The easiest way to understand what the FCA wants to see on creditworthiness and affordability is to look at Table 1 on Page 7 of the Consultation Paper published this morning.

This contains a schematic for ‘profitable and affordable’ lending (good) versus ‘profitable but unaffordable’ lending (bad).  The FCA wants to see more of the former and less of the latter; and to ensure that lenders’ attempts to eradicate the risk of the latter do not adversely affect the achievement of the former.

Clear?  There are 57 pages of consultation paper and 34 pages of Annex to provide clarification.

These pages amount to a long description of how the FCA would like to see lenders bring about affordable and creditworthy lending without restricting access to borrowing (and undermining the economy into the bargain).

There’s an awful lot to say about this particular consultation paper, which will have lasting implications for every lender in every sector of the credit market, except mortgage providers who are not covered.

What follows is a quick take on the ‘top notes’, with much more to follow in the weeks and months to come.

The FCA has a fine balance to strike, to put it mildly.  As it says, it needs to require firms to make reasonable assessments of consumers’ ability to repay loans without adversely affecting their wider financial well-being on the one hand, while on the other avoiding being overly prescriptive and thereby causing unwanted and unintended consequences on access to credit.

Some task.

To achieve this, it proposes to use a combination of ‘Principles’ to which lenders should adhere and ‘Outcomes’ that lenders should seek.  This, it hopes, will obviate the need for the bit in the middle — ‘prescription’, or hard rules — which it recognises are nigh on impossible to set in a market so diverse.

The FCA is recommending more continuity with its current approach than change.  As it says, ‘We do not think our basic approach to creditworthiness needs any fundamental change. It is based around high-level principles with an emphasis on proportionality. We consider that outcomes matter more than process, and firms can satisfy themselves on affordability in different ways.’

However, the proposed rules do include a new and explicit definition of ‘affordability risk’. Crucially, this sets out ‘the factors which firms should consider when assessing whether the credit is likely to be affordable for the borrower.’

So there is an element of prescription in there too.  Chapter 4 of the CP is dedicated to this.

The third part of the FCA’s scheme after ‘principles’ and ‘outcomes’ (and a small amount of ‘prescription’) is ‘supervision’.  As the FCA states:

‘We will evaluate the success of our proposals through our supervision of firms and monitoring regulatory returns and complaints. We may also undertake research or multi-firm work to assess the changes firms have made.’

So it’s up to firms to make the judgements, but the FCA will be ready with its own judgements as to whether firms have got it right or not.  And it will of course have a voluminous data set to assist it, based on every firm’s regulatory reporting of its lending decisions and their impacts.

Alongside the Consultation Paper, the FCA has also published the research on which the consultation paper and its recommendations are based; and an Occasional Paper which sets out an economic framework for understanding why unaffordable consumer credit can occur and how it might be prevented.

So there’s an awful lot for everyone to consider over the summer while the regulator takes a break.  The CCTA will be unbundling and analysing the documents on your behalf over the next few months.

The consultation period runs until 31 October 2017.  The FCA will then consider the feedback and make decisions about final rules and guidance which will be published in the first half of 2018.

Happy holidays!