the future of affordability assessments · powered affordability assessments. • real-time view of...

The future of affordability assessments

White PaperApril 2018

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Contents

Executive Summary2.

Our predictions for future regulatory drivers3.

4. Prediction 1: Current affordability assessments are falling short

5. Prediction 2: Applicants incoming and outgoing stability isn’t being established

6. Prediction 3: Businesses aren’t actively looking to identify vulnerability

7. Prediction 4: Bank verification prevails over self-certification

8. The Open Banking solution

9 - 10. OpenWrks

within applicants

Executive Summary

New outlines from FCA set to change the way lenders assess affordability.

With 48%¹ of all UK households having financial liabilities and with 6%1 of UK households having problem debt, there’s little wonder that the FCA is encouraging creditors to change the way customers are assessed for affordability.

The FCA has concluded that the current process of assessing a person’s creditworthiness is putting people at risk. This is put into stark reality when looking at the break down of households with problem debt as almost a fifth (18%1) of the most vulnerable and lowest-earning households in the UK carry problem debt.

Within the next couple of months, the FCA is expected to release their guidelines regarding best practice for establishing creditworthiness in consumer credit, which is sure to bring about changes to the way things are currently done.

With first-hand experience within the credit industry, as a previous Director of TDX and Lowell, I know exactly what challenges the collections and lending industry face when assessing a person’s affordability and creditworthiness. The manual rekeying of data that adds hours or even days to an application. Applicants inadvertently giving an inaccurate view of how much they can afford to repay. Or the time waiting in standstill for applicants to supply printed documentation.

The FCA review will put more emphasis on the assessment of affordability within creditworthiness, using more accurate information and analysis, but this doesn’t mean that the application process will need to be extended. New technologies and innovations, such as Open Banking, mean that affordability and creditworthiness assessments can be thorough without extending the time and effort required from both businesses and their customers.

This paper outlines our predictions for upcoming changes, regulations driving them and the effect it will have on businesses and their customers. This paper will consider viable solutions to respond to the guidance and share our view on how to implement these solutions in a business today.

Olly Betts - CEO at OpenWrks

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1 Office for National Statistics (2018): https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/datasets/householddebtwealthingreatbritain

2.

Our predictions for future regulatory drivers

The regulations set out by the FCA are constantly under review to ensure that consumers are always protected and getting a fair deal.

During the second quarter of 2018, the FCA are expected to announce their updates to the standards and regulations of establishing creditworthiness in consumer credit which will impact businesses within lending and collections. These changes are being implemented due to research conducted by the FCA which highlighted a risk to customers from ‘poor culture and practice when assessing affordability in consumer credit’2.

During the current review the FCA is looking to:

Define the distinction between affordability and credit risk.

Clarify the factors that should be used when deciding the proportionality of assessments. Highlight the role of data and analytics around income and expenditure information.

Cement the FCA expectations around firms’ policies and procedures.

With over 100 years combined experience in the credit industry, OpenWrks’ credit experts and risk analysts have predicted the following four changes will be presented by the FCA following

their review.

openwrks.com2FCA - Assessing creditworthiness in consumer credit (July 2017) Pg. 3, Pt. 1.6 https://www.fca.org.uk/publication/consultation/cp17-27.pdf

3.

Prediction 1Current affordability assessments are falling short

Over 2 in 53 credit applicants aren’t being accurately assessed for affordability. Assessing the creditworthiness of an individual combines both credit risk and affordability assessments. However, during their research the FCA found that just over half (57%3) of surveyed firms conduct separate tests to establish an individual’s creditworthiness. This means that 43%3 of firms aren’t establishing enough evidence to show they have analysed an applicant’s affordability rating, potentially resulting in an overpriced or unaffordable product for customers and in extreme cases, unenforcable credit agreements.

The guidelines due to be set by the FCA are just that, they’re guidelines and best practice that can be interpreted by those in the credit and lending industry as they see fit. In line with our prediction and the goals of the FCA, there will be a number of impacts within the lending and credit sectors.

In order to more accurately assess the affordability of an applicant, businesses will need to evidence that they’re asking enough of the right questions or gathering enough of the right data and analysing it correctly to establish the affordability of an individual.

What’s the predicted impact?

Affordability assessmentsSolution Positives Limitations

Add more questions to applicant interviews.

• Easy to deploy into existing process.• Get a deeper insight into applicants

current financial situation.

• Adds more time and hassle to an already long process.

• Under the GDPR all information gathered will have to be used as part of creditworthiness assessment.

• Self-certified assessment of financial situation.• More operational resource needed for team

members to manually input the extra data collected.

Ask applicants to supply more paper documents.

• Easy to deploy into existing process.• Get a longer term view into applicants

current financial situation.

