The ideal credit search system: the search continues

Jeremy Phillips

In the UK the House of Commons Treasury Committee has reported the findings of its recent inquiry into the adverse effect of consumer credit searches. These include recommendations which, if implemented, could significantly change the way lenders conduct credit searches on potential borrowers.

The Committee inquiry into credit searches originated from fears that consumers, by shopping around for credit (especially unsecured credit), were unknowingly building up credit application searches on their credit reference files, making it harder for them to obtain further credit. This inquiry, which is part of a wider review on the impact of the banking crisis on the consumer, seeks to balance (i) the public interest in preventing fraud and protecting consumers from reckless lending with (ii) the need to “ensure that the market is subject to the disciplines of informed consumer choice”. The report states that the Committee had not been presented with unequivocal evidence that application search data is necessary for loan providers, given that on their own admission, providers use over 400 indicators.

Representatives of a range of interested parties submitted evidence. These included the British Bankers’ Association, the Finance and Leasing Association, credit reference agencies and the Information Commissioner’s Office (ICO).

The Treasury Committee’s biggest concern was the effect of the use of credit searches on market mechanisms, given that the ability of consumers to shop around is an important means for assessing the market (a “key discipline on providers”). The OFT is now asked to examine this area.

A number of other recommendations focused on data protection concerns:
• In light of evidence of inaccuracies on consumers’ credit records, the ICO should consider whether further assurances should be sought that data quality and data correction systems at credit reference agencies comply with the Data Protection Act (potentially by means of an independent audit).

* the ICO should also consider whether it is fair that credit reference files contain details of consumer application searches made when the files were demonstrably incorrect;

• the ICO and the OFT should consider whether the £2 fee required for a consumer to receive his or her statutory credit file should be scrapped in order to increase take-up;

• The Committee noted that the evidence suggested that the usefulness of the application credit search information diminishes with time, and recommended that the ICO examine whether the current 12 month period for storing search data conforms with the principle that information must not be kept longer than necessary;

• the ICO should examine whether a cut-off point exists beyond which the impact of search data on consumers’ risk profiles is so weak that storing would be unfair, and that it should examine the information presented in statutory credit reports and provide guidance on how best to ensure that such information is understood by consumers.

The Report concluded that various methods should be considered for reducing the adverse effects of the use of credit application search data in credit reference files, saying that the OFT should examine this area in its wider assessment of the credit market. There was some evidence of the industry itself developing solutions to the problem, for example a system developed by Confused.com which reduced the number of searches on consumer’s credit reference files by educating consumers on the credit options most appropriate to them. The Report welcomed such developments and urged industry participants to examine such systems and to share good practice where possible.

Also, the OFT is to release guidance this month on irresponsible lending, which will refer to the need for lenders to undertake a credit reference search.
The Report, including the evidence, can be viewed here.

Written by Peter Clyde, posted by Jeremy

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