(8 years, 9 months ago)
Commons ChamberRead Hansard Text Read Debate Ministerial Extracts
Chris Evans (Islwyn) (Lab/Co-op)
Thank you for calling me to speak, Madam Deputy Speaker; it is a pleasure. I have been in this House for six years in May, and this is the first time I have ever been granted an end-of-day Adjournment debate.
I am delighted to have the opportunity to debate the topic of real-time credit scoring. For me, this is a very important issue, especially in the wake of several financial scandals over the years. The financial crash of 2008 proved one thing—that banking needs reform.
Whenever I think of banking, I think of the need for reform. Most people who use banks will want to borrow money and, unfortunately, personal lending and personal loans are the last area to be considered for reform by the Government.
Real-time credit scoring makes complete sense. The term describes the sharing of data from the credit reference agencies in real time or as close to real time as possible. This requires sufficiently up-to-date and complete relevant data from all the banks and financial institutions. People expect choice in any walk of life. It is what our system is based on. In the market for personal loans, the choice is too narrow and too clearly focused on the banks. Real-time credit scoring would shake up the market and bring about real change for consumers and banks.
The Financial Conduct Authority is looking at the issue. The case for regulation to enable data sharing to happen safely and effectively is compelling. If consumers could ask their banks to share real-time data about their account with a prospective lender, lenders could assess affordability more accurately, meaning that they could make more capital available to consumers with lower risk, thereby driving down cost.
Julian Knight (Solihull) (Con)
I congratulate the hon. Gentleman on securing this debate on a very important topic. I support his call for real-time credit scoring, which needs to be explored further. In my previous occupation as a financial journalist, I dealt with a lady who got into £107,000 of debt in three days, following a relationship breakdown. If real-time credit scoring had been in place on the high street, she would not have got into such enormous debt, which caused further mental health issues. Perhaps the hon. Gentleman will reflect on that.
Chris Evans
I will develop that argument further. The hon. Gentleman identifies the nub of the problem—the delay in credit scoring needs to be addressed. That is common sense and I hope the Government will grasp the nettle.
Yvonne Fovargue (Makerfield) (Lab)
I congratulate my hon. Friend on obtaining this debate. Does he agree that it is not just consumers who would benefit, but new entrants to the market who are lending for the medium term would be able to come in without having to buy two databases: the payday loan database, which operates in real time, and the other database that operates for banks and other financial institutions, which is at least a month behind?
Chris Evans
My hon. Friend speaks with some expertise. I pay tribute to the amount of work she has done on payday lending and raising the issues associated with it. She is right. The real problem is that the banks have a stranglehold on lending. They jealously guard their data and they are suspicious of the Data Protection Act. They therefore keep out of the market major competitors who could bring down interest rates, which is what we all want to see.
Jim Shannon (Strangford) (DUP)
The hon. Gentleman is very gracious and I thank him for giving way. Credit risk is one of the top issues in financial services and there is a need for services to be automated. Is there a possibility through real-time credit scoring to provide new, exciting jobs in a well-paid high-end market? That would be a plus, if it was done in the right way.
Chris Evans
The hon. Gentleman is right. The more competitors there are in the market, the more jobs and the more specialised jobs there will be. I pay tribute to the hon. Gentleman, who speaks on every single topic. We have often joked privately that Westminster Hall is his lounge in the morning, as he speaks there so often. Coming from Northern Ireland and Wales, which have great similarities—both are heavily reliant on public sector jobs—the hon. Gentleman and I know that real-time data sharing and more competitors in the market would bring the private sector jobs that areas such as mine, his and the north-east are crying out for.
Currently, consumers pay the high costs in two ways. Consumers who can afford credit pay more than they should, and consumers to whom lenders ought not to lend are able to access credit even when it is not affordable. Better data would reduce both these problems, to the benefit of all concerned. So who would be the big losers if the Financial Conduct Authority acts? The banks and the incumbent lenders, but I do not think they would be losers. They would have to up their game and offer innovative products such as those that the hon. Gentleman mentioned. The FCA should also be ready to act in the teeth of resistance and entrenched interests, to further the interests of the consumer and our constituents.
I want to provide some background information to data sharing in consumer credit markets. An important interaction in the consumer credit market is the way in which lenders, particularly unsecured lenders—or, as we know them, high-cost, short-term credit lenders—assess a prospective borrower’s creditworthiness before agreeing whether to lend to them and setting the terms on which the loan is made. Lenders rely on information about a borrower’s creditworthiness from a range of services, including information supplied directly by the potential borrower as part of their loan application and information obtained from credit reference agencies.
