Jonathan Davidson, Director of Supervision – Retail and Authorisations at the Financial Conduct Authority (FCA) – spoke to the Credit Summit, London in March 2018.
In a speech entitled “Getting affordability right in consumer credit”, Mr Davidson warned consumer credit firms that “a business model that is predicated on selling products to customers who can’t afford to repay them is not acceptable.” He added that the FCA “will take action against firms who run their businesses this way”, and cited the compensation now being paid by retailer BrightHouse as an example.
The FCA director also cited the importance of lenders ensuring that credit applicants are likely to be able to afford the repayments should their circumstances change. Mr Davidson commented:
“[Some customers] might be able to just about afford any loans you grant them today, but it is far from certain that they will be able to do so in the future.”
The next section of the speech described a number of “warning signs” in the credit market as a whole, which include:
- Consumer credit levels have risen rapidly in recent years
- Household debt levels are high in relation to income
- A significant number of households are deeply indebted
- 36% of the 25-34 age group have been overdrawn at some point in the last 12 months. 19% of this group have no savings, and 30% have less than £1,000 set aside
- More than 900,000 people in the UK are currently on zero-hours contracts
- Of those paying mortgage or rent, one in six said they would struggle if their repayments rose by just £50
- There could be further increases in the cost of living in the coming months and yearsMr Davidson then moved on directly to the subject of affordability and consumer credit. He asked firms to consider that “the key point for today is that a credit check is not the same as an affordability check.” This is largely because a credit check is concerned with the past – what is the applicant’s record in meeting their credit commitments? However, an affordability assessment is concerned with the future – will the applicant be able to make the repayments on the loan or other credit product they have applied for? Despite this key difference, the speaker said that his organisation had seen a number of firms who were relying simply on credit checks when assessing an application, and who were not specifically considering affordability.He stressed that while the consumer credit rulebook does not set out detailed rules as to how affordability should be assessed, mortgage lenders are required to carry out a comprehensive analysis of an applicant’s income and expenditure, and to carry out ‘stress tests’. A stress test is an assessment of whether the individual would still be able to afford the repayments were interest rates to rise.Regardless of whether the FCA Handbook sets out detailed rules for a firm to follow, Mr Davidson said it was good practice to consider:
- What would be the situation regarding the applicant were interest rates to rise?
- What would happen if the cost of living went up?
- Are there any indications of a forthcoming change in the applicant’s circumstances, such as a change of employment?The FCA director made reference to new rules introduced by the regulator, such as the requirements to assist borrowers in persistent debt on their credit card. He also reminded his audience of the requirements for individuals within financial firms under the Senior Managers & Certification Regime, which include the need to treat customers fairly.
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