CONC 5.2A Creditworthiness assessment

1Subject to CONC 5.2A.2R, this section applies to a firm with respect to consumer credit lending.

1This section does not apply to:

1. (1)

   an agreement under which a firm takes an article in pawn and under the terms of the agreement:

   1. (a)

      the customer’s total financial liability (including in respect of capital, interest and all other charges including any expenses of sale) is not capable of exceeding the true market value of the article pawned by the customer; and

   2. (b)

      the effect of the passing of property in the pawned article to the firm under section 120 of the CCA, or of a sale of the article under section 121 of the CCA, would, therefore, be (at the very least) to discharge the debt secured by the pawn and any other obligation to pay a sum of money under the agreement including any expenses of sale;

2. (2)

   a current account agreement where:

   1. (a)

      there is a possibility that the account-holder may be allowed to overdraw on the current account without a pre-arranged overdraft or to exceed a pre-arranged overdraft limit; and

   2. (b)

      if the account-holder did so, this would be a regulated credit agreement (overrunning);

3. (3)

   a non-commercial agreement; or

4. (4)

   a small borrower-lender-supplier agreement which is a restricted-use credit agreement.

1In this section, references to ‘repayment’ refer to repayment of capital or payment of interest or other charges (excluding any charge for non-compliance with a regulated credit agreement or any charge payable by the customer under a hire-purchase agreement in respect of an exercise of an option to purchase the goods to which the agreement relates).

1A firm must undertake a reasonable assessment of the creditworthiness of a customer before:

1. (1)

   entering into a regulated credit agreement; or

2. (2)

   significantly increasing the amount of credit provided under a regulated credit agreement; or

3. (3)

   significantly increasing a credit limit for running-account credit under a regulated credit agreement.

1The firm must not take a step in CONC 5.2A.4R(1) to (3) unless it can demonstrate that it has, before doing so:

1. (1)

   undertaken a creditworthiness assessment and, where relevant, the assessment under CONC 5.2A.31R(2) (guarantors) in accordance with the rules set out in this section; and

2. (2)

   had proper regard to the outcome of that assessment in respect of affordability risk.

1A firm must base its creditworthiness assessment on sufficient information:

1. (1)

   of which it is aware at the time the creditworthiness assessment is carried out;

2. (2)

   obtained, where appropriate, from the customer, and where necessary from a credit reference agency, and

the information must enable the firm to carry out a reasonable creditworthiness assessment.

1Rules and guidance in this section apply in relation to carrying out a creditworthiness assessment.

1The firm must consider:

1. (1)

   the risk that the customer will not make repayments under the agreement by their due dates (this is sometimes referred to as credit risk); and

2. (2)

   the risk to the customer of not being able to make repayments under the agreement in accordance with CONC 5.2A.12R (referred to as ‘affordability risk’ in this section).

1The firm must consider the customer’s ability to make repayments under the agreement:

1. (1)

   as they fall due over the life of the agreement and, where the agreement is an open-end agreement, within a reasonable period;

2. (2)

   out of, or using, one or more of the following:

   1. (a)

      the customer’s income;

   2. (b)

      income from savings or assets jointly held by the customer with another person, income received by the customer jointly with another person or income received by another person in so far as it is reasonable to expect such income to be available to the customer to make repayments under the agreement; and/or

   3. (c)

      savings or other assets where the customer has indicated clearly an intention to repay (wholly or partly) using them;

3. (3)

   without the customer having to borrow to meet the repayments;

4. (4)

   without failing to make any other payment the customer has a contractual or statutory obligation to make; and

5. (5)

   without the repayments having a significant adverse impact on the customer’s financial situation.

1If the customer intends to make repayments (wholly or partly) using savings or other assets, the firm must take into account:

1. (1)

   the purpose for which the savings or assets are or will be held;

2. (2)

   the likelihood of the savings or assets being available to make repayments under the agreement; and

3. (3)

   any significant adverse impact on the customer’s financial situation of using those savings or assets.

1When considering affordability risk, the firm must not take into account the existence of (or the intention to provide or request the provision of) any guarantee or indemnity or other form of security.

1. (1)

   1This rule applies unless:

   1. (a)

      the firm can demonstrate that it is obvious in the circumstances of the particular case that the customer is able to make repayments in accordance with CONC 5.2A.12R, so as to make the actions described in (2) to (4) disproportionate; or

   2. (b)

      the customer has indicated clearly an intention to repay wholly using savings or other assets (see CONC 5.2A.13R).

