Arum’s Senior Consultant Walter Mather comments on the customer affordability issue that organisations can’t afford to get wrong.
Payday lender Wonga has said it is writing off £220m of debts for 330,000 customers after putting in place new affordability checks, following discussions with the Financial Conduct Authority (FCA) about its lending practices.
A further 45,000 customers in arrears will not have to pay interest on loans, with affected Wonga customers to be notified by 10 October.
It is a very interesting precedent which could have substantial implications not just for the payday lending sector but for the wider Collections & Recoveries Industry.
Indeed the FCA has effectively put the rest of the Industry on notice through the Wonga announcement, with the FCA’s director of supervision Clive Anderson stressing the industry “needs to lend affordably and responsibly.”
The FCA has now laid down the affordability gauntlet. With this increased regulatory focus and rising interest rates on the horizon, lenders need to take stock of their current measures of affordability.
If affordability is not already at the heart of the credit process, it should be, with the Wonga case highlighting that it’s an expensive process to correct.
The extent and scope of any assessment of affordability depends upon a number of factors. These include the type of credit product; the credit amount; the borrower’s financial situation; their credit history; and potential future changes in the borrower’s circumstances, including external factors such as interest rates that could affect this.
When implementing a robust affordability strategy, there are key lynchpin areas that should form the basis of the strategy – Data, Process, Systems, Model and Calculation Design (I&E), Monitoring and Policy Design.
It would be prudent for organisations to review existing policies and processes to ensure that they can validate and pass the affordability test.
It is clear that affordability is not an area that organisations can afford to get wrong from a customer advocacy, regulatory conduct and cost perspective.