Credit reference agencies aggregate information about the individual borrower’s personal information, past credit history and current credit commitments, and they supply that information to lenders on commercial terms. The three main credit reference agencies in the UK are Experian, Equifax and Callcredit. The way in which credit reference agencies aggregate and supply information is not regulated by the FCA, but operates on an industry-wide reciprocal basis. There is no requirement on individual lenders to share information, and although banks, which hold the most critical current account information, have the most detailed overview of a customer’s financial position, they do not in general supply data to credit reference agencies—of course not, because the data give them a leg up into the market and an advantage over other providers.
Veritec states that payday lenders have, as we all know, consistently failed to act in the best interests of consumers. Previous efforts to allow the UK payday lending industry to self-regulate have not succeeded, and tragic cases have come to light whereby individuals have become trapped in a downward spiral of debt through multiple, simultaneous loans. The actions of payday loan companies should be monitored by the FCA, and a database with real-time information on existing loans is required.
I do not want anyone to think that I want short-term lending to be banned. It is a massive industry that creates jobs for people. There is obviously a need for it, otherwise there would not be so much money in the market, but I believe that tools have to be made available so that decisions can be made about creditworthiness.
Crucially, not all lenders report data to more than one credit reference agency, and a reliance on credit reference agencies has played a key role in the downfall of the implementation of FCA rules and consumer protection. It is disappointing that the FCA will not consult on real-time data sharing requirements at this time.
Only a database with real-time information on existing loans will protect consumers from potential harm. A system should be considered real time only if every inquiry and every lending decision is updated instantaneously across 100% of the market. That would allow for lenders to know immediately if a consumer is eligible for a loan under the FCA’s responsible lending rules. However, the reciprocal principles that underpin data sharing require that lenders provide data to credit reference agencies “on a regular basis”, usually a minimum of once a month. Even where data are provided monthly, they can be as much as 60 days old by the time they are made available to other lenders.
The fact that lenders may routinely not have access to the most recent 60 days of a consumer’s credit history creates serious consequences for competition and, above all, consumer welfare, with the potential for unaffordable levels of debt. The question as to which lenders share information is an entirely commercial decision, and it is left to lenders to assess whether it is in their interests. They do not have to take into account any other information, such as the wider benefits to consumers.
Rather than just talking about affordability, it is very important to take a customer’s lifestyle into consideration, as happens when people take out mortgages. If we had real-time data sharing, that practice could be spread right across the board in personal lending.
Incumbent lenders, such as bankers, have no incentive to share data. Banks hold the most critical current account information, and the marginal benefit of sharing information and receiving reciprocal information is very small compared with the much larger marginal benefit to smaller lenders, such as unsecured lenders, or high-cost, short-term credit lenders. That creates a very important market failure. Having unrivalled access to credit data puts the banks in a unique position in considering whether to lend to consumers, and it allows them to lend at the most competitive rate. As a result, smaller lenders and new entrants are placed at a significant competitive disadvantage. That not only restricts competition, but distorts it in favour of one sub-market over another.
In addition, that risks cutting off some consumers from access to credit altogether. If they are unable to obtain a bank loan, such consumers must either rely on other forms of credit, such as unsecured lending or high-cost, short-term credit, or make do without a loan. Lenders want to lend to such under-served customers, but for lenders to be able to offer loans at reasonable interest rates, it is essential that they can minimise the risk of default. That means conducting rigorous affordability assessments, for which they require access to complete and up-to-date credit data.
The Competition and Markets Authority considered real-time data sharing in its payday lending market investigation. In its final report, it stated that it saw significant benefits to implementing real-time data sharing, but:
“We consider that further development of RTDS, specifically the frequency of updates, would benefit borrowers and lenders and that our recommendation is not redundant”.
In response to the report, the FCA was asked to consult on a range of issues, including real-time data sharing, in the high-cost, short-term credit market. In its consultation paper, the FCA stated:
“Although we see clear benefits to real-time data sharing, we do not propose to consult on introducing real-time data sharing requirements at this time.”
The FCA’s proposed approach is, in effect, to do nothing and assume that the issues associated with real-time data sharing will work themselves out through a combination of time and commercial pressures. It is true that entrepreneurial new companies are developing systems and services that use existing arrangements that are already available to consumers, such as online banking, to offer something approaching real-time credit data. Although there is scope for technology to make sharing faster and easier, unless real-time data sharing is supported by regulatory requirements from the FCA, it is likely to be opposed as a result of commercial pressures by large incumbent lenders to prevent more effective competition.
