Further to our blog on 2 August, the FCA has introduced regulations which require lenders to assess affordability more rigorously. This would seem to be in response to soaring levels of household debt in the UK, which, according to the following article in the Guardian, are worse than at any time on record.
The new regulations contained in PS 18/19 and the revisions to CONC 5 place much more onerous requirements on the lender to assess affordability. Key points in these regulations are as follows:
Creditworthiness comprises credit risk (to the firm) and affordability (for the borrower).
to protect consumers from the harm that can arise when they are granted credit that is predictably unaffordable
we want consumers to be able to access credit where it is affordable
We want firms to make a reasonable assessment, not just of whether the customer will repay, but also of their ability to repay affordably and without this significantly affecting their wider financial situation.
A firm should consider the types and sources of information to use in its creditworthiness assessment, which may include evidence of income, Evidence of expenditure, a credit score, amongst others
A firm should take account of actual current income or expenditure and reasonably expected future income or expenditure where it is reasonably foreseeable that it will differ from actual current income or expenditure over the anticipated repayment period of the agreement
it is not generally sufficient for a firm to rely solely for its assessment of the customer's income and expenditure, on a statement of those matters made by the customer
A firm should take adequate steps, insofar as it is reasonable and practicable to do so, to ensure that information (including information supplied by the customer is complete and correct
A firm must not complete some or all of those parts of an application for credit
These regulations are definitely a step in the right direction and should go a long way to ensuring that lenders apply affordability tests more rigorously. This should ensure the provision of more sustainable lending and less financial distress for consumers.