Credit information: UK FCA publishes final report with remedies package for improving the market

Key takeaways

• The FCA's remedies package for improving the credit information market include reformed industry governance arrangements (in the form of a new credit reporting governance body (CRGB)), mandatory reporting requirements and a new common data format for reporting to credit reference agencies (CRAs).
• Some of the remedies will be industry-led, with the FCA's input where necessary. Other remedies will be taken forward by the FCA using its rule-making powers, subject to further consultation.
• A temporary, advisory-only Interim Working Group (IWG), made up of a broad range of industry stakeholders and consumer bodies, has been set up to consider options and make recommendations on the CRGB to the FCA.

What should firms be thinking about?

• With the IWG expected to start development of proposals relating to the CRGB's objectives, governance, constitution, operational model, resources and funding models in January 2024, those firms which are not directly involved in the IWG's work will need to be ready to review and provide feedback on its output.
• As the FCA itself recognised in its November 2022 interim report, introduction of a common data reporting format will require specialist industry expertise to consider technical implementation issues and any new reporting parameters (eg in relation to the proposed more consistent approach to reporting arrangements and debt solutions relating to borrowers in financial difficulty). Inevitably there will also be costs implications for firms.
• The FCA acknowledges the potential competition implications of requiring lenders to share credit information with designated CRAs. It may be of some comfort to lenders that it is planning to consider this – as well as potentially disproportionate costs implications for those lenders who may be required to share credit information with additional CRAs - more fully as it develops its cost benefit analysis, competition assessment and consultation paper on this remedy.

What's next?

• The reformed industry governance arrangements, in the form of the new CRGB, are a key priority as a foundation for the other credit information market improvements that the FCA wants to see.
• The IWG's work is due for completion by Q4 2024. The FCA then expects that the CRGB will begin work on delivering the industry-led remedies.
• The FCA is also prioritising the remedies that it will be leading on which relate to improving data quality such as mandatory data sharing with designated CRAs, with a consultation on rules for mandatory data sharing due by the end of 2024.

Read on for a more detailed look at the FCA's final report including the remedies that are being taken forward.

Background

In 2019, the FCA launched a study into the credit information sector following concerns about the quality of credit information, strength of competition, and the extent of consumer engagement and understanding. The study was paused in April 2020 at the start of the COVID-19 pandemic and restarted again in July 2021.On 22 November 2022, the FCA published an interim report and discussion paper setting out its initial findings and potential steps forward. 

The interim report identified a number of weaknesses in the sector and set out four areas of focus for 12 proposed remedies. Broadly, these related to updating the industry governance arrangements, ensuring better quality and coverage of credit information, improving competition and innovation, and introducing more support for consumers. For more on the interim report's findings, take a look at our previous Engage article: 'Attention lenders: UK FCA proposals to improve the credit information sector'.

What remedies will now be taken forward?

The final report details the remedies that the FCA proposes to take forward based on feedback to the interim report – which was largely supportive of the identified focus areas - and further analysis that it has carried out to develop its thinking on the form and scope of the remedies.

Table 1 in the final report summarises the remedies package. Some of the remedies will be industry-led, with the FCA's input where necessary. Other remedies will be taken forward by the FCA using its rule-making powers, subject to further consultation.

Governance arrangements remedy to be jointly led by industry and FCA

Industry governance arrangements in the credit information market will need to be inclusive and representative of credit information users, including consumers, in order to achieve the improvements sought. Reformed industry governance arrangements will be responsible for leading on the thinking, development and implementation of the industry-led remedies set out below. Therefore this change, in the form of new industry governance arrangements referred to as the credit reporting governance body (CRGB), is a key priority. The CRGB will have broader objectives and be more inclusive, transparent and accountable than the current, outdated Steering Committee on Reciprocity (SCOR).

As a first step towards establishing the CRGB, the FCA has formed an Interim Working Group (IWG). As set out in its Terms of Reference, the IWG has been set up on a temporary and advisory-only basis. It is made up of a broad range of industry stakeholders and consumer bodies and will have an independent chair, Jackie Keogh. It is expected to consider options and make recommendations on the CRGB's objectives, governance, constitution, operational model, resources and funding models to the FCA. The IWG is expected to start development of proposals in January 2024 and provisionally run for 9 months, with its work due for completion by Q4 2024.

The FCA will engage with and support the IWG through its term, after which it expects the CRGB to be formed by the industry and consider the list of recommendations in the FCA's final report with a view to beginning work on delivering the industry-led remedies. In a reflection of the importance of this remedy to progress on many of the industry-led remedies (see the next sub-section below), the FCA states that it will monitor progress using regular milestone outcomes. It also makes it clear that it will develop alternative options if the industry is unable to agree on how the governance arrangements should be reformed to achieve the outcomes sought.

