Appendix 2: Office of Fair Trading Response
The Office of Fair Trading (OFT) is a non-ministerial
government department with responsibility for the licensing and
control of businesses that offer credit and/or credit services
to consumers in the UK. Given its responsibilities, the OFT was
invited to provide evidence to the Treasury Committee's inquiry
into the availability of credit searches for consumers wishing
to shop around for credit.
The Committee's report published in December 2009
raised a number of concerns around the functioning of the quotation
search mechanism. This note sets out the OFT's view of some of
the key issues raised by the Committee and describes some of the
work to address the Committee's concerns.
Background
THE TRADE OFF BETWEEN PREVENTING IRRESPONSIBLE LENDING
AND ENSURING CONSUMERS FEEL FREE TO SHOP AROUND
The OFT strongly supports shopping around by consumers.
Such behaviour puts pressure on suppliers of credit to compete
on price and quality of products and service, and means that consumers
can benefit from better offers available in the market. Our Irresponsible
Lending Guidance included our view that borrowers should be able
to shop around for credit without a footprint being left on their
credit files.
This must not, however, prevent creditors undertaking
a proper assessment of the affordability of a loan when a consumer
makes an application for credit. The critical point is that enquiries
for credit (quotations) should be treated differently from application
for credit with the former being allowed without any negative
consequence.
SHOULD SEARCH DATA BE USED FOR CREDIT SCORING WHEN
MORE CONSUMERS ARE SHOPPING AROUND AND LENDERS HAVE SO MANY OTHER
INDICATORS?
This depends on whether the search relates to a credit
application or to an enquiry. Multiple applications may be a
signal that a consumer has financial difficulties or that fraud
is taking place. OFT considers it important that lenders have
this information. We agree that with genuine quotation searches
the position is different and that these should not be treated
as a negative sign in terms of creditworthiness.
Actions in hand
AVAILABILITY OF QUOTATION SEARCHES
The OFT has explicitly addressed the availability
of quotation searches in its Irresponsible Lending Guidance (current
version published in August 2010) which says that:
"We consider that borrowers should be able to
shop around for credit without a footprint being left on their
credit files which could impair their credit rating. This would
be facilitated by creditors undertaking 'quotation searches',
as distinct from 'application searches', when appropriate to do
so."
In addition, the credit industry has committed to
work with the OFT during the reviews of The Lending Code (as operated
by the Lending Code Standards Board) and the Finance and Leasing
Association (FLA) Lending Code in order to decide what guidance
should be added to these Codes to illustrate when and how it might
be appropriate for subscribers to provide customers with indicative
interest rate information without that registering as a full application
search at a Credit Reference Agency (CRA).
The OFT sees this as a positive step which should
go some way to ensuring that credit searches are more readily
available. We see no reason why such searches cannot be made
available where the price of a credit product is not fixed so
as to ensure scope for comparisons.
It is planned that any industry guidance will be
finalised before the end of 2010 and implemented by the end of
March 2011 (subject to any systems or process changes requiring
extended implementation). We will consider how our Irresponsible
Lending Guidance is working and to what extent it can inform the
industry codes of practice and guidance. We will also discuss
further with the industry our view that the availability of credit
searches goes wider than that of facilitating responsible lending
and has an impact on competition and the effective functioning
of the market as a whole.
TRANSPARENCY
The trade associations and CRAs have now made a number
of commitments to the OFT which are designed to address the concerns
about transparency identified by the Committee. They are currently
working together to produce appropriate customer-facing information
to:
- improve consumer awareness
of the difference between an application and a quotation search;
and
- make consumers aware of how, and when it might
be appropriate, to ask for an indicative quote.
It is planned that this information will be launched
before the end of 2010.
The trade associations will also produce best practice
guidance for members' staff training to:
- ensure that where a quotation
is available and requested by the customer it is used;
- ensure that customers are appropriately informed
in what circumstances a credit search will be undertaken; and
- ensure that clear information is given to a customer
following a declined application.
It is planned that this guidance will be finalised
before the end of the year and implemented during 2011.
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