House of Commons - Treasury

Select Committee on Treasury Second Report

3 Data sharing and responsible lending

52. Before financial liberalisation, customers typically had lending relationships with only one or two high street banks. In 2000, over 50% of credit card users had only one credit card. Customers now have relationships with many different financial institutions and have multiple products—over 21% of people now hold 4 or more credit cards. In these circumstances greater importance attaches to possible lenders having accurate and comprehensive data concerning a consumer's existing credit commitments. The flexible nature of credit cards also makes it important that financial institutions have sufficient data to monitor the level of overall commitments. In the case of credit cards there may be a large gap of months or even years between the initial credit check conducted when the customer applies and the time the consumer actually borrows the money.

53. APACS noted that "Widespread data sharing has been in place for many years, albeit at varying levels in different institutions".[93] Some banks currently only share what is known as negative data—events such as arrears, missed payments and bankruptcies. Others share positive or full data—this could include the size of the outstanding balance, the credit limit, the maximum balance, the size of payment required and a full record of any late payments made over the past 24 months and when they were made.

54. A number of cases where individuals' debt commitments have grown beyond reasonable limits have been drawn to our attention. Illustrations from just one debt advice charity indicate that of their client base:[94]

178 had more than 16 credit cards
2,322 had debts in excess of 5 times their net yearly income
815 had debts of over £100,000.

These cases show the importance of companies having clear data on the size of a consumer's existing commitments. Some cases have had tragic consequences.

55. The Committee has three main concerns regarding the problems that stem from the lack of complete data sharing,

i. Promotion of irresponsible lending: Lenders may be unable to assess accurately a consumer's ability to take on additional debt. A consumer making the minimum repayment across a number of different credit cards may be struggling with debt but may be seen to have a good credit record.

ii. Prevention of competition: With the increased prevalence of risk-based pricing (determining the customer's interest rate according to their credit record), non- sharing of positive information may preclude consumers from being eligible for lower rates elsewhere.

iii. Fraud: Criminals who are successful in obtaining a number of cards over a short period of time could use the credit of one card to pay the due balance off another. Once the perpetrator availed themselves of a sufficient number of cards and extended lines of credit, they would draw down on each card to its maximum limit and then disappear.

56. Which? told us "The banks repeatedly claim that they lend responsibly by undertaking credit checks. Yet how can banks do this if they lack access to a complete picture of the applicant's existing debt burdens?"[95] Banks acknowledged that there is scope for improvement. Mr Crosby told us that "There is not complete sharing and, therefore [the present system] is not going to work" and that there "is scope for data sharing to improve, positive and negative information. We share it across the industry on consumers' greatest financial liabilities which relate to mortgages, but not completely on credit cards, and it is somewhere we must go as an industry"; he agreed "completely" with the statement that if all banks shared positive information, the type of recent problems of over-commitment that we have seen would be much less likely to happen.[96] The lack of full data sharing in the credit card industry has significantly contributed to problems of over-commitment by hampering responsible lending. As industry representatives themselves acknowledged, there is significant scope for the system of data sharing to be improved and the industry must make progress in this direction.

57. APACS told us that "the industry acknowledges that it could potentially improve the quality of its lending decisions through wider sharing of data known to be predictive. Consequently APACS members have agreed a new set of data sharing principles, including for the first time explicit support from all APACS members for the sharing of full data on credit card accounts (within the constraints imposed by law). We estimate that this will increase the number of credit card accounts on which full data is shared by at least 6 million, accounting for around 11% of the market".[97]

58. Barclays told us that "There were three main ways in which lenders can improve credit risk decision making: Better analysis…, Higher quality data…, and Completing the picture…"; they noted that they "have a great deal of data on our customers. However, this does not give us the full picture—unless we can have access data held by other lenders we will not know, for example, the full extent of an individual's borrowing."[98] Mr Varley told us that "from the point of view both of consumer and [lender], the more data that is available the better. The lending will be better; the risk calibration will be better; the calculation of an individual's ability to pay will better. We should not assume that data is a panacea but in the area of minimum repayments and cash withdrawals…the sharing of that data across the industry would be helpful."[99] We recommend that all banks should share the maximum permitted data on credit card accounts. We welcome the explicit support from all APACS members for this course of action and hope it will be accomplished promptly. However, there will continue to be room for improvement, particularly regarding the sharing of behavioural data to identify those consumers who may be over-committed and making the minimum payment across several cards, sometimes by using cash withdrawals from other cards.

