Taking a look at affordability and lender oversight

Lender oversight

Back in March this year, the FCA Final Findings report that followed their motor finance review made an important observation; they expected lenders to have better oversight of the dealers offering their finance with lenders taking reasonable steps to ensure any persons acting on their behalf comply with CONC.

Fast-forward to October 15th and the FCA issued an update on their motor finance review. While this update outlined a number of notable changes to the motor finance model that are subject to consultation, there was no reference to dealer oversight, however that doesn’t mean it should be neglected.

Dealer oversight is a crucial requirement for lenders and should be seen as a positive thing for dealers – helping to protect both the dealer and the lender involved. This is likely to be all the more critical with the SM&CR regime comes into force on December 9th this year.

In their review, the FCA’s observation on oversight was very clear:

“Lenders also have obligations in this area. In particular, CONC 1.2.2R requires lenders to take reasonable steps to ensure that persons acting on their behalf comply with CONC. This includes compliance with rules relating to disclosure of commission. However, while in principle the way lenders told us they frame their controls appeared broadly reasonable, we have doubts as to whether and to what extent these are always implemented in practice.”

So, what about affordability?

Another area of the FCA’s report focused on the need for lenders to look at customer affordability when considering a finance application, rather than just creditworthiness.

The FCA’s work on motor finance has now evolved and on October 15th the FCA issued an update on their work. Their conclusion of affordability was brief; “We are not proposing further changes to the rules on firms’ creditworthiness assessments”.  While the reference to creditworthiness might be seen as a little confusing, it’s likely that the FCA are comfortable they can supervise against the current CONC rules in most instances.

A key take-way from the FCA’s position on this part of their motor finance review is; listen to what is required and act accordingly and the market can evolve with the regulator.

Why Does Affordability Checking Matter?

The FCA is very clear that there is a significant difference between checking creditworthiness, which assesses the credit risk to the lender and affordability checking, which impacts the borrower.

With the rise in consumer credit, the FCA is committed to protecting consumers from the harm that can arise when they are granted credit that is predictably unaffordable at the point it is taken out.  At the same time, the FCA has been clear that it wants consumers to be able to access credit where it is affordable.

The FCA is keen to ensure that customers can meet their car finance commitments on time, without hardship, while still fulfilling their other financial obligations. Just because a customer’s car finance is up to date, it may not mean it is affordable, if other parts of their finances are under stress. Since November 2018, car finance companies have been obliged to undertake additional checks.

To gain a full picture of a customer’s capacity to afford a car finance agreement, lenders must check a customer’s income and expenses. Many lenders, including MotoNovo, are working to digitise affordability checking as quickly as possible, but in all circumstances, some additional work may well be needed by lenders to comply with the FCA’s requirements:

Are you a MotoNovo dealer? You can find a full briefing paper on the latest FCA updates in the Dealer Hub, just head to the downloads section!