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Harriett Baldwin responds to debate on real-time credit scoring

2nd February 2016

Harriett Baldwin responds to a backbench debate on real-time credit scoring.

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.

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