In considering the types and sources of information which it wishes to use in its creditworthiness and affordability assessments, a finance company may include some or all of the following:
- its record of previous dealings with the customer, but making sure the data reflects the customer’s current situation;
- evidence of income and non-discretionary expenditure (see below);
- a credit score;
- a credit reference agency report; and
- any other information provided by the customer.
Income and expenditure
In 2018 the FCA updated CONC 5 requiring that finance companies must take reasonable steps to determine the amount, or make a reasonable estimate of, the customer’s income and non-discretionary expenditure. This rule does not apply only where:
- Lenders can demonstrate that it is obvious in the circumstances the customer is able to make repayments.
- The customer has indicated an intention to repay wholly using savings or other assets.
The customer’s ability to make repayments should be “sustainable” – that is, the customer should be able to make the repayments from income (or savings or other assets where the customer makes this clear). The payments should be made on time without undue difficulties, whilst meeting other reasonable commitments.
The customer should not have to borrow or sell assets in order to meet the repayments.
Finance companies should adopt a proportionate approach to establishing whether a customer can afford credit. This means tailoring the checks they undertake and information they collect to the level of credit and affordability risk exhibited by customers. The FCA’s rules on obtaining a reasonable estimate of income and expenditure are a good example of proportionality. Where income and expenditure data does not need to be collected where it is obvious the customer can make repayments. Although the finance company will need to set out why this is the case.
A firm must not:
- advise or encourage a customer to enter into a credit agreement for an amount of credit which is higher than the customer initially requested if the creditworthiness assessment indicates that repayments of the higher amount would not be sustainable, or the firm ought reasonably to suspect that this is the case;
- complete some or all parts of a credit application which are intended to be completed by the customer without the customer’s consent, unless the customer checks the application before signing the agreement; or
- accept an application for credit where it knows or ought reasonably to suspect that the customer has not been truthful in completing the application. (For example, information supplied by the customer concerning income or employment status might not be consistent with other available information.)