Affordability and Responsible Lending — FCA Requirements for UK Credit Firms

The Legal Framework for Affordability

The FCA's affordability and responsible lending requirements are set out primarily in the Consumer Credit sourcebook (CONC), supplemented by the overarching Principles for Businesses and the Consumer Duty. The key provisions are:

CONC 5.2A — Creditworthiness assessment: Before entering into a regulated credit agreement, a lender must undertake a reasonable assessment of the creditworthiness of the borrower. The assessment must consider the risk that the borrower will not make repayments under the agreement as they fall due, and the risk that the commitment will adversely affect the borrower's financial situation — including the ability to meet other financial obligations and commitments.

CONC 5.3 — Proportionality: The nature and extent of the creditworthiness assessment must be proportionate to the individual circumstances, including the type and amount of credit, the cost to the borrower and the borrower's financial situation. A £500 short-term loan requires a different assessment approach than a £25,000 unsecured personal loan.

Principle 6 — Treating customers fairly (and Principle 12 — Consumer Duty): These overarching principles require firms to act in customers' interests. In the context of lending, this means not providing credit that the borrower cannot sustainably afford, even if the borrower is willing to accept it.

What "Sustainable" Means

The FCA has made clear that affordability is not simply about whether the borrower can make the required repayments. It is about whether they can do so sustainably — meaning:

• Without undue difficulty or adverse consequences for their broader financial situation
• Without having to borrow further to make repayments
• While still meeting essential living costs, priority debts and other financial commitments
• With a reasonable buffer for unexpected expenses or changes in circumstances

A borrower who can only make repayments by reducing expenditure on essential items (food, utilities, housing costs) or by borrowing from other sources is not sustainably affording the credit — even if they make every payment on time.

Designing an Affordability Framework

An effective affordability framework should include the following elements:

Income verification: - Obtain evidence of the borrower's income — not merely a self-declaration - For employed borrowers: recent payslips, bank statements showing salary credits or P60/tax returns - For self-employed borrowers: tax returns, accountant-certified accounts or bank statements covering a representative period - Consider the stability and sustainability of income — a borrower on a zero-hours contract presents different affordability risk than one on a permanent salary

Expenditure assessment: - Obtain information on the borrower's essential expenditure including housing costs (mortgage/rent), council tax, utilities, insurance, transport and food - Use statistical models (such as ONS expenditure data) as a cross-check on declared expenditure — but do not rely solely on statistical models without considering the individual's actual circumstances - Identify existing credit commitments (credit cards, loans, BNPL, overdrafts) and include the repayment obligations in the affordability calculation

Surplus income calculation: - Calculate the borrower's disposable income after essential expenditure and existing credit commitments - Ensure the proposed credit repayment is affordable within this surplus — with an appropriate buffer - The FCA does not prescribe a specific surplus threshold, but enforcement cases suggest that lending where the repayment consumes substantially all available surplus is unlikely to be considered responsible

Stress testing: - For longer-term credit products (personal loans, hire purchase), consider the impact of plausible adverse scenarios — such as a moderate interest rate increase, a reduction in income or an increase in essential expenditure - For variable-rate products, assess affordability at a stressed rate above the current contractual rate

Common Affordability Failures

The FCA's enforcement record provides clear guidance on what constitutes inadequate affordability assessment:

Reliance on credit scores alone: A credit score indicates the statistical probability of default based on historical credit behaviour. It does not assess whether the specific credit product under consideration is affordable for the individual borrower. Multiple enforcement actions have confirmed that credit scoring is not a substitute for affordability assessment.

Accepting self-declared income without verification: Borrowers — particularly those in financial difficulty — may overstate income or understate expenditure. The FCA expects lenders to take reasonable steps to verify declared information, particularly for higher-value or higher-risk lending.

Ignoring existing credit commitments: An affordability assessment that does not account for the borrower's existing credit obligations — including BNPL commitments, credit card minimum payments and overdraft usage — is incomplete. The FCA has criticised firms that assess affordability in isolation from the borrower's total indebtedness.

Static assessments for revolving credit: For credit cards and other revolving facilities, affordability must be assessed not just at the initial credit limit but at the point of any limit increase. Firms that automatically increase credit limits without reassessing affordability have faced enforcement action.

Failure to apply enhanced checks at scale: Where lending volumes mean that manual affordability assessment is impractical, firms must implement automated systems that replicate the rigour of manual assessment. Automated systems must be regularly validated and tested to ensure they produce appropriate outcomes.

Forbearance and Financial Difficulty

Responsible lending obligations extend beyond the point of origination. Under CONC 7, firms must treat customers in financial difficulty with forbearance and due consideration. Requirements include:

• Identifying customers who may be in financial difficulty — proactively, not only when the customer discloses problems
• Offering appropriate forbearance measures — such as reduced payments, payment holidays, interest freezes or extended terms
• Not pursuing aggressive debt collection tactics against customers who are cooperating with the firm to resolve their indebtedness
• Signposting customers to free debt advice services (StepChange, Citizens Advice, National Debtline)

The FCA has made clear that firms should not profit from financial difficulty — for example, by charging default fees or penalty interest that increase the customer's total indebtedness without a realistic prospect of resolution.

Motor Finance Commissions — Recent Developments

The FCA's 2024 review of motor finance discretionary commission arrangements (DCAs) has significant implications for affordability practices across the consumer credit sector. The FCA found that DCAs — where brokers could set the interest rate within a range, receiving higher commission for higher rates — created incentives to sell more expensive credit that was less likely to represent fair value. Key lessons include:

• Commission structures must not create conflicts of interest that incentivise unaffordable lending
• Fair value assessments must consider the total cost of credit to the customer — not just the APR in isolation
• Firms must be able to demonstrate that the credit sold was appropriate for the individual customer's circumstances

Practical Recommendations

Build affordability into product design. Design products with maximum debt-to-income ratios, mandatory cooling-off periods and automatic affordability rechecks at renewal or top-up. Prevention is more effective — and less costly — than remediation.

Invest in data and technology. Open banking data, credit reference agency data and statistical expenditure models can all improve the accuracy and efficiency of affordability assessments. The FCA supports the use of technology to improve outcomes — but technology must supplement, not replace, regulatory compliance.

Maintain comprehensive audit trails. Document every affordability decision — including the data considered, the methodology applied, the outcome and the rationale for proceeding. These records are the primary evidence in any FCA review or FOS complaint.

Monitor outcomes. Track default rates, early arrears, customer complaints and repeat borrowing patterns as leading indicators of affordability stress. If these metrics deteriorate, investigate the root cause before the FCA does.