59. We are aware that there may be certain legislative barriers to improved data sharing between banks and credit card issuers. We accordingly wrote to the Information Commissioner, Mr Richard Thomas. He told us that

"The main barrier to a wider sharing of historic data is the common law duty of confidence, rather than the Data Protection Act 1998. There is, though, an interaction between the two. The 1998 Act requires that any processing of personal data is 'lawful'. A disclosure of personal information that involves a breach of the common law duty of confidence will not be lawful and will therefore also contravene data protection law. The legal advice that we have received is that banks, card issuers and other financial institutions owe a duty of confidence to their customers as regards a customer's financial standing and affairs. A disclosure of such information by a financial institution to a credit reference agency without the customer's consent potentially breaches this duty.

100

Sir Fred Goodwin explained that from 1998-99 the terms and conditions of credit cards have enabled issuers to share data with credit reference agencies.[101] Prior to that, the terms and conditions of the products which were sold did not include the appropriate wording. To share this information from these products would require the customer's express consent.

60. There was some difference of opinion over the extent of the problems that stemmed from these pre-1998 products where data was not shared. The Information Commissioner told us that "given the extent of positive information sharing that was already in place, the rate of turnover in the market and the apparent eagerness of credit and store card issuers to share positive information it would be surprising if the non-sharing of positive information is particularly widespread".[102] The industry disagreed with this. APACS told us that they estimated "that the recently agreed commitment of all APACS members to share full credit card account data will enable information on at least 6 million credit card accounts to be shared (11% of the market). Removal of legal inhibitors will result in at least a further 9 million [credit card] accounts where data could be shared (at least 16% of the market)"; they concluded that government and regulators could make a bigger contribution to addressing this issue than the industry was able to alone.[103] Barclays told us that they estimated that the total number of accounts affected by the legal obstacles was 33 million current accounts, and 15 million loan and credit card accounts.[104] Mr Thomas told us that positive information on these historic accounts could be shared with the customers consent. APACS noted that "whilst this is true it would involve writing to 9 million accounts (with some cardholders receiving several similar letters from different card issuers) to obtain explicit consent. Given that response rates to a typical direct mail campaign would be in the low single figures, the response rate to a letter regarding a legal technicality where there is nothing in it for the cardholder can be assumed to be extremely low indeed, with the distinct possibility that those with most cards may be the least likely to respond".[105] They believed that "The power to enable lenders to share this data rests with the Information Commissioner who, in the absence of customer consent, may be able to grant an exemption to lenders or initiate a change in the legal framework".[106]

61. There are problems relating to the sharing of data on 'historic' accounts where customer consent was not obtained at the time the account was opened. There are differences of opinion between the industry and the Information Commissioner regarding the extent of the problem. We believe the industry should immediately carry out a pilot study to assess the response rate to letters seeking customer consent. If response rates remain low, then we believe there is a case for an exemption from the common law duty of confidence for the sharing of positive information on credit card accounts. The industry, relevant government departments and the Information Commissioner need to work together to resolve the legal barriers to sharing historic data.

62. One of the concerns raised by some witnesses was that potential greater sharing of data could be used for purposes of aggressive marketing and predatory lending. Mr Daniels told us that "there are some companies that specialise in looking for highly indebted [consumers] and then lending them more. I think we lay ourselves open to those kind of issues with full data sharing, so while I am in agreement with data sharing I think we have to be very careful how we apply it, and I am not sure that this is a panacea or will prevent some of the tragedies we have seen happen recently".[107] Practices that could be considered predatory lending could include aggressive targeting of lenders with unsecured debt, or attempting to persuade them to purchase a loan secured on a house, when it was clear they would be unlikely to be able to afford the repayments. Regarding the issue of predatory marketing, Mr Flynn told us that while "it is a fair point of criticism [to] say information could be used in a predatory sense," he believed that "there are protections in place through the data protection laws that would prevent lenders from using the information for marketing purposes".[108] Sir Fred Goodwin told us that an APACS working group had recently arrived at an agreement that "there would be prevention of the data being used for marketing of any sort, whether it is predatory or not".[109] Improved data sharing needs to be accompanied by strong and robust safeguards to prevent predatory lending. We note evidence from card issuers that these safeguards are in place; it would be appropriate for the DTI to review the adequacy of these arrangements.

