Posted: 22nd July 2020
Andrew Bailey summarised the FCA’s priorities on affordability and responsible lending at the beginning of 2019, and the message was clear; firms need to take the right steps to ensure they lend responsibly, no matter what the conditions.
18 months later and we have found ourselves in the midst of a global pandemic. The result? A huge increase in the number of people who might now be at risk of financial distress, many of whom may need to borrow to make ends meet.
The FCA has been very clear in terms of what their expectations are, the risks that they've seen within the market and how firms should assess affordability to mitigate them. The 2018 ‘Dear CEO’ letter is a key starting point for firms when it comes to understanding these expectations. It set outs how the regulator expects high-cost short-term credit firms to manage issues surrounding the increase in complaints on unaffordable lending, what responsible lending and suitable affordability checks should look like, and it also references how firms can learn from complaints and put those findings back into the business in terms of better policies and processes.
An impossible choice
More recently, the global economic crisis resulting from the Coronavirus pandemic has underlined the consumer need for access to credit and the central role the consumer credit sector has to play. It could be argued that it is more necessary than ever for firms to support customers who are struggling financially.
However, to exacerbate the challenges further, lenders now need not only consider issues of affordability, but also balance this with the Government’s requirement to show forbearance to consumers around mortgages, overdrafts and other credit mechanisms, while still generating enough revenue to sustain business.
This means that many lenders are stuck with the impossible choice of extending credit terms in a show of leniency and worsening indebtedness, or tightening credit and restricting access to cash to protect people from the debt cycle.
The FCA is looking at evidence-based information when doing affordability checks, be that bank statements, payslips or looking at CRA data. These data points must be proportionate to the amount being borrowed – as the customer borrows more, the expectation is that the check should also increase. However, the guidance from the regulator leaves many rules open to interpretation from lenders.
In the eyes of the FCA, many lenders ‘proportionate’ affordability checks haven't gone far enough in the past. That could be as significant as not obtaining income and expenditure evidence, but it can also be quite specific. For example, it could be that the FCA interprets CRA data in a different way than firms, leading to a significant imbalance in expectations of what is required.
It’s these granular details the FCA has recently been focusing on. On the face of it, granular details don’t seem like a lot, but they do have a big impact from a lending perspective and could make or break the FCA’s verdict on whether a firm has acted ‘responsibly’.
Past Business Reviews
This isn’t just a challenge for firms moving forward, there is also a clear expectation from the FCA that firms should apply today's standards retrospectively. The regulator doesn't accept that its rules have changed since the FCA took over responsibility for regulating the sector in 2014 and therefore expects firms to be able to evidence good practices since that point in time.
It's more imperative than ever that lenders review their past business practices from a regulatory perspective. But this is a challenging ask of any firm.
Lenders should do all they can to keep one step ahead of the regulator and proactively take steps to ensure they are in control of what happens next. Making the necessary changes to processes, policies and products will help avoid future or retrospective punitive measures and allow firms to demonstrate to the FCA that they have understood affordability and its importance.
A guide to responsible lending
Huntswood has written a guide for lenders that explores why affordability and responsible lending should be a key priority for all businesses operating in the consumer credit space. It also outlines how lenders can take proactive steps to ensure that they are not only meeting the FCA’s expectations, but enforcing a healthy, purposeful culture that eliminates harm and puts positive customer outcomes at the heart of their operations.