The Financial Conduct Authority (FCA) has published a document intended to clarify some of the ‘common misunderstandings’ regarding the process of conducting checks on a customer’s creditworthiness and ability to afford repayments.
Some of the ‘myths’ the document seeks to clarify include:
• The FCA prescribes what credit checks need to be done – it is in fact the firm that needs to decide what checks are appropriate, having regard to the type of credit being offered, the amount offered, the cost of credit and the applicant’s financial position
• The FCA is only concerned with process and not outcomes regarding credit checks – on the contrary the FCA expects the firm to ensure that the customer is likely to be able to make repayments on time, without falling into arrears or needing to effect additional borrowing
• Credit reference checks via an agency are always required – it is in fact up to the firm to decide whether this is necessary in each individual case
• Firms have to have a crystal ball to predict an applicant’s future circumstances – all a firm can realistically do is look at past behaviour of the applicant, as well as future changes in expenditure that can reasonably be foreseen, such as moving home, having children, impending redundancy etc.
• The same level of checks are needed in all cases – no, firms can make sensible judgements based on the type of credit being offered, the amount offered, the cost of credit and the applicant’s financial position, and can decide to apply different levels of checks in different scenarios
• Checks are not required for repeat customers – firms are entitled to take the applicant’s payment record on the previous credit agreement into account, but they must consider whether a further check is appropriate for subsequent applications, especially as the customer’s financial circumstances may have altered
• Automated processes cannot be used – firms can indeed use automated processes provided they are sufficiently robust to deliver the desired outcome, i.e. it can be demonstrated that the applicant is sufficiently credit worthy
• A similar level of checks is required on both a mortgage application and a consumer credit application – mortgage lenders are subject to very prescriptive requirements on affordability checking, but it is not necessary to go to these lengths for very single application for any form of credit
• The FCA’s rules effectively forbid firms from approving loans in joint names – FCA guidance requires firms to consider the financial position of each applicant, but credit can still be offered if the firm is satisfied that both borrowers meet the required standards for creditworthiness and affordability. Remember each applicant for a joint arrangement is ‘jointly and severally’ liable for the debt
The FCA’s rules on this subject are not prescriptive, and in many cases require a firm to make its own judgement about what level of checks are appropriate.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.