Report calls for investigation into credit market

• Report: Credit Searches
• Treasury Committee

The report follows an inquiry sparked by concerns that, in shopping around for credit - especially for unsecured credit such as personal loans and credit cards - consumers were building up a record of credit application searches on their credit reference files. The result of these high numbers in fact made it harder for them to obtain credit, or affected the rates charged.

John McFall MP, Chairman of the Committee said:

"Christmas is precisely the time when consumers are likely to be feeling the pinch. Everyone naturally wants to be able to give their loved ones something nice. While it is right to protect consumers from potentially reckless lending, equally, they shouldn’t be penalised for shopping around for loans.

"We are today calling on the OFT and Information Commissioner to look into the credit market, following an inquiry which sparked concerns amongst the Treasury Committee about just how fairly and openly it is operating."

The Committee’s inquiry considered a range of evidence, including from members of the public who responded to a request on the moneysavingexpert.com website to provide examples of their experiences and difficulties obtaining credit, from credit search companies themselves, the OFT, ICO and others. The Committee is grateful to all those who contributed.

Shopping around

The report concludes that there is a fine balance of public interest between ensuring that fraud is prevented and consumers are protected from reckless lending, and ensuring that the market is subject to the disciplines of informed consumer choice.

Loan providers have over 400 indicators that they may use to assess suitability; the Committee did not get compelling evidence that application search data is essential.

Nor was it presented with overwhelming evidence that making multiple application searches is a major source of direct consumer detriment, although the number of consumers doing this seems likely to rise.

However, the Committee was extremely concerned about the effect of the use of credit searches on market mechanisms, since, in principle, the ability to shop around is not only an important means for consumers to assess the market, but also provides a key discipline on providers.

During the course of the inquiry the Committee heard about some solutions which could reduce the adverse effects of the use of credit application search data in credit reference files.

It considers that any acceptable solution must strike an appropriate balance between minimising fraud and over-borrowing and ensuring the market is subject to normal market disciplines. It recommends that the OFT look at this.

Accuracy and access

Given the importance of credit reference files to consumers who wish to access credit, the report also stresses the importance of data quality.

It recommends the ICO consider whether it should seek further assurances that data quality and data correction systems at credit reference agencies conform with the Data Protection Act, potentially by independent audit.

The Committee also heard that credit applications may be being rejected because incorrect data may remain on file and affect future credit scoring. Being rejected for credit is seen as an indicator of risk.

Accordingly, today’s report recommends that the Information Commissioner’s Office considers whether it is fair for credit reference files to contain details of consumer application searches made while credit reference files were demonstrably incorrect.

Moreover, while a £2 fee for a consumer to receive their statutory credit file may seem modest, given that there are three potential providers of such reports, and regular checking may be appropriate, costs can add up.

The report recommends that the OFT and the ICO consider again whether charges are reasonable. In particular, given the key role credit reports play, and the fact that relatively few consumers request their credit reports, they should consider whether there is a case for providing free access to increase take-up.

John McFall said:

"Many consumers have no idea why they are rejected for a loan. That is why it is so important people should be able to afford to access their credit files, and why correcting inaccurate data should be simple and easy.

"There may be a case for free access, and we have asked the ICO and OFT to look at this. This could also have the effect of increasing the numbers of people checking their credit reports, which would undoubtedly be a good thing for both for consumers and the industry in terms of improving accuracy and fairness."