Credit Searches - Treasury Contents


Conclusions and recommendations


Introduction

1.  While it is right that the OFT works on issues such as debt management and high cost credit, it must also ensure a fair market. There are complex trade-offs between the need to prevent irresponsible lending, and the need to ensure consumers feel free to search for the best deals on unsecured credit. In responding to this Report, we recommend that the OFT explicitly considers those trade-offs. (Paragraph 1)

Credit reference files

2.  Given the importance of credit reference files to consumers who wish to access credit, we believe the assurance of data quality is paramount. We therefore recommend the ICO consider whether it should seek further assurances that data quality and data correction systems at credit reference agencies conform with the Data Protection Act, potentially by independent audit. There are concerns that credit applications rejected because of incorrect data may remain on file and affect future credit scoring, because being rejected for credit is seen as an indicator of risk. Accordingly, we also recommend that the Information Commissioner's Office considers whether it is fair for credit reference files to contain details of consumer application searches made while credit reference files were demonstrably incorrect. (Paragraph 14)

3.  While a £2 fee for a consumer to receive their statutory credit file may seem modest, given that there are three potential providers of such reports, and regular checking may be appropriate, costs may begin to add up. We recommend that the OFT and the ICO consider again whether the charge remains reasonable. In particular, given the key role credit reports play, and the fact that relatively few consumers request their credit reports, they should consider whether there is a case for providing free access to increase take-up. (Paragraph 16)

4.  Given the complexity of the information presented in consumer credit reference files, we recommend that the OFT and the ICO review the information presented in statutory credit reports, and any supporting documentation and assistance the credit reference agencies provide, and provide guidance on how best to ensure consumers understand this. (Paragraph 17)

Multiple credit searches

5.  We recommend that in considering the impact of multiple credit searches, and credit searches more generally, the OFT assesses whether there are lessons to be learnt for how the UK system operates from other countries' systems. (Paragraph 23)

6.  We note that application credit searches become less useful both for detecting fraud and as part of a credit scoring system, the older the search data is. We recommend that the ICO look at whether the 12 month period for storing search data is appropriate, given the principle that information "must not be kept longer than is necessary". (Paragraph 29)

Shopping around

7.  Both the impact on credit availability from the recession, and the ease with which an application can be submitted via the internet has meant an increase in full applications being made. The industry seems to have responded by reducing their use in credit scores, or lessening the weight given to them. We recommend that the ICO examine whether there is a cut-off point beyond which the impact of search data on consumers' risk profiles is so weak that storing this data is unfair, since any benefit would be outweighed by its detrimental impact on customers. (Paragraph 33)

8.  Consumers who have been quoted a price for a product expect to get the product at that price and not be refused on full application. (Paragraph 35)

9.  The problem is that given there is no way to find out if the product is available other than to make a full application, there is no practical distinction between "multiple credit applications" and "shopping around", whatever the industry view. We cannot see anything wrong in consumers making multiple full credit applications to see whether or not they can obtain credit from firms which may have different, opaque, criteria for acceptance. We received evidence that consumers seeking credit under the current system could find that multiple application searches tipped the balance between being offered credit and being refused, or affected the rate they were offered. We are not convinced that consumers when 'shopping around' distinguish between questions over price and availability sequentially, but rather think of them together. At present, the evidence is that repeated application attempts reduce some consumers' ability to access credit, or affect its price. We recommend that the OFT investigate the impact of multiple applications on the availability and price of credit to consumers. (Paragraph 36)

Fraud

10.  The Committee is, of course, committed to ensuring that fraud is minimised, and also to ensuring that people are not offered too many potential credit commitments at one time. However, as shopping around increases, the extent to which multiple credit searches are good indicators of fraud or over commitment may well be changing, and should be kept under review by the OFT. (Paragraph 38)

Does the system deter shopping around?

11.  There is clear evidence that some consumers do not shop around because they fear that to do so will affect their credit score. Indeed, industry advice suggests that multiple applications "may lower your [credit] score". We consider there are likely to be serious flaws in a market in which consumers are discouraged from shopping around, either because of unfounded fears or because of industry bias against multiple searches. (Paragraph 40)

Possible solutions

12.  Quotation searches have been widely used in the mortgage market. There may be parts of the unsecured market where they should be used more widely, in particular where the price of a product is weighted for risk. We welcome the moves by the OFT to ensure its guidance is explicit on the need to allow quotation searches where appropriate, and recommend that it undertakes regular monitoring to ensure compliance. (Paragraph 43)

13.  We welcome the development of tools by the industry that may minimise the number of full searches that have to be made by consumers, and urge all industry participants to examine such systems, and see if good practice can be shared. (Paragraph 44)

14.  We welcome the steps taken by the British Bankers Association and the Finance and Leasing Association to explore how further transparency can be achieved. We urge the credit reference agencies to ensure they are part of this process, so that a well thought-out, comprehensive approach can rapidly be achieved. (Paragraph 45)

Conclusion

15.  The use of application search data in credit scoring has clearly been sensible in the past as a means to detect fraud or demonstrate potential inability to pay. However, it is not clear that this remains the case now that shopping around has become more common, and credit is harder to obtain, even for those who may be able to repay it. There is a fine balance of public interest between ensuring that fraud is prevented and consumers are protected from reckless lending, and ensuring that the market is subject to the disciplines of informed consumer choice. We have not been presented with unequivocal evidence that application search data is essential for loan providers, who have over 400 indicators that they may use. Nor have we been given overwhelming evidence that it is a major source of direct consumer detriment, although the number of consumers making multiple application searches seems likely to rise. However, we are extremely concerned about the effect of the use of credit searches on market mechanisms, since, in principle, we believe the ability to shop around is not only an important means for consumers to assess the market, but also provides a key discipline on providers. We have been presented with some solutions which would reduce the adverse effects of the use of credit application search data in credit reference files; we consider that any acceptable solution must strike an appropriate balance between minimising fraud and over borrowing and ensuring the market is subject to normal disciplines. We recommend that the OFT look at this in its assessment of the credit market. (Paragraph 46)



 
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Prepared 22 December 2009