2. (2)

   The firm must take reasonable steps to determine the amount, or make a reasonable estimate, of the customer’s current income.

3. (3)

   Where it is reasonably foreseeable that there is likely to be a reduction in the customer’s income:

   1. (a)

      during the term of the agreement; or

   2. (b)

      in the case of an open-end agreement, during the likely duration of the credit (see CONC 5.2A.26R),

   which could have a material impact on affordability risk, the firm must take reasonable steps to estimate the amount of that reduction.

4. (4)

   The firm must take account of the customer’s income it has determined or estimated in accordance with (2) and (3).

5. (5)

   The firm may only take into account an expected future increase in the customer’s income where the firm reasonably believes on the basis of appropriate evidence that the increase is likely to happen during the term of the agreement or, in the case of an open-end agreement, during the likely duration of the credit.

1. (1)

   1This rule:

   1. (a)

      applies only where CONC 5.2A.15R also applies; and

   2. (b)

      does not apply where the firm can demonstrate that it is obvious in the circumstances of the particular case that the customer’s non-discretionary expenditure is unlikely to have a material impact on affordability risk, so as to make the actions described in (2) to (4) disproportionate.

2. (2)

   The firm must take reasonable steps to determine the amount, or make a reasonable estimate, of the customer’s current non-discretionary expenditure.

3. (3)

   Where it is reasonably foreseeable that there is likely to be an increase in the customer’s non-discretionary expenditure:

   1. (a)

      during the term of the agreement; or

   2. (b)

      in the case of an open-end agreement, during the likely duration of the credit (see CONC 5.2A.26R),

   which could have a material impact on affordability risk, the firm must take reasonable steps to estimate the amount of that increase.

4. (4)

   The firm must take account of the customer’s non-discretionary expenditure it has determined or estimated in accordance with (2) and (3).

5. (5)

   The firm may only take into account an expected future decrease in non-discretionary expenditure where the firm reasonably believes on the basis of appropriate evidence that the decrease is likely to happen during the term of the agreement or, in the case of an open-end agreement, during the likely duration of the credit.

1. (1)

   1The extent and scope of the creditworthiness assessment, and the steps that the firm must take to satisfy the requirement that the assessment is a reasonable one, based on sufficient information, are dependent upon, and proportionate to, the individual circumstances of each case.

2. (2)

   The firm must consider:

   1. (a)

      the types of information to use in the creditworthiness assessment;

   2. (b)

      the content and level of detail of the information to use;

   3. (c)

      whether the information in the firm’s possession is sufficient;

   4. (d)

      whether and to what extent to obtain additional information from the customer;

   5. (e)

      whether and to what extent to obtain information from a credit reference agency;

   6. (f)

      any other sources of information to use;

   7. (g)

      whether and to what extent to verify the accuracy of the information that is used;

   8. (h)

      the degree of evaluation and analysis of the information that is used; and

   9. (i)

      the steps to take to determine or estimate the customer’s income or non-discretionary expenditure (where such a determination or estimate is required),

   having regard to the factors listed in (3) where applicable to the agreement.

3. (3)

   The factors to which the firm must have regard when complying with (2) and deciding what steps are needed to make the creditworthiness assessment a reasonable one include each of the following where applicable to the agreement:

   1. (a)

      the type of credit;

   2. (b)

      the amount of the credit or, where applicable, the credit limit;

   3. (c)

      the duration (or likely duration) of the credit;

   4. (d)

      the frequency of the repayments;

   5. (e)

      the amounts of the repayments;

   6. (f)

      the total amount payable;

   7. (g)

      the total charge for credit;

   8. (h)

      the annual percentage rate of charge;

   9. (i)

      whether the rate of interest or any other charge (except any charge for non-compliance with the agreement or any charge payable by the customer under a hire-purchase agreement in respect of an exercise of an option to purchase the goods to which the agreement relates) is fixed or variable;

   10. (j)

       any other costs which will or may be payable by or on behalf of the customer in connection with the agreement, including any charge for non-compliance with the agreement but excluding any charge payable by the customer under a hire-purchase agreement in respect of an exercise of an option to purchase the goods to which the agreement relates; and

   11. (k)

       any other potential adverse consequences for the customer arising under the agreement from a failure to make a repayment by the due date.

