In November 2022, the FCA reported the interim findings of its Credit Information Market Study. The market, which is dominated by three large credit reference agencies, is critically important as it provides the information from which lenders construct their risk and pricing models, and informs their lending decisions. Credit referencing systems also impact borrower repayment behaviours, with previous studies finding that they have a "disciplinary effect" - encouraging borrowers to maintain payments out of fear that failure to do so will negatively impact their access to credit (and/or the price they pay for it) moving forwards.
The FCA report makes for uncomfortable reading. The information held about individuals often varies significantly between the three main reference agencies, with the result that credit scores (and therefore acceptance rates and offered prices) also vary depending on which credit reference agency the lender is using. As the FCA (para 4.18) put it:
"Where CRAs hold different information on an individual, both cannot give a true reflection of the individual’s financial standing – ie one CRA must be missing information or (currently) holding inaccurate information."
In addition, the FCA found that the overall governance of the credit information system and the "principle of reciprocity" - whereby lenders can only access information from the same reference agencies that they provide their data to - are inhibiting innovation.
To address these failings the FCA has proposed a set of potential remedies, including establishing a new body (containing both industry and consumer representation) with the remit to oversee the market and deliver improved outcomes; putting in place a standardised reporting framework, expanding information sources - by including current account turnover ('CATO') data - and developing a "consumer portal" to facilitate borrower challenges to inaccurate reports.
We welcome the FCA's interim report and are generally supportive of the proposed remedies. In the context of the cost-of-living crisis, it is imperative that the UK has a properly functioning credit information system. In our view, it must be capable of empowering lenders to make fair and proper risk assessments based on appropriate and accurate information sources and it should be continually innovating to help improve the quality of those assessments. Credit reference agencies and lenders particularly need to innovate in order to help people experiencing financial difficulties regain access to credit at fair prices as soon as they can afford to do so.
To achieve this, the credit information system will need to make use of additional sources of information. For example, rather than simply report whether payments have been missed, the system could include information concerning the extent to which the consumer has maintained contact with their lender when experiencing payment difficulties; what forbearance has been provided by their lenders, and whether the consumer has been referred to sources of support such as money guidance and debt advice services.
These types of information are likely to be highly relevant to lenders when assessing and pricing for risk, but they are not currently available to them for testing. If new models were able to incorporate these aspects, we expect that the collection of this information would also encourage borrowers experiencing financial difficulty to maintain contact with their lenders and access support at an early stage.
In our view, there has been an over reliance of the market on historic data, which has led to many borrowers becoming trapped in sub-prime credit markets (and paying unfairly high prices) for lengthy periods. The length of time that impairments are held on credit files (typically six years) also prohibits a “fresh start” for consumers despite improvements in their liquidity position following an insolvency. The public policy objectives of insolvency procedures are therefore being frustrated by rules designed by market participants. And those rules have themselves primarily been designed to create a “disciplinary effect” on consumers in financial difficulty to maximise lender returns. We believe that there is a need to ensure a rapid fresh start and rehabilitation to mainstream credit markets by removing records of impairment and insolvency from credit files at a far earlier point.
To some extent, the use of historic data regarding previous missed payments and/or defaults is becoming increasingly redundant due to the expansion of Open Banking. This is facilitating a greater focus on affordability assessment by providing an analysis of a consumer’s current liquidity position. Whilst we consider the development of Open Banking to be generally positive, we also have some concerns regarding a lack of transparency for consumers and consider that greater clarity from regulators is needed to address ethical concerns. For example, it is not currently clear to us how people who continue to make predominantly cash purchases are being treated. There is a danger that these consumers are disadvantaged within Open Banking assessments (as cash payments cannot be categorised) when their use of cash may be (to them) an extremely effective budgeting method.
In any event, the use of Open Banking data is not yet comprehensive and there is an urgent need to address the over-reliance on historic repayment data within the current system. Without this, the current cost-of-living crisis will inevitably lead to more consumers being denied access to reasonably priced credit products moving forwards.
