BBA submission on the HM Treasury (HMT) Consultation Competition in banking: improving access to SME credit data

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1 BBA submission on the HM Treasury (HMT) Consultation Competition in banking: improving access to SME credit data The British Bankers Association (BBA) is the leading association for the United Kingdom banking and financial services sector, representing over 200 banks, which are headquartered in 50 countries and have operations in 180 countries worldwide. The BBA welcomes the opportunity to respond to HMT s Consultation Competition in banking: improving access to SME credit data and to build on the on-going dialogue that we have had with the government on this. We look forward to continuing to work with you closely in this area and will be happy to meet with you in the coming weeks to progress matters. General Comments The BBA understands the objectives behind the proposals in the consultation and we support the overarching goals of the proposals in the context of responsible lending and the desire to increase access to reliable data to help inform and shape business credit decisions across the finance sector. The BBA fully endorses having a competitive finance market for businesses and the diversity of this market place is exemplified by 500 plus business finance providers listed on betterbusinessfinance.co.uk, as well as the growing number of banks offering business services. We also support the on-going work the government is undertaking on the regulatory framework to support new market entrants and maintain regulatory proportionality. The BBA has very much been a proponent of transparency and has taken a leading role in the fulfilment of voluntary arrangements under the Steering Committee on Reciprocity (SCOR) framework to ensure that there is the ability for data to be shared among all forms of credit providers for the purposes of ensuring responsible credit provision. Under the SCOR framework, a simple rule of thumb is that any credit provider can access a range of credit information on businesses, with the proviso the credit provider shares all that it can. It is important to stress that this does not have to be like for like information e.g. today, under the SCOR framework, a credit provider that does not offer business current accounts can still access data on business current account indicators. This data is open to all forms of banks and alternate finance providers. The BBA is also fully supportive of the government s aim to introduce legislation to work alongside the SCOR framework and would stress: 1. such legislation should relate to business current accounts and associated business credit information on other business products such as credit cards and loans only. This will cover the majority of SMEs as banks encourage all business owners to maintain business current accounts. 2. the rules of reciprocity should apply to maintain the focus of data sharing on responsible credit provision and should be legislated.

2 2 3. the legislation should define the exact data to be shared balancing between transparency and data protection rights. The BBA agrees that SME customers should continue to give permission for their data to be shared so as to comply with any privacy concerns the business customer may have. It is important to note here that where a relationship has been in place for some time, further liaison might be required to gain consent and existing consent clauses may have to be reviewed to ensure that they accommodate this new initiative. We would however question the use of a market share threshold when deciding on the amount of information to disclose. We do not believe that any threshold is appropriate as the intention is to ensure the best possible outcome for the customer, and therefore thresholds should not play a role in this, rather legislation should apply to all banks. This is currently occurs with existing small lenders in the personal space who provide data. The following section provides detailed responses to the specific questions raised within the consultation and suggests ways in which the legislation can be practically developed to support HMT s aims, whilst also recognising the rights of a business owner. The BBA looks forward to working with HMT to finalise the legislative approach. What information should be shared? 1. Currently any individual or business has to give its consent for its data to be shared with CRAs. Do you agree that it is important that legislation mandates that data can only be shared where an SME gives its permission? A. We agree with the statement that legislation should mandate that data can only be shared when an SME gives its permission. There will already be a good number of customers where this permission already exists but some relationships will have been in place for some time, and so may require further liaison to gain consent, unless in general documentation, it has already been gained. It is worth noting that the ICO is currently exploring with industry whether credit accounts where (for historical reasons) there is no consent to share data might become shareable if customers are told of the creditor s intent to share and given an opt out from such arrangements (rather than a need to seek explicit consent). 2. Do you agree that the sharing of key indicators of current account performance data should be mandatory? A. We support legislation on this issue to cover business current accounts and other associated products and we suggest that the key indicators of business current account performance data are as we have outlined in Annex 1. We welcome legislation as it will provide greater protection over misuse of data and provide more clearly defined use of the information as well as support data protection requirements. We also firmly believe that the rules of reciprocity are maintained and that the legislation should work alongside SCOR. 3. Do you also agree that more granular current account data should be shared? If the answer to this is yes, do you think this should be as granular as turnover data showing payments in and out of an SMEs account?