1In relation to an open-end agreement, the firm must make a reasonable assumption about the likely duration of the credit which should take into account:

1. (1)

   the terms and conditions of the agreement;

2. (2)

   any pre-contractual disclosure and explanation given to the customer under the CCA or CONC; and

3. (3)

   the customer’s intentions, where known to the firm.

1. (1)

   1In relation to entering into a regulated credit agreement for running-account credit, the firm must assume that the customer draws down the entire credit limit at the earliest opportunity and repays by equal instalments over a reasonable period.

2. (2)

   In relation to significantly increasing the credit limit that applies to an existing regulated credit agreement for running-account credit, the firm must assume that the customer draws down the entire available balance up to the increased credit limit at the earliest opportunity and repays by equal instalments over a reasonable period.

3. (3)

   If, after considering the individual circumstances of the particular customer of which the firm is aware at the time the creditworthiness assessment is carried out, it is reasonable to make further assumptions about the timing and amounts of drawdowns of credit and repayments over the duration or likely duration of the credit, then the firm must do so and these assumptions must be reasonable ones.

4. (4)

   The firm must set the credit limit in the light of the assumptions in (1) to (3).

1. (1)

   1This rule applies if, in relation to a regulated credit agreement:

   1. (a)

      an individual other than the borrower (in this section referred to as ‘the guarantor’) is to provide a guarantee or an indemnity (or both) (in this rule and CONC 5.2A.32G referred to as ‘the guarantee’); and

   2. (b)

      the firm is required to undertake a creditworthiness assessment in respect of the borrower.

2. (2)

   Before entering into the regulated credit agreement or significantly increasing the amount of credit provided under the agreement or significantly increasing a credit limit for running-account credit under the agreement, the firm must undertake a reasonable assessment of the potential for the guarantor’s commitments in respect of the agreement to have a significant adverse impact on the guarantor’s financial situation.

3. (3)

   The firm must base the assessment under (2) on sufficient information:

   1. (a)

      of which it is aware at the time the assessment is carried out;

   2. (b)

      obtained, where appropriate, from the guarantor or from the borrower on the guarantor’s behalf, and where necessary from a credit reference agency, and

   the information must enable the firm to carry out a reasonable assessment.

4. (4)

   For the purposes of this rule, a guarantee does not include a legal or equitable mortgage or a pledge.

1A firm must:

1. (1)

   establish, implement and maintain clear and effective policies and procedures:

   1. (a)

      to enable it to carry out creditworthiness assessments or assessments under CONC 5.2A.31R(2); and

   2. (b)

      setting out the principal factors it will take into account in carrying out creditworthiness assessments or assessments under CONC 5.2A.31R(2);

2. (2)

   set out the policies and procedures in (1) in writing, and (other than in the case of a sole trader) have them approved by its governing body or senior personnel;

3. (3)

   assess and periodically review:

   1. (a)

      the effectiveness of the policies and procedures in (1); and

   2. (b)

      the firm’s compliance with those policies and procedures and with its obligations under CONC 5.2A;

4. (4)

   in the light of (3), take appropriate measures to address any deficiencies in the policies and procedures or in the firm’s compliance with its obligations;

5. (5)

   maintain a record, on paper or in electronic form, of each transaction where a regulated credit agreement is entered into, or where there is a significant increase in the amount of credit provided under a regulated credit agreement or a credit limit for running-account credit under a regulated credit agreement, sufficient to demonstrate that:

   1. (a)

      a creditworthiness assessment or an assessment under CONC 5.2A.31R(2) was carried out where required; and

   2. (b)

      the creditworthiness assessment or the assessment under CONC 5.2A.31R(2) was reasonable and was undertaken in accordance with CONC 5.2A,

   and so to enable the FCA to monitor the firm’s compliance with its obligations under CONC 5.2A; and

6. (6)

   (other than in the case of a sole trader) establish, implement and maintain robust governance arrangements and internal control mechanisms designed to ensure the firm’s compliance with (1) to (5).

1A firm must not complete some or all of those parts of an application for credit under a regulated credit agreement intended to be completed by the customer, without the consent of the customer or unless the customer has been advised to check the application (and has had a full opportunity to do so) before signing the agreement.

1A firm must not accept an application for credit under a regulated credit agreement where the firm knows or has reasonable cause to suspect that the customer has not been truthful in completing the application in relation to information relevant to the creditworthiness assessment.