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CONC 5.2 Creditworthiness assessment: before agreement

CONC 5.2.1R
  1. (1)

    Before making a regulated credit agreement the firm must undertake an assessment of the creditworthiness of the customer.

    [Note: section 55B(1) of CCA]

  2. (2)

    A firm carrying out the assessment required in (1) must consider:

    1. (a)

      the potential for the commitments under the regulated credit agreement to adversely impact the customer's financial situation, taking into account the information of which the firm is aware at the time the regulated credit agreement is to be made; and

      [Note: paragraph 4.1 of ILG]

    2. (b)

      the ability of the customer to make repayments as they fall due over the life of the regulated credit agreement, or for such an agreement which is an open-end agreement, to make repayments within a reasonable period.

      [Note: paragraph 4.3 of ILG]

  3. (3)

    A creditworthiness assessment must be based on sufficient information obtained from:

    1. (a)

      the customer, where appropriate; and

    2. (b)

      a credit reference agency, where necessary.

      [Note: section 55B(3) of CCA]

  4. (4)

    This rule does not apply to:

    1. (a)

      an agreement secured on land; or

    2. (b)

      an agreement under which a person takes an article in pawn.

      [Note: section 55B(4) of CCA]

  5. (5)

    This rule does not apply, except to the agreements in (6), to:

    1. (a)

      a non-commercial agreement; or

    2. (b)

      a borrower-lender agreement enabling the borrower to overdraw on a current account; or

    3. (c)

      a small borrower-lender-supplier agreement for restricted-use credit.

      [Note: section 74 of CCA]

  6. (6)

    The agreements referred to in (5) and therefore to which this rule does apply are:

    1. (a)

      a borrower-lender agreement enabling the borrower to overdraw on a current account which is an authorised business overdraft agreement or an authorised non-business overdraft agreement; and

      [Note: section 74(1B) and (1C) of CCA]

    2. (b)

      a borrower-lender agreement enabling the borrower to overdraw on a current account which would be an authorised non-business overdraft agreement but for the fact that the credit is not repayable on demand or within three months.

      [Note: section 74(1D) of CCA]

  7. (7)

    Where the borrower-lender agreement in question is to finance the making of payments arising on or connected with the death of a person, this rule applies to the agreement to the extent the payments are:

    1. (a)

      inheritance tax chargeable in the UK on the death of any person;

    2. (b)

      fees payable to a court:

      1. (i)

        in England, Wales or Northern Ireland on an application for a grant of probate or of letters of administration;

      2. (ii)

        in Scotland, in connection with a grant of confirmation; and

      3. (iii)

        in the UK, on an application for resealing of a Commonwealth or colonial grant of probate or of letters of administration; and

    3. (c)

      payments in England, Wales or Northern Ireland to a surety in connection with a guarantee required as a condition of a grant of letters of administration or payments in Scotland to a cautioner in connection with a bond of caution required as a condition of issuing a grant of confirmation.

      [Note: section 74(1F) of CCA and SI 1983/1554]

    [Note: article 8 of the Consumer Credit Directive]

Scope of the pre-contract assessments

CONC 5.2.2R
  1. (1)

    Before entering into a regulated credit agreement which is excluded from CONC 5.2.1 R (see (4), (5) and (6)), a firm must carry out an assessment of the potential for the commitments under the agreement to adversely impact the customer's financial situation, taking into account the information of which the firm is aware at the time the agreement is to be made.

    [Note: paragraphs 1.14 and 4.1 of ILG]

  2. (2)

    Paragraph (1) does not apply to an agreement to which CONC 4.7.2R (1) applies (overrunning).

  3. (3)

    A firm must consider sufficient information to enable it to make a reasonable creditworthiness assessment or a reasonable assessment required by (1).

    [Note: paragraph 4.21 of ILG]

CONC 5.2.3G

The extent and scope of the creditworthiness assessment or the assessment required by CONC 5.2.2R (1), in a given case, should be dependent upon and proportionate to factors which may include one or more of the following:

  1. (1)

    the type of credit;

  2. (2)

    the amount of the credit;

  3. (3)

    the cost of the credit;

  4. (4)

    the financial position of the customer at the time of seeking the credit;

  5. (5)

    the customer's credit history, including any indications that the customer is experiencing or has experienced financial difficulties;

  6. (6)

    the customer's existing financial commitments including any repayments due in respect of other credit agreements, consumer hire agreements, regulated mortgage contracts, payments for rent, council tax, electricity, gas, telecommunications, water and other major outgoings known to the firm;

  7. (7)

    any future financial commitments of the customer;

  8. (8)

    any future changes in circumstances which could be reasonably expected to have a significant financial adverse impact on the customer;

  9. (9)

    the vulnerability of the customer, in particular where the firm understands the customer has some form of mental capacity limitation or reasonably suspects this to be so because the customer displays indications of some form of mental capacity limitation (see CONC 2.10).