New technological solutions show that there are few material costs to implementing real-time data sharing. IT systems are already geared to real-time data sharing, and it is clear that financial institutions can mobilise their account information to support real-time data sharing for their own purposes without any difficulty. I have also been informed of the benefits of a regulatory database. A database would allow instant monitoring of loans and of the whole high-cost, short-term credit market, which can be simplified into a traffic light system for lenders and alerts when loans are made outside regulatory rules. If all applications were processed using the database, regulators would have certainty that the rules were being followed at point of sale in store or online. In addition, because the data are not shared among creditors and are used only by the regulator, commercially sensitive information and customer data are not bought and sold.
The Financial Conduct Authority should ensure that any real-time data are used to ensure compliance at every step of the lending process. That can be achieved only if all lenders of short-term, high-cost credit report data into a real-time FCA database. The payday loan market operates best, and consumers are best protected, when a database is in place. Alongside that, high-level scrutiny and enforcement activity are required to limit and prohibit illegal lending.
The absence of real-time data sharing is important for two principal reasons. First, it is a partial cause of unaffordable personal debt. Consumers may be granted loans which they cannot truly afford, because providers do not have up-to-date information about their most recent liabilities and missed payments. Secondly, it is a critical factor that limits the degree and effectiveness of competition within many overlapping consumer credit markets, because it discourages providers from entering the market and limits their ability to compete fairly if they do enter. The FCA must revise its proposed strategy and develop long-term, future-proof regulatory solutions that promote real-time data sharing and enable the innovative use of new technology.
In our society, many people, whatever their political persuasion, believe that the Government are no longer on their side. Real-time data sharing, to me, is absolute common sense, and it can be adopted with a few simple steps. It is time, through this simple measure, for the Government to show that they can stand up to large corporations and organisations that are quite clearly trying to rig the market in their favour.
The Economic Secretary to the Treasury (Harriett Baldwin)
I congratulate the hon. Member for Islwyn (Chris Evans) on securing this very interesting debate. I want to assure him that my key priority as Economic Secretary is to ensure that financial services are on the side of people who work hard and who want to do the right thing and get on in life. Financial services should help people to achieve their aspirations at every stage of their lives, whether they are saving for their first home, taking out a mortgage, buying a car or saving and investing for their retirement.
This Government have fundamentally reformed the regulation of the consumer credit market to deliver our vision of one that is well functioning and sustainable and, vitally, can meet consumers’ needs. That is why we created a more robust regulatory system and transferred regulatory responsibility for consumer credit from the Office of Fair Trading to the Financial Conduct Authority in April 2014. The regime was designed to strike the right balance between proportionality and consumer protection. The FCA thoroughly assesses every single consumer credit firm’s fitness to trade as part of the authorisation process, and it has put in place binding standards. It proactively monitors the consumer credit market, focusing on the areas most likely to cause consumers harm. This Government have ensured that the FCA has robust powers to protect consumers.
It is very important that lenders act responsibly when deciding whether to grant credit and how much to give. The FCA makes it clear that a firm should lend responsibly, and that it should take reasonable steps to assess the customer’s ability to meet repayments in a sustainable manner, without having to borrow further. The hon. Gentleman is right that, ultimately, credit should only be extended to a consumer if they can afford it. Improving creditworthiness assessments will help to deliver a lower risk and a more affordable credit market.
When the responsibility for regulating consumer credit was transferred, the FCA turned key elements of the OFT’s “Irresponsible lending” guidance into binding rules. The rules set out that a firm should assess the customer’s creditworthiness with regard to the potential for the commitments to impact adversely on the consumer’s financial situation, and the consumer’s ability to make payments as they fall due. Although the FCA requires firms to undertake a creditworthiness assessment, including on the affordability of credit, it does not require firms to share or use all available credit data, whether real-time or otherwise, as the hon. Gentleman pointed out.
Providing lenders with a broad spread of information on which to base their lending decisions facilitates better decisions. The UK has a competitive credit information market that delivers this function. Credit data are shared by lenders through private credit reference agencies—the hon. Gentleman mentioned the three main ones—and lenders of all types provide credit reference agencies with information, including about traditional and non-traditional lenders. Providers of non-credit services, such as utilities, share data with credit reference agencies.