• Hassle for applicant to download, print/send PDF versions of bank statements.

• Creates a lag between application and assessment, waiting for documents.

• More operational resource needed to manually input the extra data collected.

• All information provided has to be analysed and used as part of assessment under the GDPR.

Use Open Banking connection at point of application.

• Real-time view of an applicant’s financial situation.

• Extensive historic view of transactions.• GDPR compliant - Granular control of data

collection.• Bank-verified financial situation.

• Only available to customers who use online banking.

Use Screen Scraping technology to access customers banking information.

• Get access to all the information within customers bank account.

• Large bank coverage.

• Less secure way of collecting customer data.• Less reliable connection method.• Set to be abolished by the FCA in 2019.• Requires customers to supply account log in

details; passwords and memorable words. • Breach of bank account Terms & Conditions• Not-GDPR compliant• Only available to customers who use online

banking.

openwrks.com3 FCA - Assessing creditworthiness in consumer credit: Summary of research findings (July 2017) Pg. 4, Pt. 8: https://www.fca.org.uk/publication/consultation/cp17-27-research-findings.pdf

4.

Prediction 2Applicants’ incoming and outgoing stability isn’t

being consideredThe amount and type of information collected about an applicant isn’t sufficiently evidencing affordability, as it isn’t taking into account the stability of incoming and outgoing expenses.

At the 2018 Credit Summit4 in March, Jonathan Davidson of the FCA, said that ‘affordability assessments need to be forward-looking instead of backwards facing’.

The FCA wants to ensure that businesses make a reasonable assessment, not just whether a customer will repay, but making sure that they are providing a responsible loan at a rate that won’t negatively affect the customer’s financial situation or give them financial distress in the future. An example of this comes from the FCA’s research findings. 57%5 of businesses only use one single payslip to verify income. For customers who may be working shift based jobs, zero-hour contracts or those that rely heavily on commissions, a simple payslip from one month doesn’t give an accurate view of how that person’s income could fluctuate between months. Not enough focus is being put on analysing this, resulting in too much time being spent on establishing the credit risk rather than affordability and whether the applicant can actually afford to pay back. What’s the predicted impact?There are a number of solutions to ensure that the stability of incoming and outgoing expenses are incorporated into affordability assessments. The table below covers possible solutions and the positives and limitations to each.

Incoming and outgoing stability isn’t being establishedSolution Positives Limitations

Ask applicants to provide hard copies of multiple months payslips.

• Get a backward view of income fluctuations.

• Able to forecast upcoming fluctuations.

• Lag between application and approval waiting on applicants to provide evidence.

• Operational time spent analysing the extra data.

Ask applicants about how steady their income is.

• Get a direct answer about income.• Quicker way of verifying income stability.

• Applicant might give an inaccurate view of fluctuations overtime.

• Applicant self-certifying their financial position.

Use Open Banking powered affordability assessments.

• Real-time view of bank statements.• Automated affordability assessment

giving you and the applicant an answer in minutes.

• Quicly and easily verify income and expenditure spikes.

• Bank verified certification of financial situation.


Use ‘screen scraping’ technology to access customers banking information.


• Large bank coverage.

• Lack of historical information - no way to track spikes or trends over time.

• No way to automate affordability assessments.• Less secure and reliable way of collecting

customer data.• Set to be abolished by the FCA in 2019.• Breach of bank account Terms & Conditions• Not-GDPR compliant• Only available to customers who use online

banking.

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4Credit Strategy - Credit Summit: https://www.creditstrategy.co.uk/credit-summit5FCA - Assessing creditworthiness in consumer credit: Summary of research findings (July 2017) Pg. 19, Pt. 61https://www.fca.org.uk/publication/consultation/cp17-27-research-findings.pdf

5.

Prediction 3Businesses aren’t actively looking to identify

vulnerability within applicantsBusinesses aren’t proactively looking to identify whether an individual might be financially vulnerable. The definition of vulnerability set out by the FCA in 2015 (Treating Customers Fairly (TCF) can include anyone who, due to their personal circumstances is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care6.

This could include any number of things; from long-term illness, addiction or sudden changes in circumstance such as the loss of a job or a death in the family. Although not all definitions of vulnerability are easily identifiable through a credit application, businesses will need to evidence that steps have been taken to actively identify customers that could be classed as vulnerable.

What’s the predicted impact?While nothing will replace the detail and nuance of speaking to customers and forming a holistic view of their life, however trends or behaviours within financial information can help identify areas of potential vulnerability that may require further understanding.

Identifying vulnerability within applicantsSolution Positives Limitations

Ask the applicant if they believe they fit into any of the vulnerability definitions.

• An applicant may be aware of changes to circumstances before they actually happen.

