Futures of Credit Risk Assessment in the UK
A Briefing Paper
Written by Joe Deville - Senior Lecturer, Lancaster University
Published by Registry Trust
This report examines recent and potential future changes in practices of consumer credit risk assessment, with a focus on the UK. As part of this, it reflects on the role that information about County
Court Judgments (CCJs) play as part of the overall mix of data that comprise assessments of creditworthiness. Key findings include the following:
• An analysis of the social and economic context for consumer credit lending and debt management in the UK reveals an increasingly stressed borrowing environment, including high borrowing volumes, increases in unsecured write-offs and default rates and individual insolvencies at a seven year high. A key factor in these trends is likely the ongoing squeeze on household economies, caused in particular by challenging macro-economic conditions and changes to tax and welfare regimes introduced by successive governments.
• The global context for credit risk assessment practices is transforming, with an increased used of so-called ‘big data’ credit scoring.
• Recent years have seen a diversification of data sources used in credit risk assessment in the UK, including current account turnover data (CATO), private rental data, and behavioural scoring.
• A major change in the UK regulatory context has been the increased focus on affordability, including the requirement for creditors to assess not just ‘credit risk’ to the lender but also ‘affordability risk’ to the borrower. This raises a number of practical challenges for creditors, which are mitigated to some extent by the increasing power of algorithmic forms of analysis and the move towards open banking.
• It is likely that coming years will see a further diversification in the data sources used in UK credit risk assessment. Analysis of interviews suggests a future UK credit risk assessment landscape likely to be characterised by a more nuanced use of CCJ data, potentially with other data sources feeding into this mix, including council tax, delinquency, private rental, and internet, device and social media data, and transactional data.
• The rise of big data credit scoring raises ethical questions relevant to both regulators and the credit industry. These include: what constitutes an ethically sound basis for assessing an individual’s creditworthiness? What should the criteria be for establishing whether a particular form of data is an appropriate or inappropriate basis for an assessment of creditworthiness? Are there are issues of consumer fairness to consider should unconventional credit risk assessment procedures be employed disproportionally in particular sectors of the consumer credit industry?
• Analysis of CCJ registrations reveals an apparent increase in the appetite for litigation in parts of the consumer credit industry. At the same time, there has been a fall in the average value of CCJs. This potentially increases the relevance of the CCJ database as a source of information on potential borrower creditworthiness, given that it is likely that the increasing number of debts being reflected in the database translates into an increasing number of debtors entering the database.
• Similarly, amongst interviewees, the consensus is that CCJ data remains a key reference point for the consumer credit industry in its diverse credit risk assessment practices.
• Within this broad consensus, there is variation in how organisations understand the relevance of CCJ data. There has been a shift in seeing a CCJ on a file from a ‘red flag’ to a contextual data point. The age of a CCJ and the inferred claimant sector are used by some as data points in their assessments of credit risk. This practice is particularly common in the debt recovery industry and is being increasingly used in this way by utilities providers.