3 3 A. We agree in principal that more data should be shared but this must be defined as business current account data and associated business credit information on other business products such as credit cards and loans. This will cover the majority of SMEs. We believe that using business current account data and associated indicators is sufficient for the intended use, and that detailed transactional flows are not necessary. If for any reason a lender does wish to see detailed transactional information this can be facilitated by the MiData initiative which allows customers to electronically transport their current account data and thereby share it with third parties as required/desired. Overall it is also necessary to recognise the parameters that the ICO sets on data protection. We do not support legislation covering any personal account being used in a lifestyle/ micro business as this would be incredibly difficult in attaining the evidence needed from an individual to support what is business income and what is personal. The banks always emphasise the importance of having a business account and promote all business owners to have one rather than a personal account. If there is scope creep into the sharing of personal current account data this would raise additional concerns around the potential misappropriation of data and implications for an individual s privacy under data protection rules. 4. In addition to taking action on the sharing of business current account data, do you think there is a case for taking action to ensure that all providers of credit share wider credit data on their SME customers with the CRAs? If so can you explain why? A. There is merit in creating a consistency in data sharing. Already under SCOR there is a range of data shared which is part of voluntary agreements made. We think that perhaps given the scope and range of credit data providers, it is better to agree under SCOR the basis of each party s data sharing components rather than legislating across all parties. We also believe that data on public debts should be shared, for example VAT, Tax, business rates data. 5. If action is taken on the sharing of wider credit data, does there need to be a market share threshold below which a credit provider is exempt from sharing this information? If the answer to this is yes, at what level should this be set? A. The stated intent is always to ensure that the best possible outcome is always attained for the customer and to support responsible lending. Therefore market share should not be a factor. 6. Would it also be helpful to mandate that non-financial information currently shared between SMEs through CRAs must be shared with finance providers? A. While this may be helpful, one has to recognise that a SME must be allowed a choice as to what as a business it shares and what is does not share. We would not want mandatory activities to add to the burden of running a business. How should information be shared with the Credit Reference Agencies? 7. Do you think that credit providers should share data with all of the CRAs or do you think it is enough for the data to be shared with one or more of the CRAs? If your answer is to limit this to one or more CRA, should that CRA be required to share that information with other CRAs? A. There is a need to define a CRA, and in defining a CRA and compiling a list, it is important to consider an entity with a proven track record. We would recommend a

4 4 record of at least 3 years operation and the need for the given CRA to have stringent protocols on security of data which have been thoroughly assessed. Annex 2 lays out a definition of an eligible CRA for discussion. This definition and list of eligible CRAs must be maintained by a central independent body which we believe should be owned by Government. In terms of process the most simple route would be for one CRA (that with the day to day commercial bank relationship) to be mandated to share the information it receives from the bank with other eligible CRAs in a standard format. We understand however that the commercial arrangements might not allow CRAs to share this information directly. As an alternative the bank could share this information with any CRA that has been deemed eligible and on the defined CRA list, which Government should compile and own. The data/information shared would have to be in a standard format and not be at a cost to the bank. In the interests of responsible lending, providers of credit should share their SME data with all eligible CRAs who are able to accept the data in this way. 8. How frequently do you think credit data should be shared? A. We believe that credit data should be shared monthly. 9. What time frame do you think the shared credit data needs to cover? Is data that goes back three months sufficient? A. Our opinion is that probably 3 months would limit the value, and we would recommend at least 12 months from a user point of view as from a scorecard development point of view, 12 to 24 months history is usually required to give sufficient time to determine good/bad definitions. To achieve a swift launch of this process however 3 months back data would clearly we believe shorten the time frame to roll out the initiative. We will continue to work with HMT in this area to determine the most optimal approach to achieving the desired aims. Who will be able to get access to this information from the Credit Reference Agencies? 10. Do you agree that all of the data that is shared with the CRAs should be made available to all providers of SME credit? A. Yes, providing that data is shared under the rules of reciprocity and they provide as much information as possible back. Additionally we would like to see a strict definition of SME credit. 11. Do you think that only SME credit providers should be able to access this data? A. Yes, we strongly agree with this statement on the basis that the intention is to provide the data in a way that is responsible and within agreed parameters; we agree it should only be with SME credit providers, although CRAs could build trends that external providers such as institutional investors could use. 12. Do you agree that credit providers should only be able to access this data where the SME has approached it seeking finance and the SME has given that provider

