Conduct and document affordability assessments for consumer credit

Before agreeing to lend to a consumer, you must assess whether they can afford the repayments without experiencing financial difficulty. This is not optional. The FCA requires all consumer credit firms to carry out affordability assessments under CONC 5, and unaffordable lending is the single most common category of consumer credit complaints referred to the Financial Ombudsman Service.

Getting affordability right protects your customers and your business. Lending that a customer cannot afford leads to arrears, default, FOS complaints, and potential FCA enforcement action.

Creditworthiness and affordability: two separate assessments

CONC 5 requires you to assess both creditworthiness and affordability. These are distinct concepts that serve different purposes.

Creditworthiness is the likelihood that the customer will repay. It is primarily a risk assessment for your business, using credit scoring models, credit reference data, and payment history to predict default probability.

Affordability is whether the customer can actually make the repayments without undue financial difficulty. A customer may have an excellent credit score but still not be able to afford a particular loan if their current commitments leave insufficient disposable income.

You must assess both. A positive credit score alone does not satisfy the affordability requirement.

Income verification

You must take reasonable steps to verify the customer's income. The depth of verification should be proportionate to the amount and duration of the credit.

You can verify income in several ways:

• Recent payslips, typically 3 months, for employed applicants. Check the employer name matches the application and look for unusual fluctuations.
• 3 months of bank statements showing salary credits, which also reveal spending patterns. Redact or ignore sensitive transaction descriptions where appropriate.
• Open Banking data, which gives real-time income verification and spending categories and reduces reliance on self-declaration. Digital lenders increasingly use it as standard.
• SA302 tax calculations or company accounts for self-employed applicants, whose income is more variable and needs careful interpretation.
• The customer's own statement of income, which may be acceptable for lower-risk, lower-value lending if you sense-check it against other data. Over-reliance on self-declaration is a common FCA finding.

The FCA does not prescribe a single method. You must use a method that is reasonable and proportionate to the risk.

Expenditure analysis

Assessing income alone is not enough. You must also understand the customer's committed and essential expenditure to calculate genuinely available disposable income.

Include the monthly repayments on existing credit, such as loans, credit cards and hire purchase, using credit reference agency data. Include essential living costs: rent or mortgage, council tax, utilities, food, transport, childcare and insurance. ONS household spending data can give a benchmark but should not replace actual data where you have it. You cannot dictate how customers spend their money, but significant discretionary commitments reduce the income left for repayments.

Net income minus total committed expenditure minus essential living costs equals disposable income. The proposed repayment must fit within this disposable income with a reasonable buffer.

Credit reference data

You must check credit reference agency (CRA) data as part of the assessment. What to look for:

• total outstanding balances and monthly commitments across all credit accounts
• late payments, defaults, CCJs, IVAs or bankruptcy orders
• several credit applications in a short period, which may indicate financial distress
• address history: check the address matches the application and look for linked addresses

CRA data shows what the customer owes elsewhere. It does not show their income or their non-credit expenditure. This is why CRA data alone cannot satisfy the affordability requirement.

Proportionality

The depth of your affordability assessment must be proportionate to the risk. CONC 5.2A.15G sets out the key factors:

• Higher amounts of credit need more thorough verification.
• Longer agreements mean more exposure to income changes.
• A higher cost of credit means a greater risk of unaffordability.
• Known vulnerability, adverse credit history or high existing commitments warrant a deeper assessment.
• For open-ended credit such as credit cards, assess whether the customer can repay within a reasonable period, not just make minimum payments.

A small, short-term loan to a customer with a clear credit history may require only basic checks. A large, long-term loan to a customer with adverse credit requires comprehensive income and expenditure verification.

Vulnerable customers

The FCA expects firms to exercise particular care when lending to customers who may be vulnerable. Vulnerability can arise from health conditions (physical or mental), life events (bereavement, job loss, relationship breakdown), low financial resilience, or low financial capability.

In practice this means:

• Training staff to recognise indicators of vulnerability during the application process
• Adjusting the affordability assessment where vulnerability is identified (for example, building in a larger income buffer)
• Ensuring communications are clear and accessible
• Not declining applications automatically because of vulnerability, but ensuring the lending decision accounts for the customer's actual circumstances

Documentation and record retention

You must document every affordability assessment and retain sufficient records to demonstrate compliance. If a customer complains to the FOS or the FCA reviews your lending decisions, you will need to evidence the assessment you carried out at the point of lending.

Record:

• Income evidence obtained and verified amount
• Expenditure data used (source and values)
• CRA data reviewed (date of search, key findings)
• Disposable income calculation
• Lending decision rationale, including any overrides of automated scoring
• Any vulnerability indicators identified and how they were addressed

Retain records for the duration of the agreement plus at least 3 years (to cover the FOS complaint time limit). In practice, many firms retain for 6 years given the Limitation Act 1980.

What happens when affordability goes wrong

If the FOS determines that your firm lent irresponsibly, the typical remedy is to refund all interest and charges paid by the customer and remove adverse credit reference data. For repeat lending to the same customer, cumulative refunds can be substantial.

The FCA can also take enforcement action for systemic affordability failures, including requirements to remediate affected customers, financial penalties, and restrictions on your permissions.

To check your own process:

1. Review your current affordability policy against CONC 5 requirements
2. Ensure income verification methods are proportionate to your product range
3. Test your expenditure models against actual customer outcomes
4. Train all staff involved in lending decisions on vulnerability indicators
5. Audit a sample of recent lending decisions for documentation quality