Affordability and the role of the FCA
The Financial Conduct Authority (“FCA”) was first established in April 2013. By this time the Office of Fair Trading (“OFT”) had already published a review. This paper reviewed the much-debated issue of loan affordability.
The Financial Conduct Authority now regulate over 56,000 financial services firms across the UK. One of their key roles is to ensure that all dealings with consumers are fair. This includes each lender taking into account any individual circumstances the consumer might have. This could include, for example, specific vulnerability such as age or disability. See FCA Executive Summary – Consumer Vulnerability.
The Financial Conduct Authority have also undertaken a full consultation as regards affordability. This means that all financial products offered to consumers must be suitable for them.
The main concern of the Financial Conduct Authority is to avoid financial detriment. As such, it doesn’t always endorse each lending application. At first sight, this may appear to be an unjust decision. Particularly at a time when a consumer might be juggling their finances.
But outcome testing proves otherwise. Declined applications can also prevent consumers from falling into arrears. It also stops them from committing to products they are unable to afford. This might be on a short or long-term basis.
The outcome remains the same. From the lender’s perspective, of course, it also prevents defaults. In turn, this reduces debt collection activity and saves further cost for the consumer.
The history of loan affordability and FCA involvement
Since the global financial crisis of 2007-2008, the financial services industry has struggled. This is perhaps due to growing interest rates. Increases have had a knock on effect. Consumers have struggled to make repayments on time.
In direct response to this, the Financial Conduct Authority have reacted. They have now encouraged much stronger strategies for UK lenders to focus on. They insist on long-term affordability and suitability for all consumers. Each lender must treat their customer with both dignity and respect.
The UK economy has seen a general rise in both unemployment and interest rates. This means that consumers have found themselves unable to make repayments. Hence the FCA’s assertion is that risk is now managed to protect all parties concerned. In response to this lenders must undertake appropriate assessments. They must be sure their customer is able to repay the loan.
To achieve this, each lender will now complete certain checks. These will include credit checks, looking at payment histories and checking for bankruptcy. In each case, there must be a full risk assessment.
The goal is to ensure a fair outcome for all. That said, CONC 5.2.1.R stresses that credit checks are only ‘recommended’. The Financial Conduct Authority don’t state they are compulsory. Far from it.
In their Business Plan for 2015/16, the Financial Conduct Authority announced changes. They spoke of an intention to undertake a full consultation process. They also spoke of their expectations of regulated firms moving forward.
FCA’s definition of creditworthiness
In Chapter 5 of their Consumer Credit Sourcebook, the FCA investigates a customer’s creditworthiness. They compare this to the affordability model. They also reiterate the importance of a customer’s capability to make repayments. See the FCA Handbook for more information.
This particular issue is also mentioned in Chapter 6.2. This concentrates in more detail about the amount of credit made available to consumers. This remains a much-debated topic. It generally reiterates that credit is to be available on an individual basis only.
In essence, then, more emphasis is with the lender. Each lender must ensure their customer’s capability to repay the loan. The product itself needs to be fit for purpose and affordable.
The Financial Conduct Authority also recommend this procedure is repetitive. For example, each time a new loan application goes through. It also suggests the same procedure in the event of a restructure or other change. This is sometimes called a ‘chain of loans’.
Interpreting the FCA’s recommendations
In making their recommendations, the FCA remain focused on a more holistic approach. By remaining principle-based and outcome focused rather than being prescriptive. That is to say that each lender must make a fair and reasonable assessment with each application.
That said, in doing so, they must also follow a strict and given process. Its main concern focuses on treating customers with respect. The Financial Conduct Authority have issued guidance on this. See: https://www.fca.org.uk/firms/fair-treatment-customers
In the meantime, the FCA accepts there are some common misunderstandings. These appear in their publication: https://www.fca.org.uk/publication/consumer-credit-information/consumer%20credit-understanding-cc-creditworthiness-affordability-web.pdf
Common consumer concerns include the credit checking process and creditworthiness. Consumers are also concerned with some of the implications associated with payday lenders.
In the publication, the Financial Conduct Authority also reiterate the need to assess creditworthiness. This falls under CONC 5. Under CONC 5.2. 4G, a lender must consider what is appropriate for the customer.
Another concern is how to assess creditworthiness to avoid future defaults. This is considered by the FCA under CONC 5.2.1R. Here it recommends lenders very much ‘look forward’. They should consider what future changes might affect their customer.
Again, there is no specific need for each lender. The Financial Conduct Authority just ask that each application looks at every possible situation. For example, future events such as marital situations, employment or past performance.
The Financial Conduct Authority remain central in providing clear guidance. They are there to support their regulated firms. That said, it is just “guidance” and nothing more. There are no strict rules. No strict regulations.
The FCA are quite clear when they say they will not dictate what a lender must do. Instead, they reiterate that each case is separate and that common sense should prevail.
The FCA have advised they will continue to request feedback on their advice. They will most likely elaborate on their policies. In the meantime, the onus rests with each lender to accept responsibility. Above all else, they must ensure that their customers are well advised. By doing this protection is there for both lender and consumer. And this, of course, is exactly what the Financial Conduct Authority want to achieve. A fair outcome for all.