Spotlight on affordability
Should consumer credit agreements be subject to the same type of affordability checks as mortgages?
At the recent Credit Summit in London, Jonathan Davidson, Director of Supervision – Retail and Authorisations at the FCA, used his speech to turn the spotlight onto how lenders assess affordability on unsecured credit agreements.
The FCA is not currently particularly prescriptive in its requirements for affordability testing on consumer credit. The guidelines only require a lender to think about likely changes to a customer’s situation for the duration of their credit, with consideration to their future financial commitments and future changes in their circumstances.
This is in contrast to the regulator’s stipulations in the mortgage world, where it requires lenders to perform a full income and expenditure assessment, with affordability stress tested against future interest rate rises.
The FCA says that in the months after taking out a mortgage, a typical customer significantly increases their unsecured debt, with the average household £1,100 further in debt a year after they’ve taken out a mortgage.
This could indicate that consumers who are not able to borrow as much on their mortgage because of affordability checks, look to borrow more from other credit providers to cover their costs, and this could potentially prove to be more expensive.
Very few people in financial services would cry out for more regulation, but we are teetering on a rising rate environment, with outstanding consumer credit balances at their highest level since the global financial crisis.
With this in mind, is it time for the regulator to take action?