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The new rules for consumer credit lenders allow greater discretion when it comes to assessing creditworthiness. With more flexibility comes more risks: it’s now vital to have a robust process in place to be able to show you’ve made the right call.
The new rules, which came into effect on 1 November 2018, are the latest in a series of changes for those in the consumer credit world. It can be safely assumed that this is an ongoing area of focus for the regulator – for example, October’s Dear CEO letter on the affordability of HCSTC (high cost short term credit).
What’s changing for consumer credit firms?
The FCA has identified issues with the way firms assess creditworthiness including poor levels of compliance with the requirements. Interestingly they also found evidence of procedures which were unnecessarily costly and restrictive. The new rules seek to address these issues by providing clarity around the credit and affordability assessment. They also allow greater scope for firms to use their own judgement on what is appropriate in the circumstances. Some of the key changes include:
- Making clear the distinction between credit and affordability risk (firms must consider both)
- Clarifications in relation to income and expenditure
- Setting out the factors which should inform the scope, extent and proportionality of an assessment
- Clearer requirements in terms of policies, procedures and record keeping.
Creating a process for assessing creditworthiness
Of course there are the usual challenges resulting from regulatory change – reviewing, updating and agreeing changes to policies and procedures, systems updates, staff training, documentation reviews and so on. But the flexibility the rule changes allow can also bring risks, as there is a greater onus on firms to assess the requirements and come to their own conclusions. And if challenged by the regulator, you will ultimately have to justify the basis for those decisions. As well as making sure you comply with the specific rules you must also create a process for assessing creditworthiness which is robust, consistent and reflects each particular case.
How we can help
We have worked with lenders on every aspect of financial services regulation. We can help you understand the requirements, deliver regulatory change and test your new systems and processes. Get in touch to explore how.