TRIGGER POINTS FOR REFERRAL TO INDEPENDENT DEBT COUNSELLING

63. Due to the flexible nature of credit cards, in addition to the credit check undertaken at the time the credit card is issued, banks will typically monitor customers' accounts to assess whether there are any indications of financial difficulties. Where a customer only has a relationship with one financial institution, it is relatively easy for the bank to assess the extent of over-commitment and refer the customer to either a specialist unit within the bank or to independent debt counselling. For example, Mr Daniels of Lloyds TSB told us about their "Customer Support Unit" whose advisers were "trained to take customers through their income and expenditure and offer advice or debt rescheduling with the aim of reducing their monthly commitments". Lloyds TSB "proactively identify loan and overdraft customers who are showing early signs of financial difficulty, and contact them by telephone to offer the Unit's services".[110] Sir Fred Goodwin told us that RBS focus in on managing the balances [they] have with the customer and looking very carefully at the customer's behaviour for any signs that the customer might be having financial difficulty, at which point we would proactively contact the consumer…If you can pick up a sign and act on it early, that is a beneficial thing to do. That can lead to customers being referred to external agencies for counselling".[111] Mr Flynn told us that, when a customer is in a very serious financial situation, "Stresses are very high. They are receiving a lot of telephone calls. Whatever it might be, the stress is mounting and they find it difficult to bring themselves to pick up the phone and ask for help. What we hope we can do is, armed with the right information, pick up the telephone and talk to that person about options while they have options available to them".[112]

64. In a situation where a customer has all their commitments with the same bank, such proactive procedures can play a part in preventing cases of over-commitment and ensuring that consumers have access to appropriate advice. However, as noted earlier, many consumers now have multiple credit cards, which are likely to be spread across several different lenders. In these circumstances, (especially given the absence of full data sharing), it is more difficult to identify customers that are struggling financially.

65. We asked lenders if they would consider examining whether a system of industry-wide trigger points based on a customer's exposure across several different lenders, and referral to independent debt counselling if the exposure exceeded a certain level, would be effective. Mr Flynn told us that MBNA "would like to make sure that we work on this topic because it is a complex one and one where we do have to make progress. We just have to be cautious about what triggers we might be talking about".[113] When a consumer is in financial difficulties, an early referral to independent debt counselling can be beneficial in preventing the situation becoming worse. Individual banks may be monitoring their own exposure to the consumer, but many people now have several credit cards spread across a large number of lenders so there is a need for a more integrated approach across the industry to identify those customers in financial difficulty and to offer them appropriate advice. We recommend that the industry work towards establishing a set of industry trigger points, so that people with debt commitments can be referred to debt counselling.

ANNUAL CONSOLIDATED DEBT STATEMENT

66. The Consumer Credit Bill contains provisions relating to the provision of annual statements for regulated credit agreements.[114] In the USA the Fair and Accurate Credit Transactions Act (FACTA) requires that credit reference agencies in the US provide to consumers, upon request, a free copy of their credit report once every 12 months. MBNA provided us with a sample US consumer credit file.[115] This contained information on each of the accounts held by the sample consumer, as well as a useful summary outlining the consumer's total debts. We welcome the measures in the Consumer Credit Bill requiring an annual statement for each individual credit agreement. We note the provisions in this area of the US Fair and Accurate Credit Transactions Act and will be looking at them further.