5 5 permission to access this information? If not, when do you think that credit providers should be able to access this data? A. We believe the circumstances under which credit providers can access this data should reflect those prescribed for credit data under the SCOR Principles of Reciprocity and followed by the wider credit data sharing community. These principles allow credit providers to access a customer s credit data only for the prevention of over-commitment, bad debt, fraud and money laundering, and to support debt recovery and debtor tracing. For business current account data, and to reflect the application of these principles, data should only be accessible by credit providers for (i) application risk assessment both new customers and existing customers seeking changes in existing limits; (ii) existing customer credit management to manage customers in early stress (but not in arrears or collections) and; (iii) to promote responsible lending via use of data to exclude at risk customers from additional product marketing. National Credit Register: We understand the rationale for the review of a national credit register and certainly support such a movement if it were to further aid the development of institutional investors into securitisation vehicles or UK private placements. The key question is, can this be achieved simply by allowing public authorities access to the existing CRA private sector data which the authorities can then undertake trend analysis on and publish; or does it need a central register and then how does this work with the existing private sector CRAs and VAT register; or simply should alternate investors have access to the underlying CRA data which will be enhanced through the mandatory process envisaged above? The BBA will be happy to participate in a formal review of the options. Concluding remarks As stated, the BBA is supportive to legislation covering banks sharing of business current account data to work alongside the SCOR framework. We look forward to progressing this further with HMT. British Bankers Association

6 6 Annex 1 Proposed definitions of key current account performance data and associated business credit information Borrower Name Economic Group s name Business activity Region or Country Size Accounts/Products Loans Commercial Credit Cards Current Accounts Information Product Date of origination Amount and term/contractual maturity Balance outstanding Payment performance Refinanced/restructured Default status Days past due Credit limit Credit limit utilisation Average balances Number of Cash Advances (credit cards) Value of Cash Advances (credit cards) BCA Data Overdraft utilisation last 3 months Current overdraft utilisation Minimum average balance Credit turnover trend Debt turnover trend No excess - lowest balance in last 12 months No excess - average balance in last 12 months Age of oldest account Maximum duration of excess Deposit balance Declined/failed payments

7 7 Annex 2 Proposed CRA definition Qualifying Credit Reference Agencies are defined as businesses whose primary purpose is to collect information on businesses, including sole proprietorships, partnerships and corporations for the purpose of credit risk assessment, credit scoring or for other business purposes such as the extension of trade and which: 1) Act as an independent third party whose main purpose is the collection and collation of information on companies financial standing; 2) Engage in the bulk purchase of public data for the purpose of credit assessment and fraud prevention; 3) Have sufficient systems in place to protect data against any loss, corruption, destruction, misuse or undue access and allow data suppliers the right to audit these systems 4) Provide the right for businesses to access data held about them periodically the right to challenge accuracy of information held about them 5) Does not have a subsidiary which offers SME credit 6) Have a proven track record of at least 3 years. The CRA could also be regulated by the FCA or a member of a recognised association. The provision of information relevant to a company s financial standing does not qualify a company as a Credit Reference Agency where it is undertaken in the course of a normal business transaction.