Consumer Duty, BNPL, and the FCA Consumer Information Market Study (CIMS); a BIG year for credit reporting

The introduction of the Consumer Duty, the much-anticipated Buy Now Pay Later (BNPL) product data sharing with Credit Reference Agencies (CRAs), and the publication of the final report of the Credit Information Market Study (CIMS) will all contribute to an important year for UK consumers’ credit profiles in 2023. The big question for lenders is what are the key challenges to achieving “fair outcomes for all” when contributing credit reporting data?

More than ever, consumers have increased access to and awareness of their credit profile, allowing more control and education over how to build their credit score. Free credit reporting apps combined with information via media and social media, provide enhanced transparency, and greater engagement between consumers, their credit reports and data rights.

With enhanced transparency comes increased expectations and scrutiny for lenders. The importance of accurate and timely data reporting processes and operations shouldn’t be underestimated. This includes data submissions, quality assurance, dispute handling processes, and a lender’s relationship with CRAs.

How can credit reporting impact good consumer outcomes?

The Consumer Duty sits at the heart of this with it’s emphasis on delivering “good consumer outcomes” together with the expectation that robust processes are in place to monitor these outcomes. Aligned with the Consumer Duty outcomes, the interim CIMS market study report [1] found two main areas that have a significant bearing on delivering this – data quality and dispute processes. Delivering high-quality data and embedding effective dispute-resolution processes can be a huge challenge for lenders…

• Data quality – Poor data quality and controls can have a huge impact on the ability for customers to obtain credit or cheaper credit. It can also mis-represent a consumer’s credit position which can lead to irresponsible lending.

• Disputes process – Poor dispute handling can be very distressing for consumers not to mention affect their ability to obtain credit elsewhere. It is important companies have the means to effectively investigate a consumer’s dispute and remediate if necessary.

What are the challenges data providers typically face?

Whether they have well-established processes or setting this up for the first time, the challenges remain the same. Consumer complaints [2] made about their credit reports remain one of the top complaint drivers at the Financial Ombudsman. Some of the challenges include:

• Establishing smooth and compliant processes for large data submissions of sensitive data that is accurate.

• Defining a default fairly. Defaults stay on file for six years. Reporting too early could unfairly penalise the consumer. Too late it stays on a consumers file for a long time.

• Defining a payment status consistently and accurately – understanding how much grace period to give consumers before marking them in arrears.

• Setting up consumer operational processes and procedures to manage disputes in a timely and fair manner.

• For short term lending where payments are more frequent than monthly, how best to define this into the ‘traditional’ CRA set up that is fair for their consumers.

• Assigning forbearance accurately and ensuring customers understand its impact on their credit file.

Why does accurate reporting matter?

High-quality credit information is an integral part of the decision-making process for all lenders. The recent interim CIMS report identified material differences between the data held by the 3 large CRAs for the same individuals. As an example, all 3 CRAs identify c.85% of customers being on the electoral roll, however they only hold consistent data on the number of defaults for 30% of them. Poor quality data was highlighted as a factor.

BNPL, new reporting, new insights and a new opportunity

With Consumer Duty there come fair outcomes for all, this also includes ‘credit invisible or no / thin file’ consumers [3]. With more ways to pay at shopping checkouts or via new payment apps the ‘Buy Now Pay Later’ product represents a new opportunity for consumers to build their credit profile and gain greater access to affordable credit, if used well.

For the first time in over a decade, the CRAs have had to create a new “deferred payment credit” product type to accommodate this new type of lending. Although BNPL accounts are now visible to consumers on their credit reports, they are not yet widely considered in credit scores. This rich new source of data provides valuable additional insight into customers’ credit commitments and borrowing history. It is therefore important that BNPL lenders have processes in place to ensure accurate, clear and consistent data (as highlighted within the recent consultation by HM Treasury [4] on the regulation of BNPL) so consumers can truly benefit and build their credit profile by using their products.

Robust and accurate reporting across the industry will support full customer participation in financial services while allowing a more complete picture for lenders to meet their obligations to support customers make informed decisions.

Next Steps

The FCA is expected to publish the final CIMS report in Q3 2023.