On 22 November 2022, the FCA published an interim report setting out findings from its latest credit information market study and potential steps forward. The report will be of particular interest to firms acting in the consumer lending space, including unsecured and secured lenders, consumer organisations, credit reference agencies and credit information service providers.
The FCA explains that the credit information sector is comprised of credit reference agencies (CRAs) that build financial profiles of consumers, such as credit scores and credit histories, that are then sold to credit information users, such as banks and other lenders, to inform lending and other decisions relating to consumers.
In 2019, the FCA launched a study into this sector following concerns about the quality of credit information, strength of competition, and the extent of consumer engagement and understanding. The study was paused in April 2020 at the start of the Covid-19 pandemic and restarted again in July 2021. Having analysed the preliminary responses received since 2019, the FCA has now published its interim conclusions.
Overview of findings
The review found that credit information is primarily used to verify the identity of consumers, thereby reducing fraud, to inform lending and risk-based decisions, and to manage customer accounts. In the UK, the value of the credit information market exceeded £800m in 2020, with almost all credit information supplied by only three CRAs (Equifax, Experian and TransUnion).
Although the FCA recognises that the UK has a relatively advanced credit information sector, comparing favourably to many other countries in terms of both the depth and coverage of credit information, there are a number of weaknesses including the following:
- credit information governance arrangements were first set up in the 1990s and are by now outdated and slow to respond to emerging issues;
- the information held by the three major CRAs for the same individuals differs significantly;
- the market is highly concentrated and the barriers to entry are high. Challenger CRAs have found it difficult to gain significant traction;
- once a lender has entered into an arrangement with a CRA, switching is difficult, costly and time consuming with the major CRAs report switching levels of between 10-20% per year; and
- consumer understanding of credit information is in general quite low, and it is particularly difficult for consumers to dispute their own credit information.
With the recent introduction of the Open Banking regime, challenger CRAs have been able to slowly expand as an alternative source of credit information but are still uncommon. The FCA credits this partly to the fact that explicit consumer consent is required for challengers to use Open Banking as a source of information, adding another barrier to entry. As a result Open Banking is not sufficient to level the playing field and encourage innovation and improvements in this sector.
The FCA further recognises that the recent cost of living crisis is also likely to increase the demand for credit and the risk of borrowers entering financial difficulty, making reforms of the credit information sector a priority.
The interim report has identified four key areas of concern for the FCA:
- Industry governance arrangements: known as the Steering Committee on Reciprocity (SCOR), these arrangements established the processes by which lenders and other data contributors share credit information with CRAs. The FCA is concerned that SCOR is solely focused on traditional credit information and is unable to keep up with the demands of bespoke credit needs and histories. Consumers are also not represented within SCOR.
In response, the FCA is proposing a new, broader governance body, which would have remit both over industry governance arrangements and other datasets currently shared by lenders with CRAs.
- Quality and coverage of credit information: the FCA has found that it is inherently difficult to match new credit information to individuals without a unique personal identifier, meaning that sometimes CRAs hold multiple files for a single individual. Moreover, there are significant differences in the credit information held by the three largest CRAs, including information important to lending decisions such as the total value of unsecured debt or the number of active accounts held by each consumer.
Potential measures in response could include requiring FSMA‑regulated data contributors to report data to certain ‘designated’ credit reference agencies to improve the coverage of credit information, as well as the introduction of requirements setting clear expectations on lenders to ensure accuracy of the individual consumer data they submit in this way.
- Competition and innovation: in addition to the difficulty of switching between CRAs the interim report also highlights the inability of smaller lenders to exercise bargaining power over the data quality and price they receive.. The FCA is especially interested in measures that will better include challengers in the designation scheme mentioned above, to support and enhance the way in which data is shared and accessed.
- Support for consumers: the FCA considers that, despite consumers being the subject of credit information, they are not given sufficient access to their own information nor opportunities to dispute inaccuracies. The FCA is proposing to improve consumer awareness of the availability of credit information through the statutory process by prominent signposting. In addition the designated CRAs would be required to develop a consumer portal to streamline consumers’ access to credit information and to the data dispute process.
The FCA is inviting feedback on its interim report by 24 February 2023 online or by email to CreditInformationMarketStudy@fca.org.uk. In particular, the FCA is concerned with how best to prioritise and phase its proposed remedies over the next three years to achieve the most effective form of industry-led change for both consumers and the credit information sector at large.
Following feedback, the FCA expects to publish a Final Report in Q3 2023 and if changes are required a consultation on any rule changes will follow.
Authored by Diana Suciu, Julie Patient.