A Story about Alex
Set under the current UK Data Protection Act
Like many people, Alex wants access to the best advice and
deals, and has benefitted from the increased competition that
the UK credit referencing system delivers.
The UK system has grown up through the joint efforts of
regulators and industry, with input from consumer groups,
which is unique in the EU. As a result, rules are in place to
protect consumers’ data and control how it may be used,
whilst at the same time making sure it is available and taken
into account when credit decisions are made.
The UK system is regularly cited as world leading by the World
Bank and, when used responsibly, provides important
protections for consumers and small businesses. It developed
in order to reduce the potential for consumers and small
businesses being unable to access credit or, alternatively,
getting credit they cannot support. Either of these outcomes
would have a detrimental effect on both individuals and the
economy as a whole.
This booklet is designed to illustrate how the UK system
currently works.
About Alex
Alex is 30 years old, currently single and renting.
Previously, Alex was in a relationship and had joint credit
with Jo, including a mortgage, credit and store cards, and
utilities. When Alex and Jo split up 4 years ago, it took
time to sell their home. Because Jo had moved out into
rented accommodation and was no longer contributing
to the household, they got behind with the mortgage.
They eventually sold their home at a loss because they
were in negative equity. They handed the keys back to the
lender and the property was the subject of a voluntary
possession order.
Alex has outstanding debt from this time, and has
several county court judgments due to the non-payment
of other credit.
1
Alex buys a flat
Alex’s granny recently died and left him a legacy, which is
enough to put down a small deposit. Alex has decided to
buy a flat, as a mortgage should be less than his current
rent and should enable him to save on monthly outgoings.
Alex finds a flat he likes. The estate agent suggests Alex
apply for a mortgage via their broker, who will send an
application for an agreement in principle to a panel of
mortgage lenders.
Alex completes the application form as a first time buyer,
and gives consent for a credit check to take place as part of
the process.
information about himself. He also describes himself as a
first time buyer – in his eyes, he is, as he is doing this alone
this time.
The application is declined by most of the panel of lenders,
because Alex failed to disclose material information in his
application: from his credit file they can tell that he is not
a first time buyer, and there are outstanding county court
judgments and a voluntary possession.
The broker contacts Alex and advises that he needs to
check his credit report. If the information regarding the
judgements and outstanding balance (which is shown as
a default on his credit report) on the possession is correct,
they will need to be settled prior to proceeding. The broker
suggests approaching a specialist lender.
On the application form, Alex is asked for salary and
outstanding credit details, and whether there is a
bankruptcy and/or county court judgments. Because
Alex is keen to start a new life and considers his financial
problems to be in the past, he does not disclose this
2
3
Thanks to data detailing Alex’s previous problems, including CCJs,
possession orders and defaults, he has been prevented from incurring
further commitments until he addresses his existing debts.
The use of the financial data from his credit report not only makes
it easier for lenders to make proper and responsible checks, but also
helps Alex to better understand his own situation, especially when
he reads the information on his report and the guidance from the
credit bureau.
An honest discussion and reality check from the broker about the
importance of providing proper information enables Alex to make
a realistic decision. This will stand him in good stead later in life,
as his debts are a fact of life and he will be required to settle them
at some point. Had he not been forced to face his situation, Alex
would have taken on financial commitments that he could not
realistically afford.
Alex struggles
arrangement with all his creditors to settle his debts out of
his legacy from his grandmother.
Alex also decides to go ahead with the application to
a specialist lender, who will offer him a mortgage despite
his recent problems. This will cost him more than
a mainstream option, but will enable him to purchase
a home.
Alex proceeds with the purchase, and is soon the proud
owner of a flat. As a result of paying down his previous
debts, he has less to put down as a deposit and cannot
afford to take on more credit. As a result, he cannot make
all the improvements to the flat he would have liked, but at
least he is now starting his new life without old debts.
Unfortunately for Alex, the council tax for the previous
flat was also unpaid and passed to a recovery agent, who
has received information on Alex’s current address. They
contact Alex requesting settlement. Alex gets some debt
advice from a free service, and with their help comes to an
4
5
Alex benefited from free debt advice. He was able to provide the
advisor with access to his credit report, which gave them the best
picture of his situation and enabled them to give the most effective
service to Alex and help him sort his situation out.
