FCA warns payday lenders about credit risk
FCA sent the following letter today (October 15) to lenders offering high cost short term credit (payday lenders)
Businesses need to take quick action to:
• Evaluate their lending activity to determine if credit ratings are compliant. If deficiencies are found, businesses should take corrective action to ensure that current lending activity is compliant and determine if proactive repair may be required; and
• Notify FCA if they are unable (now or in the future) to meet their financial commitments due to remediation costs.
I am writing to you regarding the issues related to the increase in complaints about unaffordable loans (including complaints about an extended ‘chain’ of loans) and to explain how we expect HCSTC companies to deal with the impact. .
Companies’ complaint handling procedures should ensure that they can improve the way they deal with complaints, in light of the relevant decisions of the financial mediation service (“the ombudsman”) regarding complaints about the company.
We note that the Ombudsman recently published four sample decisions on individual payday loan complaints to illustrate his approach to the issues raised in those complaints (see: https://www.financial-ombudsman.org.uk/publications/ technical. htm). Where applicable, companies should consider these example determinations when establishing their own effective complaints handling procedures (see DISP 1.3.1R).
When businesses identify recurring or systemic issues in their provision of a financial service, which could include issues with performing affordability assessments, businesses should determine the extent and severity of the harm that could have been caused. arise for the consumer, and consider whether it is fair and reasonable for the business to proactively undertake a remedy or remedial exercise, which may include contacting customers who have not made a complaint. In this regard, companies are reminded of the requirement of DISP 1.3.3R which requires companies to analyze the root causes of complaints and, if necessary, correct these root causes, i.e. ready.
We also remind you that when the ombudsman issues a decision or a directive, such as an obligation to reimburse customers, companies must comply quickly.
We expect businesses to take appropriate action for any corrective action that may be required, including associated costs (eg ombudsman fees). If this calls into question your company’s current and future ability to meet its financial commitments as they come due, you should immediately notify the FCA.
We also take this opportunity to remind you of our requirements for affordable credit. We expect the company to review its current loan processes to ensure that it is fully compliant with our rules in the CONC. If the business finds that its processes are not compliant, it should take appropriate action to correct it, including considering stopping lending until the contraventions are corrected. If the company becomes aware of or has information that reasonably suggests that there are material violations of our rules, it must immediately notify the FCA. The company should explain the steps it plans to take to resolve the problem.
In particular, we will highlight the risks associated with repeated borrowing. These were pointed out in our price cap proposals in CP14 / 10, in July 2014, in which we said we were concerned that repeated borrowing could indicate a damaging pattern of reliance on HCSTC. to the borrower. We have noted that rigorous affordability assessments are essential to avoid damage in this area, and companies should ensure that they conduct responsible assessments of loan sustainability.
We recently issued a policy statement (PS18 / 19) with amended rules and guidance on assessing the affordability of consumer credit. These come into effect on November 1. The new rules clarify our expectations, but they do not fundamentally change the requirements businesses have to comply with since we took over consumer credit regulation in 2014. Businesses will, however, need to review their policies and procedures, and how they have been implemented, to ensure that they are compliant, and can prove it. They should also keep their policies and procedures under review to monitor compliance on an ongoing basis.
A summary of our new rules and guidelines can be found in the appendix to this letter.
Director of Supervision – Retail and Authorizations
APPENDIX – OUR AFFORDABILITY REQUIREMENTS
Our current requirements on assessing the creditworthiness (including affordability) of consumer credit are set out in CONC 5.2 and 5.3 (and CONC 6.2 with respect to credit increases).
In addition, there are rules and guidance in CONC 6.7 regarding the refinancing of agreements, and in CONC 7 regarding the treatment of defaulting or late customers. CONC 6.7.22G confirms that a business should not enter into consecutive High Cost Short Term Credit (HCSTC) arrangements if the cumulative effect would be that the total amount payable by the customer is not sustainable.