• Some applicants won’t know that they fit into the description of vulnerable.

• Applicants might find the question uncomfortable to answer or might not be in the right state of mind to answer.


• An extensive history of backdated bank statements will highlight circumstantial vulnerabilities.

• No questions need to be asked directly to the applicant.

• Bank-verified information.• Ablility to analyse trends across multiple

months of transaction history.


• Changes to circumstances will still only be identifiable after the event, however proactive steps can be taken to mitigate the wider impact of this increased vulnerability.

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6 FCA - Consumer Vulnerability Occasional Paper No.8 (Feb 2015), https://www.fca.org.uk/publication/occasional-papers/occasional-paper-8-exec-summary.pdf

6.

Prediction 4Bank-verification prevails over self-certification

Current affordability assessments are limited by the amount and type of information that is available.

Applicants have to answer a number of questions that relate to their income and expenditure, but many people don’t actively manage their finances or are blissfully unaware of how much they actually spend each month. When applicants answer income and expenditure questions, they may not realise that they are self-certifying and can often inadvertently end up providing an inaccurate view of how much they can afford to repay. Bank-verified assessments takes away the risk associated with self-certification by using real-time banking information to accurately analyse the affordability of an applicant.

What’s the predicted impact?We predict the FCA will highlight the role of data and analytics around income and expenditure information. More technology and analysis will need to be introduced into businesses to ensure that income and expenditure are being accurately determined.

Bank-verification prevails over self-certificationSolution Positives Limitations

Ask applicants to provide all statements available on their online banking.

• Get a view of all historical financial information.

• Applicant has to provide 12+ months of documents.

• Operational support will need to be increased to manually input all of the data returned.

• All documentation needs to be stored and filled in line with the Data Protection Act.


• Extensive history of backdated bank statements will allow you to analyse the future view.

• Only request the information you need to conduct the affordability assessment.

• Bank-verified assessment.


Use Screen Scraping technology to access financial information.


• Larger bank coverage.

• Less secure way of collecting customer data.• Less reliable connection method.• Set to be abolished by the FCA in 2019.• Requires customers to supply account log in

details; passwords and memorable words. • Breach of bank account Terms & Conditions.• Not-GDPR compliant.• Only available to customers who use online

banking.

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7.

The Open Banking solution

Open Banking is the biggest innovation within financial services since the humble ATM. Allowing people to securely share their financial information with businesses they trust, Open Banking has created the opportunity for those within the lending and credit sectors to create faster, more sustainable and personalised products.

With access to real-time financial information, it’s quick and simple to collect the information you need in order to analyse a person’s affordability. Reducing the time it takes from application to product by removing the need for paper documents to be sent via snail mail and freeing up your team to analyse affordability rather than inputting months of bank statements.

8.

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We make Open Banking work for businesses, by providing right data, in the right format, at the right time and place - so that you can make the right decisions for your customers.

We’ve created the OpenWrks toolkit to help the most ambitious and customer focussed financial services businesses create new solutions to their customers everyday challenges. By seamlessly integrating Open Banking data into your business and your processes, you can make more of the right customer decisions.

OpenWrks API

The OpenWrks API seamlessly connects any of your customer’s bank accounts to your systems and processes, so you get the information you need exactly where and when you want it.

We’ve connected with every UK bank through their secure Open Banking APIs, removing bloat and variability from those different connections so our clients don’t have to. The OpenWrks API provides a single, simple and secure way to integrate normalised, categorised and profiled customer bank data in the most flexible and scalable way.

OpenAffordability

Make faster, more personalised and sustainable affordability decisions for every customer, with automated and bank verified affordability assessments.

Tailor what income and expense information your customers need to provide to make the right affordability assessment everytime.

9.

OpenStatements

Instant access to bank statements.

Save your customers time by taking away the need to download, scan and send statements with instant access to 12 months of digital bank statements. Available to consume through the OpenWrks API or our Surface Dashboard.

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All the Open Banking solutions that we provide are powered by the OpenWrks platform.

1. FlowFlow is a GDPR and PSD2 compliant authentication journey that lets your customers give you permission to see their bank account information through a seamless, secure and

customised journey.

2. EngineThe brains behind OpenWrks, engine transforms raw bank data from any UK bank into a standardised, categorised and profiled view of your customers’ income and spending

patterns.

3. SurfaceSurface is how you receive your customers transformed bank data, so you get the answers you need exactly where you need them most. Whether that’s plugged directly into your existing systems via the OpenWrks API or if you just want the answer, you can use our out of the box surface

dashboard.

Get in touch with us To get a Demo of the OpenWrks Toolkit or to find out more information about the

tools we provide, get in touch with us at [email protected].

10.

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