The UK’s first ever Financial Capability Week took place in November – a week of initiatives designed to highlight ways in which people can be helped to manage their money well. Financial capability as a concept is gaining ground and hundreds of organisations in the UK are involved in tackling the issue of low financial capability, helping people to prepare and cope with financial shocks and life events such as redundancy, bereavement and divorce.
These organisations are doing a good job and there are some excellent articles accessible online about the issue. However, financial capability is not the same as the concept of affordability which is at the heart of everything we are committed to at Castlight. And the reason we don’t have an Affordability Week is that we believe that every day across the financial services sector is an Affordability Day!
So what’s the difference between financial capability and affordability?
Basically, affordability is the acid test. It’s the health check, the MoT, the thorough, forensic review of an individual’s finances. And of course, it’s personal, unique to each and every person. Once an individual has had an affordability assessment, then and only then are they in a position to consider their financial capability – or what and when they are able to spend or save.
The FCA has done a great job in bringing the concept of affordability to the forefront of the financial sector’s consciousness, as clearly, affordability affects every lending decision that is governed by FCA. However, in general, consumers’ awareness of their own affordability parameters is relatively low. Whilst consumers are increasingly aware of their credit score, they will flounder if asked to put a figure on their average monthly disposable income. They simply don’t have a handle on their affordability – what the minutiae of their bank statement tells them.
Tools for more robust credit decisions
There are currently tools out there in the marketplace which are being used by financial retailers to base their lending and credit decisions on – tools such as ONS data along with Common Financial Statements (CFS) or an affordability calculator. These should come with a health warning! They are rudimentary instruments and we believe they are too blunt to determine a consumer’s financial expenditure pattern.
At Castlight, we believe that no financial product should be consumed unless a rigorous affordability assessment has been completed. There wasn’t one on the market, so we have built a financial platform that not only calculates the consumer’s affordability (Actual Income Aggregated – Actual Expenditure Aggregated), by month but also categorises their expenditure in a format that enables full and comprehensive financial visibility.
Then, and only then, is a consumer able to see clearly what his or her financial capability is. Quite simply – no-one can work out their financial capability until they have worked through their affordability.
An Affordability Platform
So – what do we mean at Castlight when we talk about affordability? We have a powerful platform which:
- Takes the average income that a consumer has across 12 months
- Aggregates their expenditure across the same period of time
- Deducts expenditure from income to get average disposable income or loss
All areas of spending are categorised and analysed, providing the consumer with a comprehensive profile of their income and outgoings and empowering them with full financial insight of their affordability. It lets them put their finger on exactly how much is coming in and going out.
We call it the Castlight Affordability Passport – because it tells people exactly where they can go next, what additional financial liabilities or expenditure they are capable of taking on.
If I was thinking about running the New York marathon, I’d go and get a health check from my GP. I’d look at my blood pressure results, my blood glucose and cholesterol levels and aerobic fitness and I’d decide if I’m fit enough to finish the 26.2 miles in a half decent time.
The Castlight Affordability Passport is just the same. It will conduct a forensic examination of an individual’s finances and give them the information they need to understand their financial capability and therefore make the right decisions for their financial health.