Conduct and document affordability assessments for consumer credit

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.

Methods of income verification:

• Payslips: Recent payslips (typically 3 months) for employed applicants. Verify the employer name matches the application and look for unusual fluctuations.
• Bank statements: 3 months of bank statements showing salary credits. These also reveal expenditure patterns. Redact or ignore sensitive transaction descriptions where appropriate.
• Open Banking: Real-time bank data via PSD2 APIs provides income verification and expenditure categorisation. This is increasingly the standard approach for digital lenders and reduces reliance on self-declaration.
• Tax documents: SA302 tax calculations or company accounts for self-employed applicants. Self-employed income is inherently more variable and requires careful interpretation.
• Self-declaration: Customer-stated income may be acceptable for lower-risk, lower-value lending, but must be sense-checked against other available 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.

What to include in expenditure:

• Existing credit commitments: Use credit reference agency data to identify outstanding loans, credit cards, hire purchase, and other regulated agreements. Include the monthly repayment amounts.
• Essential living costs: Housing (rent or mortgage), council tax, utilities, food, transport, childcare, insurance. ONS data on household expenditure can provide a benchmark, but should not replace actual data where available.
• Discretionary spending: While you cannot dictate how customers spend their money, significant discretionary commitments reduce available income for loan repayments.

Calculating disposable income: 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:

• Existing debt burden: Total outstanding balances and monthly commitments across all credit accounts
• Payment history: Late payments, defaults, CCJs, IVAs, or bankruptcy orders
• Recent credit applications: Multiple applications in a short period may indicate financial distress
• Address history: Verify the address matches the application and check 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:

• Amount of credit: Higher amounts require more thorough verification
• Duration of the agreement: Longer terms mean more exposure to income changes
• Cost of credit: Higher APR means greater risk of unaffordability
• Customer risk profile: Known vulnerability, adverse credit history, or high existing commitments warrant deeper assessment
• Product type: Open-ended credit (credit cards) requires assessment of the customer's ability to 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.

What to 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

Retention period: 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.

Next steps:

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