Credit card cheques

67. Many firms now issue cheque books which can be used to draw on credit card accounts. The DTI Task Force on Over-indebtedness identified the unsolicited issuing of such cheques as one of a number of lending practices which disproportionately affected households at risk of over-indebtedness and had the potential to make a bad situation worse.[116] We concluded in our last report that "Credit card cheques are being issued irresponsibly by some lenders". We called for cheques not to be sent unsolicited and to be accompanied by clear information regarding the APR and fees—specifically, the information that interest will be calculated from the date of the transaction with no interest free period, and that consumers do not have the same degree of protection under the Consumer Credit Act as when using a credit card.[117]

68. APACS told us that the industry had developed a set of best practice guidelines for inclusion in the Banking Code. The guidelines "cover those credit-worthiness checks that should be made before credit card cheques are sent out to cardholders and, from the point of view of transparency, the information that should accompany them including the purpose and key features, how they are treated, the applicable interest rate and accrual time and the duration of any promotional rates".[118]

69. Industry witnesses put forward a number of justifications for the issuing of unsolicited credit card cheques, including that they are a way of helping customers to have access to their credit line;[119] can be used for balance transfers;[120] and, since just over 50 per cent of the people in the Yellow Pages do not take credit cards, can enable customers to pay for goods and services that they could not otherwise use the [credit card] to pay for.[121] We asked lenders whether they would consider issuing credit card cheques using a system under which customers had to opt in to receiving them. Some witnesses did not believe this would be to the benefit of the customer, but several witnesses said they would consider it. Mr Hoffman later wrote to tell us that Barclaycard were designing a test that offered "new customers the opportunity to opt in or out at account recruitment stage".[122]

70. We welcome the inclusion in the Banking Code of guidelines covering the marketing of credit card cheques, although there is undoubtedly room for improvement in how the information regarding the interest rates and terms and conditions are communicated to the consumer. Credit card cheques continue to be issued unsolicited, a practice which we believe should cease. If consumers wish to avail themselves of credit card cheques, they should opt in to the system.

71. Concern has also been expressed that credit card cheques are vulnerable to fraud. Detective Chief Superintendent Ken Farrow, Chair of the Association of Chief Police Officers national working group on fraud was recently quoted as saying that "Criminals are able to use credit card cheques to commit fraud because they aren't secure and are sent out unsolicited".[123] The industry should also introduce new measures to combat the fraudulent use of credit card cheques. The ending of unsolicited issuing will be very helpful in this regard.

Credit limit increases

72. In our earlier report we discussed the practice of unsolicited increases in credit limits. The DTI Task Force on Over-indebtedness identified that this practice as being associated with households in financial difficulties.[124] We recommended that issuers should carry out internal and external checks before increasing credit limits and that there should be restrictions on the number of unsolicited increases in credit limits.[125] In response, APACS have introduced a set of best practice guidelines that have been incorporated into the Banking Code: "These cover assessment of a customer's ability to repay, checks on a customer's suitability to receive an increase, communication with cardholders, regulation of emergency increases and clarity of information to consumers as well as opt-outs [from receiving unsolicited increases in credit limits], refusals of increases and reductions in credit limits too".[126] In regard to whether there should be a restriction on the number of unsolicited credit limits each year they told us that "The industry does not believe that a pre-specified one-size-fits-all number of increases per year would assist consumers. It is not the number of increases but how these are operated in the interest of consumers that is paramount. Constraint on the way in which credit limit increases are currently managed would undermine proven processes which are a central pillar of responsible lending and could lead to higher credit limits being set at the outset of agreements, unnecessarily increasing risk to both lenders and borrowers".[127]

73. Mr Varley told us that if a consumer is "running a card, borrowing on it, operating that borrowing and repayment successfully, we would consider maybe once or twice a year whether there should be a limit increase. If there is a pattern of minimum payments, for example, if it is clear that the card holder is struggling with the borrowing, we certainly would not increase the limit".[128] Sir Fred told us that RBS "have a maximum of two increases per year".[129] Some card issuers were supportive of the Committee's recommendation that there should be a restriction on unsolicited increases in credit limits. Egg told us that they "voluntarily restrict the number of unsolicited credit limit increases that a customer may receive".[130] We welcome the inclusion of guidelines covering credit limit increases in the Banking Code. However, we believe that implementing a system restricting the number of unsolicited increases in credit limits would be beneficial in preventing some cases of financial difficulty. We do not believe that this would place excessive restraints on the industry as companies would continue to be free to raise credit limits should customers contact them to request an increase. We also note that some lenders already operate such a system and, to ensure responsible lending, this should become common practice across the industry.

