In these challenging times, the reality of regulatory obligations and expectations do not disappear and they can be hard to juggle in the face of human need. In a series of briefings focussing on areas of key relevance for lenders at this unique moment in time, we set out some of our thoughts on the central issues lenders need to be thinking about.
The FCA's rules on creditworthiness and the assessment of a customer's ability to afford the lending they have applied for remain in play. Whilst it is reasonable to assume that consumer borrowing needs may increase and the government is likely to want lenders to help as much as possible, it would be wrong to assume this can be achieved by a more relaxed approach to creditworthiness assessments when customers are applying for new borrowing. Unless and until the FCA clearly explain that it is prepared to flex its rules in this area – which we think is incredibly unlikely given the journey we have been on to get to where we are - it must be assumed that they are full in force and the regulatory expectation is that firms will fully adhere to them.
With this in mind, we have set out some key points related to creditworthiness assessments you may wish to bear in mind over the coming days, weeks and months.
KEY POINTS TO CONSIDER
- The requirements around assessing creditworthiness apply in relation to new borrowing. This is a separate issue raising distinct considerations from those which applicable to customers experiencing financial difficulty and who need forbearance in relation to their existing borrowing. The FCA has made clear it expects firms to engage sympathetically with their customers in relation to their existing borrowing.
- The requirement to assess a customer's income and expenditure (CONC 5.2A.15R) applies. The requirement to estimate the amount of any reasonably foreseeable reduction in income is likely to be particularly relevant as we head into increased economic uncertainty.
- Do not be quick to assume the amount applied for is "obviously" affordable. Whilst the FCA's rules anticipate that carrying out a full assessment of the customer's income and expenditure may be disproportionate where it is "obvious" a customer can afford it, we anticipate this will be narrowly construed, particularly if in the future there are high levels of complaints or evidence of detriment.
- As pressures on the economy increase, it is important to be live to the ongoing viability of businesses. Lending to employees of businesses which are widely known to be struggling without factoring this into your assessment will be difficult to defend in the future. This will particularly be the case where employment details are captured in the application process.
- Reliance on self-certified income will be difficult to support given the FCA's recent activity in this area and the pressures many consumers will be facing in the coming weeks and months.
- There are likely to be challenges around basing lending decisions made right now solely on data from the credit reference agencies. That data is a month old and reflective of a UK consumer base and economy relatively unaffected by COVID-19. Lenders will need to think how this can be addressed in their decisioning methodology.
- The direction of travel over the last few years has been to broaden the concept of vulnerability. Vulnerability and affordability often bump up against each other at the point of application decisioning. Lenders need to be particularly alert to indicators of vulnerability when lending decisions are being made. The reality is that when today's lending decisions are scrutinised in 2 or 3 years' time, it will likely be done through a lens of presumed vulnerability.
- Whilst not strictly an affordability issue, responsible lending will require lenders to consider the appropriateness of the product being applied for in the context of the customer's circumstances. If the customer is facing a relatively short term drop in income, providing a 5 year, high value loan may not be appropriate.
- Credit card issuers may face requests for a relatively small credit limit increase where the customer has little or no other option. The reality is that, on a human level, it may be very difficult to refuse such a request. However, from a regulatory perspective, lending can only proceed in those circumstances where the creditworthiness assessment is either not run or if it discloses the customer cannot afford the additional borrowing, then it is accepted that this is a risk that the lender is taking and which cannot have any negative customer implications or outcomes.
- Lenders' approach to affordability will need to be reviewed to ensure it remains robust in the changing circumstances we find ourselves in. Just carrying on as is without considering if your assessments and methodology needs to adapt to ensure you can defend your decisions in the future, isn't really an option.
Whatever you decide to do with your creditworthiness assessments over the coming months, we are entering a period in which large swathes of the UK consumer population are likely to be regarded by the FCA as being vulnerable. It is vital you document your decision making and evidence the good customer outcomes which motivated the decisions made. It is quite likely, given the trajectory consumer finance has been on over the last 10 years, that your actions will be scrutinised. Building your defence today, as you navigate these difficult waters for the challenges that may come tomorrow, really is your only option.
If you would like to know more or would like to discuss anything further, please get in touch.
Partner, Financial Regulation
Partner, Financial Regulation and Co-head of Financial Services Sector
Managing Associate, Financial Regulation
Compliance Director (Non Lawyer), Financial Regulation LondonView profile