    [Note: paragraph 4.10 of ILG]

Proportionality of assessments

CONC 5.2.4G
  1. (1)

    To consider all of the factors set out in CONC 5.2.3 G in all cases is likely to be disproportionate.

    [Note: paragraph 4.11 of ILG]

  2. (2)

    A firm should consider what is appropriate in any particular circumstances dependent on, for example, the type and amount of the credit being sought and the potential risks to the customer. The risk of credit not being sustainable directly relates to the amount of credit granted and the total charge for credit relative to the customer's financial situation.

    [Note: paragraph 4.11 and part of 4.16 of ILG]

  3. (3)

    A firm should consider the types and sources of information to use in its creditworthiness assessment and assessment required by CONC 5.2.2R (1), which may, depending on the circumstances, include some or all of the following:

    1. (a)

      its record of previous dealings;

    2. (b)

      evidence of income;

    3. (c)

      evidence of expenditure;

    4. (d)

      a credit score;

    5. (e)

      a credit reference agency report; and

    6. (f)

      information provided by the customer.

      [Note: paragraph 4.12 of ILG]

  4. (3A)

    Where the customer is borrowing for the purposes of a business, it may be reasonable to have regard to the customer’s business plan for the purposes of an assessment required by CONC 5.2.1R or CONC 5.2.2R, but the assessment should not be based solely on that business plan.1

  5. (3B)

    Where there is more than one customer acting together as ‘joint borrowers’, the lender should consider whether it may be appropriate to assess each customer in accordance with CONC 5.2.1R or CONC 5.2.2R separately (as well as collectively), having regard to the risk to that customer arising from the credit being sought were the customer to be treated as being solely responsible for obligations of the joint borrowers under the agreement. (Where the borrower is a partnership or an unincorporated association, the members or partners may be treated as a single customer.)1

  6. (4)

    A high level of scrutiny in the assessment required by CONC 5.2.2R (1) would normally be expected before the lender enters into a regulated credit agreement secured by a second or subsequent charge on the customer's home.

    [Note: paragraph 4.17 of ILG]

Creditworthiness assessment where there is a guarantor etc

CONC 5.2.5R
  1. (1)

    1This rule applies if, in relation to a regulated credit agreement:

    1. (a)

      an individual other than the borrower (in this rule referred to as “the guarantor”) is to provide a guarantee or an indemnity (or both); and

    2. (b)

      the lender is required to undertake an assessment of the customer under CONC 5.2.1R or CONC 5.2.2R.

  2. (2)

    Before entering into the regulated credit agreement, the lender must undertake an assessment of the potential for the guarantor’s commitments in respect of the regulated credit agreement to adversely impact the guarantor’s financial situation.

  3. (3)

    A firm must consider sufficient information to enable it to make a reasonable assessment under this rule, taking into account the information of which the firm is aware at the time the regulated credit agreement is to be made.

  4. (4)

    For the purposes of (2), CONC 5.2.3G, CONC 5.2.4G and CONC 5.3.1G to CONC 5.3.8G apply as if:

    1. (a)

      references to the customer were references to the guarantor; and

    2. (b)

      references to CONC 5.2.2R(1) were references to CONC 5.2.5R(2).

  5. (5)

    For the purposes of this rule, a guarantee does not include a legal or equitable mortgage or a pledge.

CONC 5.2.6G
  1. (1)

    1The assessment of the guarantor does not need to be identical to the assessment undertaken in respect of the borrower, but should be sufficient in depth and scope having regard to the potential obligations which might fall on the guarantor.

  2. (2)

    The provision of the guarantee or indemnity (or both), and the assessment of the guarantor under CONC 5.2.5R, does not remove or reduce the obligation on the lender to carry out an assessment of the borrower under CONC 5.2.1R or CONC 5.2.2R. Firms are reminded of the rule in CONC 5.3.4R that the assessment of the borrower must not be based primarily or solely on the value of any security provided by the borrower.