United KingdomFCA Handbook, CONC 5.2A, assessing the creditworthiness of a customer before consumer credit is granted or significantly increased
In force since .
An AI sector rules rule binding private bodies.
- Criminal exposure
- No
- Private right of action
- Yes
- Enforcement body
- Financial Conduct Authority
- Instrument type
- a regulation made under an act
- Obligation class
- Governance
- Audit expectation
- periodic
- Who audits it
- Self, Regulator
- Where the report goes
- Kept
As of .
What it requires
- It reaches you if you operate as a firm with respect to consumer credit lending, other than under an agreement in which you take an article in pawn on the terms described in CONC 5.2A.2R(1), a current account agreement that may allow the account-holder to overdraw without a pre-arranged overdraft or to exceed a pre-arranged overdraft limit where doing so would be a regulated credit agreement (overrunning), a non-commercial agreement, or a small borrower-lender-supplier agreement which is a restricted-use credit agreement: undertake a reasonable assessment of the creditworthiness of a customer before entering into a regulated credit agreement, significantly increasing the amount of credit provided under one, or significantly increasing a credit limit for running-account credit under one, and do not take that step unless you can demonstrate that you have done so in accordance with CONC 5.2A and had proper regard to the outcome in respect of affordability risk (CONC 5.2A.1R, 5.2A.2R, 5.2A.4R, 5.2A.5R).
- Base the assessment on sufficient information that you are aware of at the time, obtained where appropriate from the customer and where necessary from a credit reference agency, enough to carry out a reasonable assessment (CONC 5.2A.7R).
- Consider the risk that the customer will not make repayments by their due dates and the risk to the customer of not being able to make repayments: their ability to repay as the repayments fall due over the life of the agreement, without having to borrow, without failing to make other payments they are obliged to make, and without a significant adverse impact on their financial situation (CONC 5.2A.10R, 5.2A.12R).
- When considering affordability risk, do not take into account the existence of, or the intention to provide or request, any guarantee, indemnity or other form of security (CONC 5.2A.14R).
- Unless you can demonstrate that it is obvious in the circumstances of the case that the customer is able to make repayments, so as to make the steps disproportionate, or the customer has indicated clearly an intention to repay wholly using savings or other assets, take reasonable steps to determine, or reasonably estimate, the customer's current income and current non-discretionary expenditure, estimate any reasonably foreseeable reduction in income or increase in expenditure that could have a material impact, and take account of the figures (CONC 5.2A.15R, 5.2A.17R).
- Make the extent and scope of the assessment proportionate to the individual circumstances of each case, and consider the types, content and level of detail of the information to use, whether to obtain more from the customer or from a credit reference agency, whether and how far to verify it, and the degree of evaluation and analysis, having regard to factors including the type of credit, the amount, the duration, the repayments, the total charge for credit and the annual percentage rate of charge (CONC 5.2A.20R).
- For an open-end agreement, make a reasonable assumption about the likely duration of the credit, and for running-account credit assume that the customer draws down the entire credit limit at the earliest opportunity and repays by equal instalments over a reasonable period, and set the credit limit in the light of the assumptions (CONC 5.2A.26R, 5.2A.27R).
- Where an individual other than the borrower is to provide a guarantee or indemnity, undertake a reasonable assessment of the potential for the guarantor's commitments to have a significant adverse impact on the guarantor's financial situation, on sufficient information, before entering into the agreement or increasing the credit (CONC 5.2A.31R).
- Establish, implement and maintain clear and effective written policies and procedures to carry out creditworthiness assessments, setting out the principal factors you will take into account and, other than as a sole trader, approved by your governing body or senior personnel; assess and periodically review their effectiveness and your compliance with them and with CONC 5.2A; take appropriate measures to address any deficiencies; and, other than as a sole trader, maintain robust governance arrangements and internal control mechanisms to ensure compliance (CONC 5.2A.33R(1) to (4) and (6)).
- Maintain a record, on paper or in electronic form, of each transaction where a regulated credit agreement is entered into, or credit is significantly increased, sufficient to demonstrate that a creditworthiness assessment was carried out where required and was reasonable and undertaken in accordance with CONC 5.2A (CONC 5.2A.33R(5)).
- Do not complete the parts of an application for credit intended to be completed by the customer without the customer's consent or unless the customer has been advised to check the application and has had a full opportunity to do so (CONC 5.2A.35R).
