Regulators’ rules about credit cards & catalogue lending

(a) the customer, where appropriate; and
(b) a credit reference agency, where necessary.
[Note: section 55B(3) of CCA]

CONC 6.2 Creditworthiness assessment: during agreement

CONC 6.2.1

(1) Before significantly increasing:

(a) the amount of credit to be provided under a regulated credit agreement; or
(b) a credit limit for running-account credit under a regulated credit agreement;
the lender must undertake an assessment of the customer’s creditworthiness.
[Note: section 55B(2) of CCA]

(2) A firm carrying out the assessment in (1) must consider:

(a) the potential for the commitments under the regulated credit agreement to adversely impact the customer’s financial situation, taking into account the information of which the firm is aware at the time that the increase in (1) is to be granted; and
(b) the ability of the customer to make repayments as they fall due over the life of the regulated credit agreement, or for such an agreement which is an open-end agreement, to make repayments within a reasonable period.
[Note: paragraphs 4.1 and 4.3 of ILG]

(3) A creditworthiness assessment must be based on sufficient information obtained from:

(a) the customer, where appropriate, and
(b) a credit reference agency, where necessary.

A few notes on the above. A lender is called a “firm”. All credit card and catalogue lending in the UK is “a regulated credit agreement”. It is “open-ended” because, unlike a loan for five years say, there is no specific time limit when the debt should be repaid. The CCA is the Consumer Credit Act 1974. The ILG is the OFT’s Irresponsible Lending Guidance.

OFT’s Irresponsible Lending Guidance

The OFT was a previous regulator before the FCA.  At 80 pages long, I don’t suggest you print out the OFT’s ILG! For irresponsible lending complaints, the most important part is Section 4: Assessment of Affordability.

4.1 In the OFT’s view, all assessments of affordability should involve a consideration of the potential for the credit commitment to adversely impact on the borrower’s financial situation, taking account of information that the creditor is aware of at the time the credit is granted. The extent and scope of any assessment of affordability, in any particular circumstance, should be dependent upon- and proportionate to- a number of factors (see paragraph 4.10 of this guidance document).

‘Assessing affordability’, in the context of this guidance, is a ‘borrower-focussed test’ which involves a creditor assessing a borrower’s ability to undertake a specific credit commitment, or specific additional credit commitment, in a sustainable manner, without the borrower incurring (further) financial difficulties and/or experiencing adverse consequences.

4.2 Whatever means and sources of information creditors employ as part of an assessment of affordability should be sufficient to make an assessment of the risk of the credit sought being unsustainable for the borrower in question. In our view this is likely to involve more than solely assessing the likelihood of the borrower being able to repay the credit in question. We consider that before granting credit, significantly increasing the amount of credit, or significantly increasing the credit limit under an agreement for running account credit, creditors should take reasonable steps to assess a borrower’s likely ability to be able to meet repayments under the credit agreement in a sustainable manner. The OFT encourages the sharing of data between creditors subject to data protection and other legal considerations. The process of assessing affordability is assisted by creditors registering accurate data with credit reference agencies, in a timely manner, about the performance of an account and/or settlement of outstanding debts/arrears. Borrowers are encouraged to always undertake their own assessment of affordability concurrent with that undertaken by the creditor.

4.3 The OFT regards ‘in a sustainable manner’ in this context as meaning credit that can be repaid by the borrower: with without undue difficulty – in particular without incurring or increasing problem indebtedness over the life of the credit agreement or, in the case of open-end agreements, within a reasonable period of time out of income and/or available savings, without having to realise security or assets.

4.4 The OFT would regard ‘without undue difficulty’ in this context as meaning the borrower being able to make repayments (in the absence of changes in personal circumstances that were not reasonably foreseeable at the time the credit was granted):

• while also meeting other debt repayments and other normal/reasonable outgoings and
• without having to borrow further to meet these repayments.

4.5 We consider that all assessments of affordability should be based on the premise that the borrower should be able to repay the credit over the term. It is accepted that providers of open-end credit, where there is no fixed term, will be limited in their ability to be able to make an assessment of whether repayments might be met in a sustainable manner over the whole life of the credit agreement – but they should be able to make a reasonable assessment of sustainability at the time the credit agreement is entered into (and on the basis of reasonable assumptions regarding the likely duration of any drawdown). The creditor’s assessment should have regard to the borrower’s ability to pay off the maximum amount of credit available (equivalent to the credit limit) over a reasonable period of time.

4.6 The OFT cannot stipulate exactly what will constitute a ‘reasonable period of time’ for this purpose as this will vary from case to case depending on the circumstances of the borrower and the amount of the credit. However, in the OFT’s view, in the case of running account credit, the borrower should be able to repay the credit on a timeline at least akin to that used for other forms of unsecured lending such as fixed sum personal loans, made for an amount equivalent to the credit limit. If there was no realistic likelihood, based on an affordability assessment, that a borrower would have been capable of paying off an outstanding balance within a reasonable period of time if he spent up to his credit limit, then we are likely to consider this to constitute irresponsible lending on the grounds that the borrower has been provided with clearly inappropriate credit. The fact that a borrower may be able to ‘service a debt’ over many years simply by making minimum repayments does not, in our view, equate to being able to pay off a debt in a reasonable period of time. We consider that the credit limit should have been set by the creditor (presumably aware of the borrower’s current disposable income and any reasonably foreseeable future changes in the level of his disposable income – for example, if the borrower is close to retirement age and facing a significant fall in disposable income) on the basis of having undertaken an appropriate affordability assessment.

4.7 The OFT would not necessarily consider repayments to be unsustainable simply because the borrower may miss an occasional payment as it falls due. However, under such circumstances, we would not expect creditors to:

• extend formally the duration of the agreement i.e. we would expect creditors to allow for missed repayments to be made up at a later date (within the original term of the loan or otherwise accommodated) or
• where the duration of the agreement is formally extended, increase the total amount payable to unsustainable levels or otherwise cause an adverse impact on the borrower’s overall financial situation.

In practice the FCA’s Rules are a simpler, snappier version of the old OFT guidance. This is why it doesn’t much matter if the regulator changed half way through the time you had a credit card account.