Industry-led remedies

This holistic package of remedies will be aimed at ensuring better outcomes for consumers through increased consumer engagement and awareness, better data quality and increased competition between firms:

• Common data format: A common data reporting format to improve consistency and granularity of credit information across credit reference agencies (CRAs), including – in relation to borrowers in financial difficulty and vulnerable consumers - a more consistent approach to reporting arrangements and debt solutions using more granular flags while reporting payment performance against agreed rather than contractual terms.
• Streamlined access to statutory credit report (SCR): Streamlined consumer access to credit information, including SCRs, by having a 'one stop shop' for consumers to engage with. One way to achieve this would be through the MaPS MoneyHelper website, working within MaPS’ statutory remit. The FCA expects the CRGB to engage and work with an organisation like MaPS to ensure that consumers are able to access their SCRs in a streamlined manner. It would also like to see the ‘one stop shop’ helping to enhance consumer understanding around the nature and role of credit information by providing factual information, holistic guidance around credit files and credit scoring prompting consumers to take action to review and engage with their credit information. In addition, the FCA would like the CRAs to consider if there is scope to have greater consistency in the presentation of key information and metrics in SCRs.
• Streamlined disputes process: Streamlined process to help consumers dispute errors in the credit information held on their credit file. The FCA would like to see a new data dispute process that achieves: prompt resolution of data disputes for consumers, reflecting the 28-day period set out in the Consumer Credit Act 1974; a simple, user-friendly, and well-signposted way for consumers to initiate a data dispute across designated CRAs in a single step; an integrated process that means where data is common across designated CRAs any errors are corrected automatically across those CRAs; and correction of erroneous data on a real-time basis wherever possible.
• Streamlined Notice of Correction (NoC) and non-financial vulnerability and "credit freeze" markers: Streamlined process for improved consumer outcomes which builds on existing processes. Among other things, this should include: enhanced consumer awareness about the purpose and implications of the NoC process, including improved visibility on how to initiate the NoC process; appropriate processes and systems that enable consumers to easily record, amend and remove information about non-financial vulnerability in a way that improves firm awareness of consumer circumstances, in order to deliver good consumer outcomes; and processes which enable consumers to register ‘credit freezes’ across the credit reporting ecosystem in a streamlined way without charge.
• More timely reporting of key data to designated CRAs: Provision of an accurate and up-to-date view of consumers' credit commitments to further support lenders in making decisions. The FCA expects the CRGB to take forward this remedy by evaluating the costs and benefits of more frequent data reporting and possible implementation options which should be included within the CRGB’s overall workplan. The FCA proposes that the outcome of this work is communicated to it, and may be used to help inform whether specific regulatory requirements are necessary and appropriate in this area.
• Reviewing the Principles of Reciprocity (PoR) (an industry document addressing issues relating to use and sharing of credit performance data) and related issues: Complementing the proposed mandatory reporting requirement implemented by the FCA (see 'FCA-led remedies' below), for example any permissible use cases for data shared under mandatory reporting set out in FCA rules may interact with the detailed rules on permissible use cases set out in the PoR.
• Improved Current Account Turnover (CATO) data with updated access arrangements: Assessment of how access arrangements to CATO data can be updated for non-personal current account (PCA) providers, and how CATO data can be improved.

The FCA explains that by having the industry implement some of the remedies (subject to some input from the FCA in development, if necessary), industry can retain the flexibility to innovate and evolve in an agile manner in response to emerging market developments. It also makes the point that, given the potential impact of the remedies package on non-FSMA regulated firms, it is important these firms and other regulators also play a role in implementing changes in the market and driving broader change.

In addition, the FCA is of the view that the current regulatory context, including the Future Regulatory Framework (FRF), supports an industry-led approach to some remedies. This is because the FRF encourages the FCA to be flexible in its approach to remedies in order to facilitate the growth and competitiveness of the UK financial markets when advancing its primary objectives. The outcomes-focussed approach of the Consumer Duty also gives firms flexibility to adapt and innovate.

The FCA does, however, reserve the right to consider the need for any further regulatory involvement on the industry-led remedies to ensure delivery of the changes, and subsequent outcomes, that it would like to see in the market.