Alex had not kept proper records of his previous debts. In fact, he did
not even know how much he owed, instead hoping his debts would
go away if he ignored them. Alex will now have to pay a higher price
for his new mortgage, as his track record has shown him to be at
a higher risk of poor financial management. However, now that he
has paid off his debts, he will be able to repair his credit position and
eventually access a better deal.
One year later, times are tight and Alex’s employer reduces
the wages for all staff by 10%. Alex can only just afford to
make repayments on his mortgage.
Sorting out his debt problems was a painful lesson for Alex. However,
receiving good advice helped him get a better grip on his finances.
He has avoided taking on debt that he cannot really afford and,
luckily for him, now that his wages have decreased, he can still afford
his mortgage – just.
Alex is moving on up
Alex cannot make the payments under the mortgage, but
the bank of Mum and Dad steps in to help with a loan.
A couple of months later, Alex gets a new job and a new
partner, who soon moves into the flat and helps Alex with
the bills. Things are looking up.
Alex has had a tough time, but his parents stepped in to help
because they could see how hard he had worked to get himself
sorted out. In fact, had his parents not helped him, his lenders would
also have been able to see – via his credit report – how hard he had
worked to get his finances in order and would have been able to
agree a viable forbearance program.
Alex has avoided getting behind on his mortgage, as he is aware
of the need to make sure he keeps on top of his commitments and
does not further impair his credit report. It is now over 5 years since
his problems with Jo, and his debts were all paid off over a year ago.
When the debts are 6 years old, they will be removed from Alex’s
credit report and he will move on with a clean slate. This is a key
benefit of retaining data.
After 6 months, Alex’s employer goes into liquidation,
leaving him unemployed.
6
7
6 months later, Alex’s new partner, Manjit, offers to take
on a share of the mortgage and provide some cash to pay
back Alex’s Mum and Dad for the loan they made whilst
Alex was out of work.
Now that Alex has shown that the mortgage will be paid
regularly, Alex’s bank suggests that they could offer a new,
cheaper mortgage.
Alex applies to his own bank, but also shops around with Manjit
to get a better deal on the new mortgage.
His bank is able to access behavioural data from the credit bureau
to help assess and manage Alex’s accounts. Seeing that he has his
finances back on track, but does not have a mortgage with them,
they are able to send him targeted and appropriate information
on other services that might be useful to him. This could include
better mortgage offers, enabling Alex to benefit from competition
between lenders.
Behavioural data also allows Alex’s bank to identify early signs of
problems and contact Alex to offer help, and to provide a better
service if difficulties start to occur. Only existing lenders may use
data in this way.
Where there is no existing relationship, lenders cannot use the data
for marketing purposes to “fish” for customers. However, they can
use services designed to screen out borrowers already in difficulty
so as to not tempt them with credit they cannot support.
8
Alex and Manjit find a way
The application is made, and Alex and new partner Manjit
provide the relevant information and give consent for
checks to be carried out.
Manjit’s parents moved abroad, and Manjit was registered
on the electoral register at the hall of residence at university
in Wolverhampton. Manjit’s surname is Singh; as there
were several Manjit Singhs at university, there were regular
problems with post.
In order to confirm which Manjit is the applicant, Manjit
is asked to provide gender, date of birth and previous
address details.
Manjit hasn’t had any past credit, so relies on electoral
register data to show the required residence history.
Manjit previously lived in a shared house, had no credit,
and shared the utility bill with housemates.
9
Many names are gender neutral. As there are only in the region of
140k truly unique names in the UK, it was agreed with the UK’s ICO
in 2000 that the following would be required to uniquely identify
individuals for credit purposes:
• Title
• Forename
• Middle name or initial
• Surname
• Date of birth
• Address
The UK has no ID system, so the Electoral Register is a key resource.
Many consumers, especially the young, do not have traditional credit,
but they do have other services – such as utilities – provided on credit.
These services can provide a picture of financial management, and
also represent an obligation. Therefore, it has been agreed in the UK
that utility data should form part of a credit report.
