Dozens of independent credit reference agencies (CRAs) operating in the UK.
A single centralised credit data repository.
A regulatory requirement for lenders to supply their data to the CRAs.
This is what the FCA has proposed in their recent report/discussion paper on the credit information market (the market). While this may sound like wishful thinking, these could all be on the cards if the ideas floated in the paper come to fruition. If implemented in full, then this would represent the biggest shakeup of the market in a generation.
The ramifications for the UK’s largest credit reference agencies (Experian, Equifax and TransUnion), lenders and borrowers are potentially immense.
The key issues with the current credit information market
The FCA has identified what it sees as several shortcomings in the market. Some of the key concerns raised by the FCA are:
- The barriers to competition are too high. Setting up a new CRA is just too difficult in the current environment. Unless all the major banks and building societies are willing to share their data with them, then any new CRA will be unable to compete with the established players.
- There is potential for poor customer outcomes/harm. The personal data held by each credit reference agency differs markedly for a given individual. This may lead to poor outcomes for customers and could conceivably cause harm because a lender’s decision may differ depending on which CRA they consult. Similarly, having to deal with several different CRAs to understand what data they hold about you, and getting errors corrected, can be confusing and time consuming given that you need to deal with each CRA separately.
- The current framework for data sharing is inadequate. The “Rules of Reciprocity” that determine how and with whom credit information is shared no longer meets the needs of the modern market. Governance of the rules by the Steering Committee on Reciprocity (SCOR) is not sufficiently transparent, is not subject to FCA rules, has limited stakeholder representation, and arguably, has a remit that is too narrow.
What are the FCA proposing as a solution?
A key remediation objective of the FCA is improved quality and greater standardisation of personal data across the industry. Getting this right will solve many of the problems that the FCA have identified. The FCA propose that this could be achieved by agreeing an industry standard data return that all lenders would be mandated to supply, which one might presume, will operate in a similar manner to the existing regulatory reporting regime. In this way, all CRAs will receive the same high quality data in the same format and each lender will only need to create one return. Any new CRA approved by the FCA would then be entitled to receive this data automatically.
Within the scope of improved data quality, the FCA have also suggested more frequent updates to data would be beneficial, and that some types of credit data could be updated daily instead of monthly.
Interestingly, the FCA have also presented the idea of having a single national credit reporting database. In this scenario, a third party would maintain the database. Lenders would supply data to the database, and each CRA would obtain copies that they could use to provide value added products and services. For example, credit reports, account verification and credit scoring. This is an idea that has been kicking around since at least the mid-2000s but has had little traction before now.
Another remediation activity proposed by the FCA is the reformulation, or possible replacement, of SCOR. This new look governance forum would be overseen by the FCA and would have broader membership. This would include consumer stakeholders as well as industry representation.
With the current cost-of-living crisis, the FCA has also noted the role of CRAs in supporting affordability assessments. The rise of Open Banking has been a game changer in terms of being able to measure and verify individuals’ income and expenditure but, unless a lender also provides current account products and shares this with the CRAs, they are unable to access this type of data via a credit reference agency to date. By allowing current account data to be shared more widely, the FCA believes better assessments of affordability, and hence better customer outcomes, will result.
Finally, the other major change being considered is to make things easier for consumers when they want to see their credit file(s) or make corrections to them. To facilitate this, the FCA is proposing the creation of a single “Consumer Portal” where people can access all their data from one place.
The FCA’s findings and potential remediations are under consultation until 24th Feb 2023.
The FCA have indicated that they would expect initial reforms to be completed by the end of 2025.
Watch this space.