There are no specific FCA rules regarding the sharing of credit data in real time and there is no standard definition of what constitutes real-time data sharing, but the general principles that lenders follow when sharing data are set out in the “Principles of Reciprocity”, as drawn up by the credit industry in collaboration with the Information Commissioner. The principles mean that lenders can access only the same type of data that they share with other lenders. For real-time data sharing, they would need to report data in real time to each other if they wanted to access such data to inform creditworthiness assessments from other firms. Nothing currently prevents them from doing so. The Government have made it clear to lenders that appropriate real-time credit data sharing can greatly assist in making more accurate affordability assessments. Real-time credit data sharing allows firms to see whether an individual has credit agreements with other providers, and gives them a much better understanding of their burdens.
As I am sure the hon. Gentleman would agree—he mentioned this a few times—these issues are particularly salient in the high-cost, short-term credit market. Owing to the nature of that market, the availability of accurate and up-to-date data is all the more important. The FCA has said that there has been substantial recent progress by the industry in real-time credit data sharing for high-cost, short-term lenders. In fact, over 90% of high-cost, short-term lenders by market share currently meet the FCA’s expectations to share data in real time. The FCA expects the proportion of high-cost, short-term credit firms using real-time data sharing to increase further by the time the authorisation process is complete for most high-cost, short-term credit firms. However, it will continue to press for further improvements to ensure that up-to-date information is available to enable lenders to make more accurate affordability assessments that deliver better outcomes for consumers.
That reflects the Government’s general approach to regulation, which focuses on the areas that are most likely to cause harm. There is obviously a particular risk in the payday market, which is why we capped the total cost of payday loans and why the FCA has placed expectations for real-time data sharing on this market.
It is worth noting that real-time data sharing is not a panacea. While credit reference agencies are a key part of the consumer credit market and are regulated by the FCA, the information record does not necessarily provide a complete picture of the consumer’s financial situation. Therefore, improving the depth and breadth of the data, rather than the timing, is more important to the affordability of credit.
The decentralised nature of the UK’s system of credit referencing means that credit reference agencies are well placed to respond to this challenge. Unlike some other markets that are highly centralised, credit reference agencies in the UK compete on the extent and timeliness of their data coverage. As such, it is in their interest to provide as much relevant data about consumers in the most timely manner possible in order to assist lenders in making the most accurate affordability assessments possible. One credit reference agency recently launched an initiative that will enable the use of social rent, as well as utilities data. That could assist consumers with thin credit files to access more affordable credit.
The FCA will continue to challenge payday lenders, as part of its ongoing authorisation process, about the robustness of their affordability assessments and their use of real-time data. It is currently considering the responses to a consultation that includes its approach to real-time data sharing. More widely, the FCA is looking into how firms assess creditworthiness and affordability, including how consumers may be protected from taking on unmanageable debt.
The Government are committed to developing the FinTech sector so that this country becomes the global hub for financial innovation, giving consumers greater choice and access to credit in the process. The hon. Member for Islwyn mentioned the potential for jobs and economic activity, as did the hon. Member for Strangford (Jim Shannon) when he was here. The FinTech industry will be crucial in meeting these objectives, particularly in fostering a climate that encourages data sharing and gives consumers greater choice in the process.
I assure the hon. Member for Islwyn that our FinTech industry is a world leader. In 2014, it contributed £20 billion to GDP and employed 135,000 people. Its development has kept our financial services sector at the cutting edge of innovation, increased competition and choice for consumers, and helped businesses to get better services. I see the developments that we are discussing very much within that context. The Government have taken a range of actions to support alternative lenders and the digital currency sector. We have appointed Britain’s first special envoy for FinTech, Eileen Burbidge, to support our engagement with the sector. We have worked with the FCA to create the right regulatory environment for the sector to flourish, while protecting consumers.
The Government are working with industry to deliver a framework for the open application programming interface. In plain English, that will mean that the banks’ data and computer languages are much more accessible to other computers and FinTech firms. That will deliver greater competition and innovation, particularly in the personal and business current account sectors, by enabling innovative third-party firms, such as FinTechs, to make use of bank data in the interests of customers. Within this innovative space, there is scope for FinTechs to shape the consumer credit market positively and to do more on real-time credit information. For example, the FCA is considering opening access to consumers’ credit card usage data to other market participants.
I thank the hon. Member for Islwyn and congratulate him once again on raising a very interesting subject for debate this evening. I stress that the Government and the FCA understand the importance of this matter to his constituents and to the country.
Question put and agreed to.