This new offering will save Alex and Manjit a lot of money
each month; they decide to transfer to the new account.
Thanks to behavioural monitoring by their lenders, they
can now repay the monies owed more cheaply and ensure
they retain a healthy financial profile.
The processing of information available to the lender facilitates an
informed and substantiated decision making process at the outset
and throughout the life of the relationship, which benefits both the
lender and the consumer.
The mortgage is agreed on the basis of available information.
6 months later, Alex and Manjit receive a letter from the
bank suggesting that they could transfer their mortgage
to an offset type account to allow them to over and
underpay as needed. Because Manjit is a consultant, the
bank has established that their salary can fluctuate from
month to month.
10
11
The UK has developed one of the most advanced credit referencing
systems in the world. This has been improved and refined over the
last 15 years through the joint initiatives of industry and regulators,
recognising that it is essential for lenders and borrowers to make
decisions about credit based on complete, accurate and up to date
information.
HM Government has actively encouraged information sharing by
lenders and other creditors via credit reference agencies as a strategy
to avoid consumers and small business owners from becoming overindebted. The privacy of that information is specifically protected
through special provisions in the UK’s data protection legislation.
More broadly, the World Bank also recognises credit reporting as
a key element of successful credit industries and has a programme
to encourage this activity.
This system is now not only the key enabler of access to credit,
and the management thereof, but also a critical part of remote
transactions such as internet trading, an activity in which the UK
is a world leader.
12
How can you get involved?
We are working to create a common voice across the UK financial
services industry to ensure the European Parliament’s proposed
Data Protection Regulation doesn’t create serious unintended
consequences. The UK is particularly vulnerable to these changes
because:
1) t he UK consumer and small business finance market is a large
part of the UK economy;
2) d
ata sharing in the UK is much more extensive than in other
European countries;
3) m
ost UK data sharing occurs via regulated private enterprise
and not via state databases; and
4) consumer access to credit in the UK is heavily dependent
on this information infrastructure.
Please contact your trade association to get involved in this
important issue. If you have any questions, comments,
or if you want further information, please contact Peter Wallwork,
Chief Executive Officer, Credit Services Association.
T: 0191 217 2940 E: [email protected]
A Story about Alex
Set under the new EU Data Protection Regulation as currently drafted
Data protection legislation provides important protections for
consumers and small businesses to prevent the unwarranted
collection, processing and abuse of personal data.
However, there are times when personal data needs to be
available in order to provide important protections for
consumers and small businesses. This is particularly true when
providing and managing financial services where access to
data is key to making responsible decisions about whether to
borrow and lend, and also how to manage existing borrowing
and lending.
In proposing new restrictions designed to prevent abuse in other
sectors, there is a serious danger that information vital to
making balanced and responsible decisions may no longer be
available. This could result in consumers and small businesses
being unable to access credit or, alternatively, getting credit
they cannot support.
Either of these outcomes would have a detrimental effect on
both individuals and the economy as a whole. This booklet is
designed to illustrate that potential impact.
About Alex
Alex is 30 years old, currently single and renting.
Previously, Alex was in a relationship and had joint credit
with Jo, including a mortgage, credit and store cards, and
utilities. When Alex and Jo split up 4 years ago, it took
time to sell their home. Because Jo had moved out into
rented accommodation and was no longer contributing
to the household, they got behind with the mortgage.
They eventually sold their home at a loss because they
were in negative equity. They handed the keys back to the
lender and the property was the subject of a voluntary
possession order.
Alex has outstanding debt from this time, and has
several county court judgments due to the non-payment
of other credit.
1
Alex buys a flat
Alex’s granny recently died and left him a legacy, which is
enough to put down a small deposit. Alex has decided to
buy a flat, as a mortgage should be less than his current
rent and should enable him to save on monthly outgoings.
Alex finds a flat he likes. The estate agent suggests Alex
applies for a mortgage via their broker, who will send an
application for an agreement in principle to a panel of
mortgage lenders. Alex completes the application form as
a first time buyer, and gives consent for a credit check to
take place as part of the process.