PS18 / 19, released on July 30, sets out our new CONC rules and guidelines on credit valuation, including affordability. These come into force on November 1, 2018 and clarify our expectations of companies, based on the current rules. As noted in CP17 / 27, we did not undertake a cost-benefit analysis (CBA) in relation to the new rules, as we concluded that any increase in costs to businesses would be limited to those necessary to bring the company in accordance with current regulations. regime, or would be of minimal importance.
A key element of the new rules is the emphasis on adequate policies and procedures and the ability to demonstrate compliance in the event of a dispute.
What we expect from companies
As under the existing CONC rules, PS18 / 19 specifies that lenders must carry out a reasonable assessment of creditworthiness, on the basis of sufficient information, before entering into a regulated agreement or significantly increasing the amount. of credit or the credit limit.
In particular, lenders should consider “affordability risk” – which we define as the risk that the borrower will not be able to make repayments under the agreement in accordance with CONC 5.2A.12R . A company should not grant a loan unless it can demonstrate that it has, before doing so, undertaken a compliant solvency assessment and has duly taken the result of that assessment into account in making a judgment on the risk of the loan. affordability.
The lender must take into account the client’s ability to repay his income:
• without the customer having to borrow to meet repayments
• without failing to make any other payment that the customer has a contractual or legal obligation to make, and
• without the repayments having a significant unfavorable impact on the customer’s financial situation
The business shall take reasonable steps to establish or estimate the client’s income, unless it can demonstrate that it is evident in the circumstances that the client is able to affordably repay, in accordance with CONC 5.2A .12R. The firm must take into account any probable and reasonably foreseeable decrease in income over the term of the contract.
When revenue is factored in, the business must also take reasonable steps to establish or estimate the client’s non-discretionary expenses, unless it can demonstrate that it is evident in the circumstances that this is not. likely to have a significant impact on accessibility risk. The company must take into account any probable and reasonably foreseeable increase in non-discretionary expenses over the term of the contract.
CONC 5.2A.20R states that the extent and scope of a creditworthiness assessment, and the steps a company must take to meet the requirement that the assessment be reasonable, will depend on and be proportionate to the circumstances individual.
In particular, the firm should consider the nature and content of the information to be used in the assessment, whether and to what extent to verify the accuracy of the information, and the degree of assessment and analysis of the information. information, taking into account the relevant factors. These will include the type and amount of credit, amounts of repayments and any negative consequences of non-payment. In particular, the more rigorous the assessment may be necessary, the higher the actual or potential costs of credit and the total amount payable, in absolute terms and relative to the client’s financial position when known.
The business should take into account information available to it at the time of the assessment that the customer is in, has recently experienced, or is likely to experience financial difficulty, or is particularly vulnerable. When the business takes into account information from previous customer relationships, it should consider updating it.
This is in line with our current approach. For example, CONC 5.2.3G notes that the extent and scope of an assessment should depend on and be proportional to relevant factors which may include the customer’s financial condition and credit history, including any indication the customer is aware of. or has experienced financial difficulties.
Where a client has engaged in repeated borrowing over an extended period, this is likely to be relevant in assessing the level of affordability risk and deciding whether a more rigorous assessment may be required, potentially involving data and / or additional verification.
When additional data or verification is required, our rules are not prescriptive on the content of the data or the manner of verification, provided the company can demonstrate that it is sufficient, in light of risk indicators. affordability in the individual case forms the basis for a reasonable and proportionate assessment of solvency. However, when considering current income, it is usually not enough to rely on self-certification by the client.
We make it clear in PS18 / 19 that firms must establish, implement and maintain clear and effective policies and procedures to enable compliance with our rules. They should periodically assess and review the effectiveness of their policies and procedures, as well as the firm’s compliance, and take appropriate action to remedy any deficiencies identified.
Companies must also keep a record of each transaction for which a regulated credit agreement is entered into, sufficient to demonstrate that a credit assessment has been carried out and that it was reasonable and in accordance with the CONC. This should be sufficient to allow the FCA to monitor the company’s compliance.
While we recognize that there will always be loans that turn out to be unaffordable, for example due to the impact of unforeseen circumstances, companies that maintain effective policies and procedures that comply with the above requirements should aim to eliminate loans that are predictably unaffordable, minimize the risk of financial distress for consumers.