- Do not accept an application for credit where you know or have reasonable cause to suspect that the customer has not been truthful in completing it in relation to information relevant to the creditworthiness assessment (CONC 5.2A.36R).
What this law does
CONC 5.2A applies to a firm with respect to consumer credit lending, subject to the exclusions in CONC 5.2A.2R. CONC 5.2A does not apply to an agreement under which a firm takes an article in pawn where the customer's total financial liability is not capable of exceeding the true market value of the article and the passing of property in it to the firm, or its sale, would at the very least discharge the debt secured by the pawn and any other obligation to pay a sum of money under the agreement.
CONC 5.2A does not apply to a current account agreement where the account-holder may be allowed to overdraw without a pre-arranged overdraft or to exceed a pre-arranged overdraft limit and doing so would be a regulated credit agreement (overrunning). CONC 5.2A does not apply to a non-commercial agreement or to a small borrower-lender-supplier agreement which is a restricted-use credit agreement.
CONC 5.2A.4R requires a firm to undertake a reasonable assessment of the creditworthiness of a customer before entering into a regulated credit agreement, significantly increasing the amount of credit provided under one, or significantly increasing a credit limit for running-account credit under one.
The firm must not take any of those steps unless it can demonstrate that it has undertaken the creditworthiness assessment and, where relevant, the assessment of a guarantor in accordance with the rules in the section, and had proper regard to the outcome of the assessment in respect of affordability risk.
A firm must base its creditworthiness assessment on sufficient information that it is aware of at the time, 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 assessment.
The firm must consider the risk that the customer will not make repayments by their due dates, which is credit risk, and the risk to the customer of not being able to make repayments, which the section calls affordability risk.
The firm must consider the customer's ability to make repayments without having to borrow to meet them, without failing to make any other payment the customer has a contractual or statutory obligation to make, and without a significant adverse impact on the customer's financial situation.
Unless the firm can demonstrate that it is obvious in the circumstances of the case that the customer is able to make repayments, so as to make the steps disproportionate, or the customer has indicated clearly an intention to repay wholly using savings or other assets, the firm must take reasonable steps to determine, or make a reasonable estimate of, the customer's current income.
CONC 5.2A.17R applies the same duty to the customer's current non-discretionary expenditure where CONC 5.2A.15R also applies, unless the firm can demonstrate that it is obvious that the expenditure is unlikely to have a material impact on affordability risk.
CONC 5.2A.19G says that, in considering non-discretionary expenditure, a firm may take into account statistical data unless it knows or has reasonable cause to suspect that the expenditure is significantly higher than the data describe or that the data are unlikely to be reasonably representative of the customer's situation.
The extent and scope of the assessment, and the steps 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. A firm must establish, implement and maintain clear and effective policies and procedures to enable it to carry out creditworthiness assessments and setting out the principal factors it will take into account.
A firm must assess and periodically review the effectiveness of those policies and procedures and its compliance with them and with CONC 5.2A. A firm must maintain a record of each transaction where a regulated credit agreement is entered into, or credit is significantly increased, sufficient to demonstrate that a reasonable creditworthiness assessment was carried out and so to enable the FCA to monitor the firm's compliance.
A firm must not accept an application for credit under a regulated credit agreement where it 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.
The Consumer Credit (Creditworthiness) Instrument 2018 was made in the exercise of powers in the Financial Services and Markets Act 2000 that include the FCA's general rules power in section 137A, its general supplementary powers in section 137T and its power to give guidance in section 139A. Section 204A of that Act defines a relevant requirement as including a requirement imposed by or under the Act.
The FCA is the appropriate regulator, under section 204A(6), for a contravention of any other requirement imposed by or under the Act, that is, one not dealt with in the earlier subsections of the section. Section 206 of that Act lets the regulator, where it considers that an authorised person has contravened a relevant requirement imposed on the person, impose a penalty in respect of the contravention of such amount as it considers appropriate.
Under section 138E(1) of the Financial Services and Markets Act 2000 a person is not guilty of an offence by reason of a contravention of a rule made by either regulator. Under section 138D(2) of the Financial Services and Markets Act 2000 a contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty.
The table in CONC Schedule 5 lists all rules in CONC other than the clear, fair and not misleading rule in CONC 3.3.1R and the prudential rules in CONC 10, a group that includes CONC 5.2A, as rules for which a private person has a right of action under section 138D, with no right of action removed. CONC 5.2A was last updated on .
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