The problem: Article 9 prohibits the use of CCJ or administrative
sanctions data – this means these details cannot be shared or used,
despite still being valid and outstanding.
There are circa 4.5 million CCJs outstanding in the UK. Many CCJs
– but not all – overlap with defaults on the credit databases. They
are vital indicators for credit/debt underwriting and remain highly
predictive, even after they are settled. In the UK, CCJs are held on file
for 6 years, after which they are removed, whether they are marked
settled or not.
The application has to be accompanied by evidence,
including 6 months of bank and other statements, salary
information and other material, which takes Alex a while
to gather. After the lender deliberates for three weeks, Alex
is asked to speak to the underwriter.
On the application form, Alex is asked for salary and
outstanding credit details, and whether there is a
bankruptcy and/or county court judgments (CCJ).
Because Alex is keen to start a new life and considers his
financial problems to be in the past, he does not disclose
this information about himself. He also describes himself
as a first time buyer – in his eyes, he is, as he is doing this
alone this time.
The mortgage is not approved because of the outstanding
debts and the possession order. Alex is asked to explain why
he applied as a first time buyer when he has a possession
order and did not disclose his other financial issues. He is
advised to check his credit file.
2
3
The problem: The lender cannot rely on the credit bureau data
because it may not be complete (Article 17 allows erasure), so they
have to ask for significant amounts of other information to cross
check the data.
It is also not permitted to provide a fully automated decision
because of the ban on profiling (Article 20), so a manual
intervention – coupled with the need to examine, check and verify
all the paperwork provided – greatly extends the time it takes for a
decision. It also costs significantly more for the lender to process the
application, so the cost of credit is much greater.
Alex gets frustrated
Alex is worried about losing his new flat. Therefore,
although the credit bureau has provided advice and links to
a free debt advice service, he also searches on the internet
– he has seen adverts that suggest he can get his credit file
“cleaned up” and have information removed.
He pays his chosen company their fee, and they advise him
that he can enact the right to object to the processing of
the personal data about previous debts and then enact the
right to erasure.
4
Alex follows the advice and gets his credit file amended.
He then reapplies for a mortgage with another lender
two weeks later. Alex does nothing about settling the
outstanding debts.
The problem: Alex now has a number of debts that are still valid
and for which he is still liable, but the new lender may not be able to
find out about them if they have been erased (Article 17). Therefore,
lenders will find it harder to make a responsible lending decision.
Instead of directing Alex to address his debts prior to taking on
further obligations, he will be able to take on even more debt.
Lenders will know that Alex has made other applications (from
search records – unless Alex gets those deleted too), but will probably
think he is just shopping around. The situation will be exacerbated
by the fact that Alex is using a broker, who has a vested interest in
getting Alex a mortgage and no responsibility for any subsequent
debts that might arise.
Alex provides some of the information about his previous
finances (the good bits). He gets a mortgage three
weeks later, and sets up the flat with new furniture and
a TV on credit.
5
Unfortunately for Alex, other lenders locate him due to
recent activity on his credit file. The council tax for the
previous flat was unpaid and passed to a recovery agent,
who has received information on Alex’s current address.
They now contact Alex seeking settlement. Alex does not
have the money to pay his old debts, and legal action is
started to recover them.
As automated profiling is now banned (Article 20), lenders will not be
able to easily monitor Alex’s behaviour and identify any signs of problems
and intervene at an early stage to help him get back on track.
Manual intervention in lending decisions also has the potential for
inconsistency and personal bias, as well as taking longer and being
more costly for lenders – costs which are passed on to the consumer. Alex gets lost in the crowd
County court judgments are granted to the creditors and
the recovery agents, and Alex is ordered to pay the sums
due. Alex cannot pay immediately; a payment plan is
agreed, which will result in Alex making payments over
five years. However, as the payments are under the county
court judgments, they are still not visible to other lenders.
One year later, times are tight and Alex’s employer reduces
the wages for all staff by 10%. Alex is really struggling
to meet the payments on his mortgage and breaks the
payment plan. He now has significant debts – he has the
old debts and the new mortgage, as well as the credit on
his new TV.
