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The FCA has publicly censured Amigo Loans for failing to conduct adequate affordability checks on borrowers and guarantors. The guarantor lender was set to receive a £73m fine were it not for its financial position and ongoing liabilities to customers.
While the guarantor loans market in the UK is small compared to other sectors in the consumer credit industry, the Final Notice should be required reading for senior management and compliance staff in all lenders and larger credit brokers. Even if your firm doesn’t offer guarantor lending, there are useful insights into FCA’s expectations for affordability assessments and the use of external data for I&E validation.
Improvements to operations
All consumer credit firms should read the Final Notice in detail and think about whether processes, controls, or record keeping need improvement. For lending firms and credit brokers who do more than a mere introduction, there are several points worth noting:
Joint applications
Ensure an adequate affordability assessment has been carried out on both applicants where an application is made in joint names, and that both applicants are fully aware of the salient points of the regulated credit agreement being entered into and the risks of non-payment.
Changes to affordability
Have a clear picture of who the applicant is and what changes to affordability and income and expenditure may be expected over the course of a credit agreement. For example, a reasonable proportion of a customer’s income may be from benefits which will likely cease prior to the end of any fixed-term credit agreement.
Justifying rationale
Make sure you fully justify the rationale for why assumptions are made, or parameters allowed, for I&E data used in the lending decision. This will be particularly relevant for firms which allow customers to self-declare their I&E data for the firm to assess without recourse to actual documentation such as payslips.
Systems issues
Assumptions used in automated processes should be robust – particularly the assumptions for when the applicant may be credit worthy, but not actually able to afford the credit over the long-term. You should be able to demonstrate that your system parameters meet your lending policy.
Vulnerable customers
Your definitions of vulnerability should be broad enough to encapsulate the various circumstances where customers may need additional support, particularly where the customer has no interaction with staff members and applies for a loan online.
Reviewing your systems and controls
Concerns were raised in the Final Notice about the guarantor lender’s systems and controls, including its approach to complaint handling, remuneration structure for staff, management information provided to Board, and the operation of a three lines of defence model. It’s a timely reminder to review your systems and controls in these areas:
Complaints handling
Review the effectiveness of your complaints handling function, particularly whether adequate root cause analysis is carried out on the reasons why customers complain and whether decisions from FOS are reviewed regularly. Particular attention was drawn by the FCA in this case to whether the lender adequately used learnings from complaints to influence its underwriting processes and affordability assessments.
Front-line remuneration
Assess whether your front-line staff are remunerated effectively or whether there are any bonus or other variable remuneration arrangements which may influence poor-behaviours (an example here is where staff were remunerated based on loans paid-out, rather than underwriting decisions made).
Management information
Review MI provided to Boards and senior managers, particularly to ensure it gives sufficiently granular information on customer outcomes, not just the performance of a particular loan book or tranche of borrowing.
Regularly review the effectiveness, and use, of your control structure (be that a three-lines-of-defence model or otherwise). The FCA drew particular attention to reviews and warnings issued by the compliance and internal audit teams in this case which were not subsequently acted upon. The compliance team also drew criticism for a lack of specialist knowledge of the marketplace.
The Final Notice issued by the FCA should be reviewed carefully by all lenders and larger credit brokers involved in regulated consumer credit, regardless of whether your firm is or has been in the guarantor marketplace. The document offers a very useful indicator as to the FCA’s expectations of firms, particularly for credit worthiness and affordability assessments.
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