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4 Jul 2019

FCA launches probe into credit report market

Concern over the quality of information on credit reports and the risks posed by Open Banking

The way your credit report is compiled and the quality of the information it includes will come under scrutiny by the Financial Conduct Authority (FCA), amid concerns the market is not working well for consumers.

The FCA has launched an investigation into the credit information market, which will include credit reference agencies (CRAs) such as Experian, Equifax and Transunion.

The regulator is worried about the coverage and quality of credit information being gathered by CRAs and used by financial providers; the effectiveness of competition between CRAs; and how well consumers understand their credit reports and scoring.

Here we explain what you need to know about the investigation and how you can contribute to the probe.

What is the credit information market?

In the UK, there are three main CRAs that collect information from the industry (like banks and utility companies) and public sources (like the courts and electoral roll) to form your credit report and score: Experian, Equifax and Transunion (formerly CallCredit).

This data collection forms the basis of the credit information market and it plays a huge role in our everyday lives.

Your credit report may be the deciding factor in whether or not you qualify for financial products like mortgages, loans and credit cards - and can often determine how much you'll pay.

But credit scoring also plays a part in other parts of your life, such as identity checks required for renting a home or taking on a job with high-level responsibilities.

Why is the market being investigated?

Given that four in five adults hold at least one credit or loan product, the FCA is keen to ensure this market is working at its best.

But the regulator has raised concerns over the quality of information being provided, competition between CRAs and how consumers are engaging with their credit reports.

It also highlighted how the market is rapidly changing, as new technology such as Open Banking gives firms more access to information about potential borrowers.

What will the FCA be looking at?

The FCA has identified three main areas as a reason for concern, as well as two others it plans to look into.

  1. 1. Purpose, quality and accessibility of credit information

It's essential that CRAs gather good-quality credit information that is accurate and complete, so that lenders can make a fair assessment of your creditworthiness.

However, as Which? has previously reported errors can slip through that can have a devastating impact on key life moments, such as renting a home.

The FCA says that poor quality credit information could lead to harm if someone is wrongly denied credit or offered credit they can't afford.

2. Market structure, business models and competition

The FCA is also concerned that some of the market's current characteristics could indicate low competition among CRAs.

Right now the market is concentrated around three main CRAs and around 20 smaller firms.

Some lenders have flagged concerns about the cost of switching to a different provider, or using more than one CRA to make decisions.

3. Consumer engagement and behaviour

Whether consumers truly understand the credit information market is also a worry for the FCA.

Last year Which? found that just 5% of people could correctly identify how five everyday actions would impact their Experian credit score.

And in 2016 Which? research found that 53% of people have never checked their credit report and 36% incorrectly believed that checking their credit report will impact their credit score.

Low awareness and poor understanding could lead to consumers missing opportunities to improve their credit score and reduce the cost of future borrowing, the FCA warned.

4. Open Banking opportunities and risks

The credit information market is going through a period of change, with developments like Open Banking offering new data sources for credit reporting and scoring.

When we spoke to the main CRAs last year they saw Open Banking as an opportunity to help those with a limited credit profiles gain access to borrowing by recording never-before-used data, such as rental payments.

CRAs also believe Open banking will streamline existing processes, like applying for a mortgage without needing printed bank statements.

However, there are downsides to technology unlocking information that lenders and CRAs previously couldn't see, including the risk that race, gender or religion could be factored into credit scores.

The FCA says it will delve into the opportunities and potential risks or ethical considerations that Open Banking presents to the credit information market.

5. The credit information market in other countries

The FCA is also going to look at how the credit information market works in other countries and what the UK could learn from them.

As it stands, the UK has a relatively advanced credit reporting system in terms of the depth and coverage, according to The World Bank Doing Business report.

Who can contribute to the investigation?

The FCA says it's not formally consulting on its investigation into the credit information market but welcomes any views by the end of July.

It will mainly gather information from CRAs, data contributors, providers of credit information services, users of credit information and consumer organisations.

If you have something to add, you can send your views to the CreditInformationMarketStudy@fca.org.uk.

The FCA says it will report on its findings by Spring 2020 and, if appropriate, set out some potential remedies.

Which? welcomes credit market probe

Which? has previously dived into the confusing world of credit scoring, to help consumers better understand how it works.

Gareth Shaw, head of money at Which?, said: Our research shows many people are confused by credit reports and scores, and a lack of transparency about how our financial lives and habits are assessed by credit reference agencies can be frustrating for consumers as they make big life decisions - so we welcome the regulator's decision to review how the market operates.

'In the meantime, the big credit reference agencies must work harder to encourage consumers to check their credit reports regularly, and lenders should also strive to be clearer about which agencies they use to assess credit applications, so consumers can investigate and challenge any potential errors if they are rejected.'