The paper proposes changes to rules and guidance surrounding the assessment of creditworthiness in order to clarify regulatory expectations on firms.

The impact is likely to be primarily on firms who lend in the non-prime market, with the FCA’s emphasis on proportionality meaning those who lend to prime customers at low rates of interest or on small loans are likely to be less affected.

These clarifications make clear the:

• Distinction between affordability and credit risk
• Factors that should be used when designing affordability checks that are appropriate and proportionate
• Appropriate role of income and expenditure information in lending decisions 
• Expectations around policies and procedures which should focus on customer outcomes, having regard to the risks of the credit and customer characteristics.

Firms should conduct some analysis of their current approach to creditworthiness assessments in response to the FCA proposals. They should identify any gaps and ensure rationale of approach undertaken is documented and all relevant risks considered.

Overall the new rules:

• Advocate a tiered approach to creditworthiness assessments based on consideration of the affordability risk. This looks at the customer financial circumstances (level of expenditure relative to income) and the characteristics and risks of the product (cost and total amount of credit). The more constrained the customer’s circumstances and the higher the cost or amount of credit, necessitate an increased level of detail, verification and assessment of their creditworthiness when making the decision to lend.
• Reinforce the importance of record keeping. Firms need to be able to demonstrate what assessment they have made, their rationale and why the approach commensurate to the risks presented. 

You can find out other areas of Financial Services that we cater to on our Financial Services page. You can contact Simon Walker, who heads up our creditworthiness team here.