The problem: The fact that Alex has had data wiped from his report
does not mean the debts have gone away. Creditors will be more
vigilant and possibly aggressive in seeking repayment, especially if
they find out that Alex has taken on even more debt, as they will
want to get their debt prioritised. The county court judgments are
not visible (Article 9), so Alex’s payment plans will not be taken into
account in decisions made by existing or new lenders, unless he
discloses them.
Alex asks his parents for help, but as he does not keep very
good records, he is not sure how much he owes, and his
parents are worried that they might lose any money they
lend him. They reluctantly say they cannot help.
6
7
Alex has been able to take on more and more debt because he has
been able to hide the extent of his commitments. However, this does
not mean he no longer owes the money. He was only just able to
afford the repayments before his wages were cut; now he is really
getting behind on both his mortgage and the credit he took out to
set up his new flat.
Alex thinks that he may be able to afford his mortgage if
the other credit is more avoidable. He has recently met
a new partner, Manjit; if they move in together, Manjit
can contribute to paying bills and then maybe join in the
existing mortgage repayment. Alex and Manjit make a new
application to the existing (expensive) mortgage company,
including an increase in order to settle some of the most
pressing debts. Manjit provides the required information
and gives consent for checks to be carried out.
Manjit’s parents moved abroad and Manjit was registered
on the electoral register at the halls of residence at
university in Wolverhampton. Manjit’s surname is Singh;
as there were several Manjit Singhs at university, there
were regular problems with post.
8
Alex seeks help
Manjit then moved into a shared house with a number of
relatives, and there was another Manjit Singh there too.
Fortunately, the shared utility bill was paid and in order,
but it took a long time for the lender to determine which
Manjit Singh was applying with Alex.
Concerned that there might be fraud, and uncomfortable
with the state of Alex’s finances, the lender is keen to
spread the risk and include Manjit, but not to increase
exposure. The lender eventually agrees to add Manjit, but
not to increase the mortgage.
The problem: Without an ID system in the UK, the Electoral Register
is currently used as a proxy to verify identity and residence. Title helps
to uniquely identify persons and is, in most cases, gender specific.
Non financial data on other agreements can also be used to verify
identity. However, under the new EU Data Protection Regulation, the
use of gender and, therefore, title will be prohibited as it will be defined
as sensitive personal data (Article 9). Therefore, in the UK in particular,
it will be harder to distinguish individuals from one another.
Even without title and gender, other dynamic data might have helped
to process this application. However, the principle of data minimisation
(Article 5) removed the potential for other sources to be used to verify
identity in unusual circumstances.
9
Alex has no alternative but to seek advice on his debts, this
time from a free debt advice service run by a charity. Manjit
is unhappy with how things are proceeding, and has refused
to join in the mortgage, but is still living with Alex.
As Alex’s credit file is incomplete, the debt advice charity
advises him that it is difficult for both them and lenders to
assess his situation and come up with a forbearance plan.
He has not kept very good records, so he cannot help either.
Alex is asked to provide all the papers he has and any
correspondence – it takes a considerable amount of time
to get a good view of his situation. Eventually, he is advised
that there is little option but to declare that he cannot pay
and that he should consider applying for an IVA because
his debts are so high.
Alex loses out
Meanwhile, Alex’s employer goes into liquidation and
Alex loses his job. Manjit cannot cope with the situation
10
and leaves. Alex moves back home to save money and
agrees to sell the flat to clear his debts and, hopefully,
pay off the mortgage. This will eat up all his equity and,
therefore, the legacy.
An incomplete credit file has allowed Alex to access credit, but not
to escape his obligations. Failure to disclose CCJs, removal of data
from his file and the inability of lenders to profile Alex’s behaviour
have all contributed to him getting into a downward spiral.
Alex’s only alternative is to seek to have all or part of his debts
written off. This will not only impact him (and his relationship with
his partner – circa 50% of relationships break down over money –
and his health), but also his employment prospects and his
relationship with his parents.
A couple of months later, the flat is still unsold, and Alex
gets a new job. He speaks to the debt advisor who sorted
out his IVA, and asks for a reassessment in the hope he can
save his flat. The debt advisor says that his debts are still
very high and the IVA has some time to run so it does not
look hopeful. It would be better if he went ahead with the
sale, settled his debts and started again.
