restrictive to consumers. The FCA therefore published a consultation paper, CP17/27, to clarify its expectations for firms when assessing creditworthiness before entering into a regulated credit agreement and to set out its proposals.
The FCA wants to balance consumer protection with the need for consumers to access affordable credit. Following feedback after the publication of CP17/27, the FCA has published PS 18/19 containing the final rules and guidance on assessing creditworthiness for consumer credit products.
PS 18/19 clarifies:
- the distinction between affordability and credit risk;
- the factors that should be used when deciding the proportionality of assessments;
- the role of income and expenditure information; and
- the FCA's expectations around firms’ policies and procedures.
The rules and guidance come into force on 1 November 2018.
What does PS 18/19 say?
Our ten key points are:
- The changes clarify the 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 FCA's Senior Management Arrangements, Systems and Controls sourcebook (SYSC).
- The FCA has clarified that creditworthiness includes both credit risk to the lender and affordability for the customer. There is a new definition of affordability: this is the risk to the customer of not being able to make repayments or of these having a significant negative effect on their overall financial position.
- There is no need for firms to have a separate process to assess credit risk and affordability; this can be dealt with under a single process.
- Firms must not enter into a regulated credit agreement, or significantly increase the amount of credit or the credit limit, unless it has carried out a creditworthiness assessment.
- The FCA has provided clarification on the use of income and expenditure information. The new provisions make it clear income is not limited to salary and wages.
- The extent and scope of a creditworthiness assessment, and the steps that must be taken to undertake a reasonable assessment, should depend upon, and be proportionate to, the individual circumstances.
- For open-ended credit, firms should make a reasonable assumption about how long the credit is likely to run for. The FCA will be converting its existing guidance into rules.
- For guarantor loans, as well as assessing the customer's creditworthiness, firms must consider the potential for the commitments under the credit agreement to have a significant negative effect on the guarantor's financial situation.
- Firms' policies and procedures should be in writing and should be reviewed periodically to ensure they remain effective.
- Similar changes are made to the requirements for peer-to-peer platforms to assess creditworthiness, including affordability, for a customer under a P2P agreement.
While the FCA maintains PS 18/19 is an evolution rather than revolution of its rules and guidance on creditworthiness and affordability, firms can find some encouragement from them. The FCA now accepts household income can be taken into account (rather than only individual income) so long as the customer can use that income to make repayments. The FCA is also giving further consideration on examples of good and poor practice. A firm's policies and procedures should, however, be approved by the firm's senior management (which will come as no surprise for those firms already subject to SMCR). Firms should also keep records of each individual assessment for audit purposes.
However, it is clear from the rules and guidance that a greater emphasis is being placed on firms to assess the customer's creditworthiness and affordability. The FCA does not say what is "reasonable and proportionate in the circumstances" meaning there will remain a number of compliant approaches. Firms will need to review the new rules and guidance and make sure they have proper processes and procedures in place by 1 November 2018.