Creditworthiness assessments: new rules and expectations

The FCA has published Policy Statement 18/19 containing its final rules on creditworthiness assessments. Although the rule changes are meant to be minimal, it is likely that firms will need to review their procedures and in some cases may need to implement significant changes. Firms will need to ensure that their creditworthiness assessment adequately covers affordability risk and is not just an assessment of credit risk. Where possible, firms will want to take advantage of the fact that where affordability is obvious income does not need to be assessed, and proper checks will need to be put into place to ensure this exception is not relied on where affordability is not obvious.

The main changes are focused on CONC 5 (Responsible lending) and CONC 6 (Post contractual requirements), and the new rules and guidance will come into effect on 1 November 2018. The transition period for pipeline agreements is no longer being implemented so all creditworthiness assessments will need to comply by that date.

What are the key changes?

"Affordability" clarified

The new rules expressly highlight that the creditworthiness assessment must consider two aspects: credit risk and affordability risk. The former focuses on the risk to the lender of the customer not making repayments, while the latter focuses on the effects on the customer of not making repayments. The FCA has also clarified that, although the rules set out that the creditworthiness assessment is based on two separate assessments, firms are not required to carry out two separate processes as long as their single process sufficiently addresses affordability.

Creditworthiness assessment is prerequisite to new or significantly increased credit

The new rules also explicitly state that a firm must not enter into a regulated credit agreement, or increase significantly the amount of credit or the credit limit, unless it has carried out a creditworthiness assessment in accordance with the rules set out in CONC. A significant credit limit increase can be made up of a number of separate increases. Some respondents to the consultation on the proposed rule changes asked for guidance on what would constitute a 'significant' increase. However, the FCA has decided that this would not be appropriate as it may vary according to the circumstances.

Role of income in assessing affordability

The new rules allow firms to avoid establishing or estimating a customer's income where it is obvious in the circumstances that the credit is affordable. In all other cases, firms will need to take reasonable steps to work out or estimate the customer's income. The new rules allow firms to consider income from savings or income from another person. In addition, firms must also estimate likely future changes that could affect income and non-discretionary expenditure. The FCA has clarified that this means that firms should base their estimation on information available to them at the time and that firms should not ignore any information that suggests that the customer's circumstances could change materially. In other words, the FCA is only expecting firms to take into account issues that are reasonably foreseeable.

Proportionality: factors to consider

The FCA has provided clarification on the principle of proportionality in relation to creditworthiness assessments. As was stated by the old rules, the new rules say that the extent and scope of the assessments and the steps that are needed to ensure the assessment is reasonable should be proportionate to the individual circumstances. Instead of providing a list of factors that may be considered, the new rules set out number of factors that firms must consider when designing affordability assessments that are appropriate and proportionate. In addition, there are further factors that firms must consider where they are applicable to the agreement. Although the FCA wants to ensure that it maintains a high-level principles approach in relation to proportionality, chapter 3 of the policy statement sets out answers to some common misconceptions that arose from the responses that the FCA received as well as some examples to illustrate how proportionality works in practice.

Market study on credit information

The FCA did not propose any changes to the use of credit reference agency (CRA) data as part of the creditworthiness assessment; however, in its policy statement, the FCA refers to the fact that, in its Business Plan for 2018/19, it announced that it intends to undertake a market study on CRAs (in early 2019). Based on the feedback the FCA received, the market study could be used to consider how access, coverage and timeliness of CRA data could be improved and whether other sources of data (such as data available through Open Banking) could be used for creditworthiness assessments.

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