Credit information provided to lenders and shortcomings in how it is shared, used and regulated – which have been brought to the fore by the Covid-19 pandemic – are a central focus of the Woolard Review, the recently published (2 February 2021) report for the Financial Conduct Authority (FCA) into change and innovation in the unsecured credit markets.
The review, which the FCA asked its former interim chief executive, Christopher Woolard CBE, to conduct in September 2020, has concentrated on how regulation can better support the rapidly evolving unsecured lending market. Although it does not make any changes to FCA regulation, the review sets out 26 high-level recommendations for the FCA and the government.
The review highlights the importance of credit information, which is largely provided by credit reference agencies (CRAs), and how it is vital to the functioning of the credit market. Data provided to lenders underpins the affordability of, lending decisions around and consumers’ access to credit.
FCA-regulated CRAs and credit information service (CIS) providers collectively control or process the data of more than 50 million UK consumers and play a significant role in the market, particularly in times of economic uncertainty when more consumers face financial difficulties and seek credit.
The review of the role of CRAs and CIS providers has pushed their scrutiny back up the regulatory agenda. Although the FCA's Credit Information Market Study that was launched in 2019 was put on hold during the pandemic, the regulator has continued to engage with (at least) the larger CRAs throughout the last year.
The conclusion of the review is that Covid-19 has highlighted very real deficiencies in how credit information is shared, used and regulated and a clear path to remedying those deficiencies needs to be drawn.
CRAs' public role
Twenty years ago CRAs were no more than a business support service. Their customers were lenders rather than consumers, and their aim was to provide tools and analytics to help lenders identify their customers, verify their income, assess creditworthiness and make commercial decisions. However, the review clearly sees the CRAs as now serving a public (and not just a commercial) function. The credit information market is one with which consumers increasingly engage directly. Following in the footsteps of the US, consumers are encouraged to increase their own awareness of the importance of their credit files in many parts of their lives, not only credit.
Furthermore, the review notes just how much the activities of CRAs can affect consumers' access to credit in the longer term. It points to the impact of Covid-19 as an example of this: there is no doubt that the pandemic has pushed some consumers into long-term financial difficulty. However, for others, the financial impact has been more nuanced. Some consumers, for the first time in their lives, have sought and benefitted from short-term forbearance by way of payment deferrals – and their need has been temporary. This has raised questions about whether there is enough nuance in the way the CRAs treat arrears, forbearance and debt solutions. The clear risk is that credit information that is insufficiently nuanced could hinder consumers in making their way back to full financial resilience and inclusion.
Regulating the CRAs
The point is more general than purely the pandemic: the review says that the credit information market must play a role in delivering the right outcomes in healthy credit markets and, crucially, it says that the CRA's role is too important to be left to market forces. There are several specific and damning concerns about CRAs raised in the review:
- some may have underinvested in their systems infrastructure;
- they are often slow to implement change;
- there are often limitations on data transparency and availability; and
- the information available from CRAs is inconsistent.
However, the concerns raised about CRAs in the review are not specific criticisms of the players in the credit information market themselves. They are more a commentary on how their function and role is changing and how to ensure that they are best armed to support the credit market of the future. A key observation is that there is no regulatory requirement on lenders to report to the CRAs at the moment. The review points out that not only does this affect data quality, availability and consistency, it is also likely to affect the drivers of competition (in that CRAs are less likely to compete on the basis of data quality).
Cue closer regulation of CRAs. The message is clear: regulators have a vital role in identifying how credit information can support a healthy credit market and in driving forward a strategy which delivers this. A letter from the FCA to CRAs and CIS providers in November 2020 highlighted the FCA's expectations of CRAs in a range of areas, from cyber and operational resilience to data quality; and from wind-down planning to complaint handling. What the Woolard Review has done has been to identify that, while it is important to make sure that the CRAs run their existing businesses in accordance with FCA principles, there is a strong case for the FCA to be the instigator and driver of change and innovation in the credit information market as a whole.
For many, it might feel strange that failure to pay some debts (for example, your loan or mortgage) can affect a credit rating while failure to pay others (for example, your council tax or your rent) does not. Although the Woolard Review does not offer any immediate solutions to this issue, it does highlight that the CRAs are not the only potential sources of credit information.
Surprisingly, the review does not see the widespread use of open banking data as the definitive key to unlocking equality of "credit information" for lenders and borrowers alike. It points to barriers that are preventing this, including the need for lenders (particularly community lenders) to invest in analytics expertise and tools, and the fact that lenders can only access open banking data with consumer consent.
Examples of other sources of credit information mentioned in the review are HMRC data, council tax payment data and student loan payment history. It notes that there is currently no way that a lender can access those data sets, and that new information channels would be needed to facilitate this. The review, therefore, recommends that the FCA's Credit Information Market Study looks at what can be done to make this kind of information available to lenders in a way that benefits consumers.
Firms should keep an eye out for the interim report in the Credit Information Market Study (MS19/1), which is due to be published during 2021. It is highly likely that the market study will be the vehicle through which the FCA seeks to implement the recommendations in the Woolard Review. We are likely to see a more proactive focus on outcomes and the facilitation of innovation, which will affect not just CRAs but any firm which interacts with the CRAs.
We will be publishing further Insights covering the other themes of the Woolard Review. In case you missed it, see our previous Insight where we focus on product innovations by fintechs that the Woolard Review says pose risks.