Focus on affordability and indebtedness
Rather than focus on historic repayment data, we would like to see the credit reporting system providing lenders and consumers with a comprehensive (and standardised) overview of their current indebtedness levels and affordability position. Systems should also allow for the consumer to challenge those assessments more readily.
Our view of the proposed remedies
We support the establishment of an independent organisation with a remit to hold the market to account and improve outcomes for consumers and lenders alike. Given our concerns that the current market is too focused on the sharing of historic repayment data and that this has led to many consumers being trapped in sub-prime markets for too long, we would welcome the new organisation having consumer representation and it taking on responsibility for other relevant datasets currently shared by lenders with CRAs, such as current account turnover data (CATO). The latter would particularly help to ensure a greater focus on supporting lenders to conduct appropriate affordability assessments moving forwards.
However, whilst the FCA’s paper notes that the current system (comprising 3 main CRAs) has failed to provide a comprehensive (or accurate) picture of indebtedness and repayment behaviours, it does not make the logical next step of asking whether a single CRA would provide a better solution? In our view, a single provider would likely do so. This would certainly ensure a single version of the truth for both consumers and lenders to access and provide a simpler mechanism through which a standard and improved framework for credit reporting could then be implemented. This is the approach taken by, for example, Belgium, which has a single public credit bureau hosted within its central bank.
In the absence of creating a single CRA, we would nevertheless support any new governing body being given a remit to design and implement a common data reporting standard across the market. We would also support “requirements setting clear expectations on lenders to ensure accuracy of the data they submit and correct errors promptly across designated CRAs.”
Concerns that this would limit the ability of CRAs to compete based on data coverage (or indeed that we require a competitive ‘market’ at all) appear to us to be of low importance compared to the need for a comprehensive and accurate view of the consumer’s indebtedness and affordability position.
The FCA correctly identifies that competition is not currently working effectively, and that the impact of ‘challenger CRAs’ is limited. Further to this, we agree that the principle of reciprocity is out-dated, and that expanding access to CATO data would provide for improved assessments of affordability. We also agree that there should be more timely reporting of key data relating to levels of indebtedness, including with respect to Buy Now Pay Later products.
However, we consider that any new reporting framework should also require lenders to provide ‘softer’ types of data which are of relevance to risk assessments and the pricing of products, and which could feasibly encourage good borrower behaviour as well as help people in financial difficulty to gain access to the support they need. Specifically, we would like to see greater sharing of information relating to the borrower’s behaviour when they are faced with financial difficulty together with the reporting of the measures that lenders are taking to provide these with forbearance. This should include whether the debtor has contacted the lender and whether a forbearance arrangement is in place. Lenders could also report on the referrals that they have made to debt advice agencies and the results of these.
In the context of the cost-of-living crisis – where missed payments and defaults are increasing – whether a borrower has maintained contact; been offered forbearance and come to an arrangement or accessed debt advice are likely to be material factors relating to their risk profile moving forwards. Greater innovation is required for lenders to test whether this information is predictive of the speed with which borrowers in financial difficulty recover, and could inform future pricing strategies. However, unless the system captures this information in the first instance then it is impossible for risk models to be developed in these ways.
Similarly, we would like to see much greater transparency in the way that affordability assessments are communicated to consumers. Although CRAs do currently provide an overview of outstanding balances, it would be helpful if they could also provide a clear assessment of their affordability position. This should be possible if CRAs utilised CATO data. However, we would like to see greater innovation still – for example by providing a portal for consumers to challenge affordability assessments more readily. This could, for example, allow for consumers to alert lenders (via the CRAs) to expected overtime or bonus payments which could have a bearing on the final lending decision.
Finally, we consider that CRAs should also actively identify and encourage consumers who are over-indebted and /or who have poor affordability scores to access support. We therefore support the FCA’s proposal that a consumer portal be developed through which consumers can access their information and submit notices of correction etc. but consider that this could be developed into a much more useful tool to assist consumers to understand their finances and seek support if needed.