FCA-led remedies

These remedies target improving the quality of credit information and consumers' knowledge of SCRs:

• Mandatory data sharing with designated CRAs: A mandatory reporting requirement for all FSMA-regulated data contributors to designated CRAs which aims to provide more accurate, consistent and comprehensive credit information. The designation scheme will be a proportionate regulatory framework for sharing credit information between firms and certain CRAs, who meet criteria, to help improve the quality of credit information. It will be separate and in addition to firm authorisation for permissions to operate in the credit information sector; the FCA is looking to create an additional layer of bespoke rules that would apply to the designated CRAs (and firms that will contribute data to them) in order to implement the mandatory reporting remedy.

Regarding data relating to non-FSMA regulated agreements -specifically, BNPL -  the FCA will consider how information from BNPL agreements could be included in the proposed mandatory reporting scheme in the event that BNPL is brought into its regulatory perimeter. It will also consider how best to engage other regulators, or encourage the CRGB to do so, with a view to enhancing the comprehensiveness of data reported by non-FSMA data contributors.

• Designated CRA regulatory reporting to FCA: A new regulatory reporting framework for designated CRAs which aims to monitor the mandatory reporting framework and give the FCA insight into potential market-wide issues. This includes new regulatory reporting requirements relating to data disputes.
• Data contributor requirements (error correction and reporting satisfied County Court Judgments (CCJs)): Proportionate requirements for FSMA-regulated data contributors that aim to provide regulatory certainty, aid supervision and deliver transparency to consumers. In responding to the FCA's interim report, stakeholders generally agreed that the Consumer Duty on its own may not achieve the desired outcomes for this remedy.
• CRA/credit information service provider (CISP) signposting to SCR: Increasing consumer awareness of the availability of free credit information via the statutory process – SCRs. The FCA agreed with stakeholder feedback that the Consumer Duty – particularly the consumer understanding outcome and cross-cutting rules - has a role to play in this remedy. Given this, the FCA expects to see improvements in signposting and will continue to monitor how firms advance this. If it does not see the outcomes it's looking for, it will decide what specific FCA rules may be necessary to require CRAs and CISPs to signpost to SCRs and consult accordingly.

Subject to further work and public consultation, the FCA thinks that introducing FCA rules is the most appropriate approach to tackle some of the issues found in the interim report and discussion paper because they have the potential to cause the largest amount of consumer harm in light of the importance of credit information quality in informing credit risk and affordability assessments. These data issues also underpin several other issues such as poor consumer awareness and understanding of credit information. FCA rules will enable a consistent approach to remedying these issues and facilitate enforcement of the remedies.

How does this work relate to wider changes in the market?

The FCA reiterates the particular importance of improving the credit information market in the current macroeconomic climate, where both borrowers in financial difficulty and lenders looking to assess credit risk in changing circumstances face challenges related to credit files.

Considerations around the potential evolution of the credit information and wider credit market have also been part of the FCA's process of designing and timing the remedies. This includes:

• the growth of digital products, embedded finance and other product innovation;
• how AI and technology could change the way in which credit information is provided and used (making it especially important to have more agile industry governance arrangements);
• developments that may affect remedy implementation, such as potential changes to the Consumer Credit Act 1974 (CCA) (working with HM Treasury as appropriate), the entry of Big Tech into credit markets, Open Banking and BNPL);
• the FCA's wider work on Big Tech entry into financial markets and the development of Open Banking, as this is particularly relevant to its work on credit information (eg its October 2022 discussion paper on competition impacts of Big Tech entry and expansion in retail financial services identified credit referencing as one of the main entry and expansion areas).

Next steps

As outlined above, reformed industry governance arrangements, in the form of the new CRGB, are a key priority as a foundation for the other credit information market improvements that the FCA wants to see. As a first step towards establishing the CRGB, the FCA has formed a temporary, advisory-only Interim Working Group (IWG) to consider options and make recommendations on the CRGB's objectives, governance, constitution, operational model, resources and funding models to the FCA. This should include consideration of whether it would be appropriate and beneficial for the CRGB to have a Memorandum of Understanding to better define the relationship between other sector regulators and bodies and the CRGB.

The IWG is expected to start development of proposals in January 2024 and provisionally run for 9 months, with its work due for completion by Q4 2024. The FCA then expects that the CRGB will begin work on delivering the industry-led remedies (see Table 2 in the final report). It points out that it will be monitoring the CRGB's progress in relation to its recommendations in the final report.

The FCA is also prioritising the remedies that it will be leading on which relate to improving data quality such as mandatory data sharing with designated CRAs. Its first steps will be to progress towards a consultation paper on rules for mandatory data sharing by the end of 2024. However, it recognises the interaction with wider governance reform so will continue to keep the prioritisation and sequencing of these remedies under review. It will also continue to consider whether using its powers remains a better course of action to deliver the change needed.

Authored by Virginia Montgomery.