Additional information following Hamish Paton’s evidence to the Committee on 28th February 2018.

1. Q121: could you send us a clear explanation of your systems for affordability?

Overview of BrightHouse’s Customer Affordability Assessment

Before making a decision to lend, it is BrightHouse’s policy to conduct an affordability assessment to ensure that the customer can afford to make the repayments as they fall due, without undue financial difficulty throughout the term of the agreement.

The vast majority of these affordability assessments are undertaken face-to-face in a Brighthouse store. However, as part of BrightHouse’s commercial strategy to make it easier for customers to do business with us, we have introducing a transactional website that enables some customers to complete a credit application entirely online.

This will be particularly beneficial to those for whom visiting a physical store may not always be practical due to, for example, the nature of their employment, a disability, being a full-time carer, etc.

The affordability assessment is only one element of the decision to lend. If the affordability assessment is passed, it does not mean we will definitely lend, as the applicant must also pass other checks – including Know your Customer, credit and fraud checks, which are separate to the affordability assessment.

Process principles

All applications require an affordability assessment. This involves an assessment of Income & Expenditure (I&E).
Proof (or independent validation) of income is required.

Where an applicant’s income can be validated using electronic means, additional proof of income is not required – unless the data indicate that an applicant may be at high risk of over-indebtedness/ financial difficulty.

Where an applicant’s income cannot be validated using electronic means, proof of income is required.

Where high risk indicators are present, proof of income is required, including bank statements for applicants who have a bank account, and a member of staff will conduct an I&E assessment with the applicant.
Bank statements (where required) may be supplied on paper or electronically.
Expenditure is validated by comparing the declared expenditure to expected expenditure for customers of a similar demographic. Documentary proof of expenditure is required if, when asked, the applicant is unable to offer a reasonable explanation for why their expenditure is less than expected.
Where bank statements are required (e.g. where high risk indicators are present or where they are presented as proof of income or proof of address), they are used to validate expenditure and also checked for any indicators of financial difficulty.
In order to build resilience for customers against income shocks and unexpected expenditure, we allow for a buffer (currently £25 per week) in the Income & Expenditure calculations.

Credit Application process

Applicants are first credit-scored through BrightHouse’s automated scoring system; utilising a combination of application and bureau data. Those who pass this stage then move on to the affordability assessment process.

The affordability assessment process includes an interview during which staff conduct an Income & Expenditure (I&E) assessment with the applicant. The key elements of the affordability assessment are:

(a) Risk indicators

(b) Income validation

(a) Risk indicators

BrightHouse seeks to identify whether the applicant may have a higher risk of over-indebtedness/financial difficulty. Where information contained in the bureau data indicates that this may be the case, applicants are required to provide bank statements (if they have a bank account) to support the I&E assessment.

(b) Income validation

BrightHouse currently employs “The Affordability Report” (TAR); Callcredit’s electronic income verification product, to validate an applicant’s income.

To reiterate, if any of the above high risk indicators are present, documentary proof of income is required, including bank statements if the applicant has a bank account.

Otherwise, BrightHouse uses a combination of the red/amber/green status of TAR and Income Confidence factors to validate the applicant’s declared income. If the declared income cannot be validated using TAR, documentary proof of income (e.g. wage slips, bank statements) is required to verify the applicant’s declared income.

Up to 16 expenditure lines are captured as part of an in store customer interview and validated through a “challenge and response” process. In this, as expenditure items are input to the system, staff are prompted to query any item, which falls below an associated “trigger” value, as part of the customer interview. In order to continue the application, staff must input the reason (e.g. “living with parents”) or ascertain a more realistic value – or, if this is not possible, request that further information (e.g. documentary evidence) be provided before the application is completed.

Where bank statements are provided, staff also use these to validate expenditure details and to check for any indicators of financial difficulty. Otherwise documentary proof of expenditure is only required if, when asked, the customer is unable to offer a reasonable explanation for why their expenditure falls below the trigger value.

Online process

We have an automated expenditure validation process for lower risk customers who start their credit application online. Overall, we are seeing that some 10% of online applicants are able to complete the affordability assessment online.

For these lower risk customers this process is more convenient and less intrusive.

The remaining online applicants are directed to visit a store to complete the credit application process.

Expenditure model

Our instore experience of analysing bank statements alongside triggers (based on Callcredit’s cost of living and rental proxy datasets) indicates that BrightHouse customers typically have a lower expenditure than the average for their age and geographic segment. From the “challenge and response” process, we know that this is often because:

Housing benefits are paid direct to the landlord so the applicant has no rental expenditure, or
The applicant lives with someone else, e.g. parent or partner who pays some of the household costs.

The chart below shows the distribution of weekly expenditure for new customer applications between November 2016 and February 2017 based on the actual observed distribution of (manually validated) weekly expenditure for BrightHouse customers (dashed line) compared to the Callcredit cost of living and rental proxy data for individuals of the same age and geography (dotted line). From this, we can see that BrightHouse customers’ expenditure is typically lower than the norm. Overall, BrightHouse customers’ expenditure is, on average, 61% of the equivalent norm based on the Callcredit cost of living and rental proxy datasets.

For our online customers we have modelled the expected expenditure for different segments based on age, geography, whether they are in receipt of housing benefits and, household composition. The resultant modelled distribution (solid line) is set slightly higher than the observed (at 76% of the Callcredit norm on average) so that the model is conservative, i.e. the model underestimates the applicant’s affordability. This will be mitigated by inviting applicants whose (modelled) affordability is borderline to go to a store for a manual I&E assessment.

Outcomes

Our in store and online affordability assessments are robust and produce positive outcomes for customers. They focus staff time and attention towards applicants who:

Have a higher risk of over-indebtedness/financial difficulty,
Are more likely to have over-stated their income or under-stated their expenditure, or
Have expenditure that differs from the norm for their demographic.

2. Q145: what is the gender balance of your staff?

As at the end of the financial year on 31st March 2018:

- BrightHouse had 2,611 colleagues who were directly employed.

- Of these, 1,307 self-reported as female and 1,304 self-reported as male.