Household borrowing has hit the news again in the last couple of weeks. The publication of research reports, along with an interest rate rise from the Bank of England, has seen commentators assessing what impact this is having on the household purse.
Last week we also saw the FCA publish its final rules and guidance on assessing creditworthiness in consumer credit, which will important for firms as they look at how affordable borrowing is for their applicants moving forward.
In terms of research publications, a new report from the Office of National Statistics (ONS) has shown that, on average, each UK household last year spent or invested £900 more than they received in income. This means that Households have become net borrowers for the first time since 1988. Consumer credit borrowing has grown, with ONS reporting car finance as the fastest growing area.
A new report from the Treasury Select Committee also explored household finances and the impact of the new regulation of High-cost Short-term Credit. They found that the changes were delivering much better outcomes for consumers, but also that the industry had shrunk. The report encourages the FCA to move forward with its plans for the rest of the high-cost credit sector.
A question still remains about what this will mean for access to credit. This is a complex issue, with arguments around the utility of consumer credit and helping those that are under-served by mainstream financial services.
This was against the backdrop an interest rate-rise from the Bank of England last week. A rise is not viewed as a good thing for households that hold a lot of debt, as the costs associated with those debts are likely to rise also, but it does also point to the economy being on the right track, continuing to grow at a steady rate.
This is why the new guidance from the FCA will be so important, the aim of which was to clarify the expectations that the FCA has of firms that offer consumer credit. The FCA wants to minimise the risk of customers experiencing financial distress by ensuring that firms make a reasonable assessment of the ability of a customer to repay a loan affordably, without significantly affecting their wider financial situation.
Firms may need to dig below the headline information and take an in-depth assessment of a household’s financial picture. However, once again, this is not a straight-forward issue and considerations such as proportionality also need to be factored in.
Part of the new guidance is making the distinction between credit risk and affordability risk clear. The FCA has also made some changes to the proposed guidance, these include allowing household or other income to be taken into account in the assessment, provided that the firm can reasonably expect the income to be available to the borrower for repayment of the credit and also changing the assumptions to be used for assessing affordability in relation to credit cards and other running-account credit.
From a CFA perspective, it is encouraging that the FCA has taken account of comments made in response to the consultation and made some sensible changes to the original proposals. And, that these rules apply across the entire consumer credit sector to ensure fair regulation.
The new rules come into force on the 1st November 2018.