In March 2024, the FCA issued a Dear CEO letter to consumer credit firms. This emphasised the need for firms to go beyond ensuring affordability at the point of sale. Firms must also demonstrate that repayments remain sustainable over the lifetime of the loan, without causing undue difficulties.

Key expectations include robust affordability assessments, avoidance of harmful business models, elimination of sludge practices, and the effective use of technology. An FCA review then followed, aimed at assessing how well firms are embedding these expectations.

While the results of the FCA’s “Sustainable Lending in the Consumer Credit Market” review are yet to be published, our engagement with the market has revealed key emerging themes. These include gaps in affordability assessments, re-lending risks, and weak outcomes monitoring and feedback loops.

Firms must act now to ensure they can demonstrate affordable and sustainable lending practices. This involves aligning business models with sustainable lending principles, preventing foreseeable harm, and implementing dynamic monitoring frameworks. Effective governance and oversight are crucial, with senior leadership accountable for sustainability and affordability performance. A culture that promotes responsible behaviour and customer financial wellbeing is also essential.

But it doesn’t stop there. It’s vital for firms to carry out proportionate affordability assessments that are flexible enough to accommodate different scenarios. This includes balancing risk, term, and product complexity with behavioural analysis and customers’ individual circumstances.

Fresh affordability assessments should be conducted when re-lending, and relevant affordability information should be collected directly from customers and validated, where possible, through technology and vice versa.

Firms relying primarily on technological solutions must have a documented fallback process to ensure responsible lending decisions when external data is insufficient to demonstrate affordability and sustainability.

An effective Target Operating Model should underpin these efforts, supporting holistic data capture, customer outcomes monitoring, and clear governance. Regular reviews of lending standards, product and pricing policies, and automated decision-making processes are necessary to ensure good customer outcomes.

Firms must place customer needs at the forefront of their business models, ensuring robust lending practices and governance frameworks that prioritise sustainability and affordability. Our recently published White Paper ‘Sustainable Lending in the Consumer Credit Market’ offers in-depth practical strategies to seize the opportunity while mitigating the risks of unsustainable lending.