Dealing with customers with mental health problems

74. In their submission to the review of the Banking Code, Citizens Advice emphasised the problems encountered by those with mental health difficulties in dealing with debt. They noted that there are "clear links between poor mental health and debt, heavy-handed debt collection practices can exacerbate mental ill-health; and that creditors and debt collectors do not respond sympathetically to requests for payment moratoria and debt write-offs in respect of customers with long-term mental health problems". Correspondence we have received has also flagged up inappropriate practices of continuing to offer debt to consumers with mental health difficulties, despite being clearly advised of these difficulties by other family members. The Independent review of the Banking Code recommended that "Code sponsors work with the national money advice associations listed in the Codes to agree guidance on the most appropriate ways for subscribers to assist people who have diagnosed mental health problems that impair their ability to handle money".[131] The banks responded that they "will undertake the work suggested and look for a practical approach within the constraints of legislation and the inevitable difficulties associated with identifying the problems for any individual".[132] As a matter of urgency we urge the banks to seek to work further with the money advice associations to agree guidance on dealing with people who have diagnosed mental health problems that impair their ability to handle money, and to publish draft guidance for the Banking Code by the end of the year.

Access to basic bank accounts

75. When consumers are in financial difficulty, it is essential that they have access to financial products to help them manage their debt commitments. Citizens Advice recently highlighted that basic bank accounts are "very useful for people in debt to manage and control their repayments, particularly those with income going into an overdrawn accounts".[133] It can sometimes be useful for people to have access to a basic bank account, which involves no access to overdraft facilities, when they are in debt. However, Citizens Advice reported that "banks are often unwilling to allow people in debt to open bank accounts".[134] There seemed to be some differences in the procedure between banks regarding the use of credit checks when opening basic bank accounts. Mr Daniels told that Lloyds TSB "put the basic bank accounts through the normal credit procedure".[135] Mr Crosby told us that for HBOS "our credit assessment is different, by definition, from ordinary current accounts because the essence of the product is…that it does not actually give credit, per se, it provides money transmission. So from our point of view the credit assessment is different but it is not without its issues and there is credit assessment".[136] Mr Varley told us that, for Barclays "There is no credit check" and that "anybody can apply for a basic bank account and, provided they can identify themselves, they will have one".[137] Basic bank accounts are a useful way for people in debt to manage their commitments and attempt to resolve their problems. Banks should ensure that their credit checking procedure does not deny access to basic bank accounts for those in financial difficulty.

Payment Protection Insurance

76. PPI is occasionally being sold to those who would not benefit from it, such as—in most circumstances—the unemployed and those with pre-existing medical conditions. PPI premiums vary significantly, but can be difficult to compare. The OFT told us that they "were aware of concerns about PPI" which they were investigating in the specific context of debt consolidation.[138] The FSA assumed responsibility for the regulation of general insurance in January 2005. Since our initial report, further evidence has emerged regarding PPI. Which? supplied the results of a survey indicating that some lenders were supplying quotes for personal loans without making it clear that PPI was included, and that policy exclusions were often not made clear to consumers. The Competition Commission has recently highlighted concerns surrounding the competitiveness of the insurance services (including payment protection) that are sold with store cards.[139] We recommend that once the transfer of responsibilities for insurance regulation to the FSA has been completed the FSA should begin an investigation into the selling of Payment Protection Insurance. This should include the safeguards in place to prevent the miss-selling of PPI to customers who would not be able to benefit from it due to exclusions, how more competition could be introduced into the market, and how the provision of information to consumers could be improved to allow better informed choices about whether to take out PPI and about which policy is appropriate for individual circumstances.

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