The FCA’s final report from its Credit Information Market Study contained proposed market remedies to increase the quality and usability of credit information for consumers. This article focuses on what lenders should be considering now to help prepare them for when the package of remedies comes into force.
The proposals set out in the report will benefit consumers by increasing the quality of credit information and making it easier for consumers to view their credit report and raise disputes. For lenders, the proposals are significant and will impact several areas such as data sharing, underwriting and operations to name a few.
Including creating a new governing body and reviewing the Principles of Reciprocity
Through improved access to the Statutory Credit Report (SCR), and streamlined dispute and NOC processes
Covering data accuracy, increased frequency of reporting, and mandatory data sharing using a new common data format
The majority of the remedies are proposed to be industry-led with a working group being set up in January 2024 to oversee the development and implementation of them. The working groups will report back later in the year, so we expect it will take some time for these proposals to come into force with some of them potentially changing. Nevertheless, lenders should start considering soon what processes will need to change and what investment is required to action these. Below we list some of these considerations.
The New Consumer Duty has strengthened the requirement for a lender to accurately report customer data to the Credit Reference Agencies (CRAs). Inaccurate data can lead to a poor outcome for consumers through, for example, reduced access to credit or higher cost of credit. Putting in place a new standardised data framework should help improve the accuracy of consumer credit files by increasing the match rate of files and improving consistency in certain areas, such as time period since an observation and how payment arrangements are treated.
Actions to consider are:
For a long time, there has been little policing of data quality from the CRAs, but with increased scrutiny from the FCA we expect there to be much more focus on the information being reported. We have seen a number of lenders with weak or inaccurate CRA reporting processes and in future this is likely to lead much more directly to FCA censure and potential remediation.
The report found that consumers find it hard to navigate the credit information dispute process and were unclear if the responsibility for fixing errors lied with the CRAs or lenders. Lenders are not mandated to provide a response within a timeframe as the CRAs are, but are expected to respond without undue delay. We would expect most lenders to have processes in place to deal with disputes but dealing with them can sometimes be deprioritised with responses lacking consistency.
Before the remedies come into play, lenders who believe there are weaknesses in their process should consider improving their approach through:
It is not clear at this stage how the CRAs will manage and share all the new data that could be provided to them if sharing with each of them becomes mandatory. It will significantly increase the quantity of data and may change the distribution of many variables they provide back to lenders to use in decisioning. For example, in their research the FCA found that only 30% of customers had a consistent number of defaults reported between the three main CRAs. If in the future, all defaults are reported to all three CRAs this could impact the threshold lenders use for policy rules as well as internal models for product eligibility and pricing. Lenders who already have a multibureau approach may see less impact from this, but it does depend on which CRAs they use.
Actions lenders should start considering are:
There is likely to be a significant analytical exercise required to align an existing strategy on currently reported CRA data to a new strategy based on mandatory shared CRA data. This would need to cover areas such as policy rules, rebuilding scorecards/models, affordability strategies and also educating underwriters. Lenders will need to get on top of these changes rapidly as opportunities will be exploited by those who move the quickest to leverage any new data.
The remedies proposed by the FCA are expected to have a significant impact on lenders processes, but we believe should help them make better lending decisions through more accurate data, giving better outcomes to their customers – both new and existing.
In the future, lenders are likely to face the consequences of having weaknesses in their CRA reporting so it is important to fix these. While it’s too early to set out exactly what will change and when in the data available to lenders, there will be a huge opportunity to improve risk control, get a more accurate view of customers and enhance the assessment of credit risk and affordability.
If you'd like to discuss the FCA's market study report in more detail with us, please get in touch.
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