Claims Management Companies (CMCs) have been targeting credit unions with largely frivolous claims that they have not been carrying out an affordability assessment. The CMC will then try and get the loan written off and may charge the borrower a percentage fee for doing so.
An applicant can complain directly to the Financial Ombudsman Scheme (FOS) once they've exhausted your complaints procedure.
FCA guidance on affordability
The FCA requires lenders to carry out a creditworthiness assessment. That includes assessing affordability risk. Because the outcome of a poor affordability assessment has a detrimental impact on the borrower, this is considered to be a poor consumer outcome and contrary to good conduct risk.
The guidance can be found in CONC 5.2A Creditworthiness assessment.
Riskier lending practices
There are no exemptions for carrying out an affordability assessment. CONC 5.2A applies for any loan that is advanced. It doesn't matter whether that loan is smaller in value, is advanced to an existing member with a good track record or is fully secured. In every case a proportional assessment is required.
It is therefore more likely that a CMC would succeed in a claim when a lender hasn't carried out a full affordability assessment for:
Refinancing (aka top ups)
Fully secured loans (they are still an interest bearing advance)
Smaller value loans
The extent of assessment will depend on a credit union's regulatory risk appetite. In all cases at least an Open Banking assessment is strongly recommended.
Refuting CMC or FoS claims
The following is a suggested template response that a lender might make if a former borrower is claiming that an affordability application wasn't carried out. Replace anything in [square brackets].
If you have already used the letter to refute a complaint and this then escalates to a FOS action, contact us and we can help you construct a more detailed response.
We are writing to refute the suggestion that [X Credit Union] failed to carry out an affordability assessment for [name of complainant].
[X Credit Union] follows a vigorous affordability assessment in compliance with the Financial Conduct Authority’s Creditworthiness Assessment under CONC 5.2A.
In line with CONC 5.2A.4 and 5.2A.9, the lender undertakes a robust and proportionate assessment of creditworthiness before entering into a credit agreement or significantly increasing an existing facility. This ensures the applicant can afford repayments without undue financial hardship.
As required by CONC 5.2A.17, [X Credit Union] reviews the applicant’s credit file, focusing on recent missed payments, defaults, and arrears, which are key indicators of financial stress and relevant to assessing the risk of non-repayment.
In accordance with CONC 5.2A.18G, we evaluate debt ratios, such as the percentage of income spent servicing existing credit commitments, helping determine whether the applicant is over-indebted.
For existing members, and in line with CONC 5.2A.19, the lender considers internal behavioural data, such as the regularity of loan repayments and savings contributions, which help assess financial reliability and stability.
Furthermore, as referenced in CONC 5.2A.22, a detailed income and expenditure analysis is performed, with attention paid to discretionary income levels to ensure there is sufficient surplus to cover new repayments, in compliance with CONC 5.2A.18.
In most cases we look at a full 12-month history using Open Banking. This helps [X Credit Union] ensure compliance with CONC 5.2A.15 to carry out a reasonable estimate of income and the propensity for that income to change over time.
Using rule-based assessments, [X Credit Union] screens for high-risk behaviours and patterns of missed payments, in alignment with CONC 5.2A.20, which recognises the use of systems and models to support affordability assessments.
Lastly, we monitor changes to income over time, as recommended in CONC 5.2A.15G, to ensure that any new line of credit remains affordable throughout the life of the agreement.
This layered approach meets the FCA’s expectations for responsible lending and fair customer outcomes.
We can confirm that in the case of [name of complainant] the above checks were carried out on [date].
[optional] When assessing the loan we did consider a pressure on affordability and reduced the amount offered from [amount] to [amount]].
On this basis we reject the claim that has been made and expect the borrower to continue to make payments under the agreement. To ensure that we support other lenders in compliance with the spirit of CONC 5.2, we will report any missed payments to a Credit Reference Agency.