Independent review and analysis

Assessing affordability – The challenge for all lenders

The FCA has turned its attention to consumer credit lenders and peer to peer platforms with the spotlight on poor practice and culture when assessing affordability.

It is an area which has been on its agenda for some time and the recent consultation paper will go a long way towards addressing the concerns. The FCA wants to ensure that there is a clear distinction between affordability which is borrower focused and credit risk which is lender focused.

It was inevitable following the introduction of affordability checks in the Mortgage Market Review of 2014 that all forms of lending would eventually need to adopt the new practices. It is now a requirement that any lender operating in the UK, whether it is in the secured or unsecured market, must have robust policies and procedures covering affordability measures. A significant change in risk assessment techniques includes the need to ensure that when a lending decision is being made, the result must not affect a borrower’s ability to repay their other financial commitments.

Therefore, obtaining the appropriate proof of income and expenditure is likely to become a vital part of the assessment process. Likewise, there are now more factors that need to be considered when compiling affordability checks.

Some of these assessments give lenders some challenges, particularly those that have been in sectors where such requirements have not applied in the past. However, we believe the regulator is not going to stand by and watch if some players are slow to react to the revised requirements.

With the warnings from the Bank of England that we may be coming to the end of the benign interest rate environment we have all enjoyed over the last ten years, it is likely that affordability risk models are going to be tested sooner rather than later.

Without pre-judging the outcome of the consultation, funders and lenders should now be re-evaluating policies and procedures deployed in assessing affordability anyway. With consumer debt at record levels, and with some commentators predicting more pain in financial markets to come, there is an opportunity for all lenders of all types, to prepare for whatever is on the horizon. We see no reason for not putting appropriate risk assessment techniques in place now.

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