FCA Research in Creditworthiness
Last month the Financial Conduct Authority began its research to look at creditworthiness (which includes affordability), a stated objective in its annual business plan which was published in March 2015.
The research will broadly look at three main themes:
- How firms assess creditworthiness (including affordability)
- The consumer impact of the various approaches
- The potential impacts of different regulatory approaches on consumer outcomes, competition and cost and availability of credit.
Recently the FCA contacted several High Cost Short Term Lenders to request information on repeat and multiple lending. This will be used in this research to look at the whole creditworthiness area.
On 14th August the FCA updated https://small-firms.fca.org.uk/creditworthiness-and-affordability-common-misunderstandings which lists 19 “Common Misunderstandings” about the assessment of creditworthiness and affordability. These are:
- Affordability and creditworthiness are separate assessments
- FCA Prescribes how to assess creditworthiness
- FCA is more concerned with process than outcome
- CONC is full of rules which limits flexibility
- Credit Reference Agencies must be checked
- Income and expenditure must be completed
- Income and Expenditure verification must be undertaken
- Crystal Balls are needed to predict the future
- All creditworthiness checks should be the same
- Creditworthiness checks must be made for even small loans
- As this person has borrowed before no creditworthiness check is needed
- Assessment must be made manually
- Assessments for loans are the same as for mortgages
- The FCA have a hidden agenda as shown by action taken against HCST lenders
- The same checks must be made of a Guarantor as a borrower
- The FCA are preventing loans to joint borrowers
- Pawnbrokers don’t need to assess creditworthiness
- Brokers need to assess affordability
- Future changes to CONC will make it more prescriptive
We think that this is very straightforward. You have to decide what you believe is adequate in proving a customers’ creditworthiness and affordability. If you are a shopfront lender, requiring information such as bank statements and payslips you may decide that credit reference agency data doesn’t really give you any extra information to decide on the customer’s ability to repay. We see many models and all have their merits.