Affordability of Consumer Credit in the Spotlight

Citizens Advice, a UK charity, raised concerns over automatic increases in credit card limits for individuals already struggling with debt. The charity has claimed that while the overall percentage of people who have had their limits increased is steady at 12%, a much higher proportion (18%) of those struggling financially have seen their limits increased unilaterally. Citizens Advice has argued that such automatic increases in credit limits can worsen an individual’s debt situation and has advocated for a ban on increases in credit without the cardholder’s explicit consent.

The timing of this report coincides with the current FCA consultation on the rules and guidance on assessing creditworthiness, including the related but distinct concept of affordability. The current system of checking affordability is based on surface checks of a client’s finances, such as income, without taking into account other significant expenditures. Amongst other concerns, the FCA intends new rules and guidance to take into account a more robust view of affordability and the consultation makes clear that this should include an assessment of a client’s ability to meet basic standards of living, such as essential spending on food and other necessities.

The changes to FCA guidance in the consultation focus on the intention to reduce the risk of borrowers suffering financial distress because of something the consumer credit firm could have reasonably foreseen at the assessment stage of lending. The FCA do not intend to propose prescriptive rules or onerous assessment obligations but suggest guidelines of when a more rigorous assessment may be triggered. Trigger events may include where repayments are high relative to the borrower’s income, or where income or expenditure are likely to fluctuate significantly.

While the FCA’s current consultation is focused on affordability, broader concerns about consumer lending remain a key focus for the FCA and the Prudential Regulation Authority (PRA). A rapid increase in consumer lending and concerns raised by the Financial Policy Committee led the PRA to introduce new prudential measures for banks to protect against the risk of ‘bad loans’ in July 2017. The FCA business plan for 2017/2018 also highlights consumer lending as a continued area of interest. In particular, high-cost credit, overdrafts and motor finance are subject to ongoing review by the FCA. The FCA reiterates that firms should be aware of and take heed of its regulatory expectations.

The FCA consultation closes on 31 October 2017, with any changes to rules and guidance expected in 2018. It remains to be seen whether the FCA will go as far as banning automatic increases in credit as advocated by Citizens Advice, however, it is clear that consumer lending will remain in the spotlight throughout 2017 and 2018. Given the greater scrutiny over consumer lending, consumer credit firms should take steps now to review their lending policies and practices to ensure their compliance with FCA conduct expectations.

Sarah Williams is an associate in Baker McKenzie's Financial Services Group in London specializing in non-contentious financial services and compliance matters.