11
Alex is now facing years of deprivation, which could have
been avoided if he had settled the first round of debts
instead of spending money on his flat and TV. He cannot
afford to go out and becomes very depressed. His flat is
sold, but as it is a forced sale and the flat is not in very good
condition, he gets less than asking price for it and does not
realise enough to settle all his debts.
The impact of debt on the individual is significant; problem debt
can result in financial, emotional and health problems. This in turn
can lead to wider impacts on others and the economy as a whole.
Had Alex realised that he would have to deal with his debts and
that removing them from his credit file did not mean he did not have
to pay them, this story might have had a very different outcome.
The impact of some of the current proposals in the Data Protection
Regulation will have a deep and long lasting impact on the credit
and financial services market in the EU, but more particularly in the
UK. Scoring, searches, verification and monitoring of agreements
will become more complex. Businesses will find it harder to make
decisions on consumers (and small businesses) and their ability
to repay credit. Consumers (and small businesses) will suffer from
restricted lending and potentially higher interest rates to cover
increased risk, and the financial services market will stagnate from
lack of monetary flow.
12
The UK has developed one of the most advanced credit referencing
systems in the world. This has been improved and refined over the
last 15 years through the joint initiatives of industry and regulators,
recognising that it is essential for lenders and borrowers to make
decisions about credit based on complete, accurate and up to
date information.
HM Government has actively encouraged information sharing by
lenders and other creditors via credit reference agencies as a strategy
to avoid consumers and small business owners from becoming overindebted. The privacy of that information is specifically protected
through special provisions in the UK’s data protection legislation.
More broadly, the World Bank also recognises credit reporting as
a key element of successful credit industries and has a programme
to encourage this activity.
This system is now not only the key enabler of access to credit,
and the management thereof, but also a critical part of remote
transactions such as internet trading, an activity in which the UK
is a world leader.
How can you help Alex?
Join forces with other concerned parties in consumer finance to
ensure we don’t rush into EU legislation that specifically harms both
the UK economy and the UK consumer.
Please contact your trade association to get involved in this
important issue. If you have any questions, comments,
or if you want further information, please contact Peter Wallwork,
Chief Executive Officer, Credit Services Association.
T: 0191 217 2940 E: [email protected]
Background
The EU has been discussing a new Data Protection Regulation to replace the existing
Data Protection Directive. The UK Data Protection Act is based on the EU Directive.
An EU Regulation replaces current national laws – with no latitude for national
changes – with a common, EU-wide law.
Three committees are involved in the development of this Regulation in Brussels;
large numbers of proposals and counter proposals have been considered. The lead
committee is the Civil Liberties, Justice and Home Affairs Committee (LIBE) – they
put forward their proposals on 21 October 2013. Their stated objective is to facilitate
companies operating across EU countries and enhance citizens’ rights. However,
the text has been heavily influenced by privacy concerns and contains proposals
which will significantly impact consumers and small businesses in the UK and their
ability to access and use financial services.
In accordance with EU parliamentary process, further talks on the matter will
commence when EU countries establish their negotiating position. EU Parliament’s
intention is to reach an agreement before the May 2014 European elections.
If rushed into and enacted in their current state, the new rules could significantly
and adversely change the UK consumer finance market in ways that go against the
current regulatory themes of responsible lending based on knowing your customer.
Lower income families and consumers seeking small sums are likely to be most
negatively affected. The UK economy will also be negatively affected.
Enclosed is a case study illustrating the potential real world unintended negative
impacts on a typical UK consumer if these new EU data protection rules are enacted
in their present form.
Key issues that affect the consumer include:
Relevant article Practical Implication
Consumer Consequence
5
Minimises the data available
for decision making
Lending decisions would be based on incomplete
information, leading to inappropriate lending
solutions being offered to consumers
9
Prevents the use of gender
as an identifier
Consumers with gender neutral names would
be indistinguishable from one another, leading
to incorrect identification of individuals
9
Prevents the use of administrative
judgement, sanction or CCJ data
Consumers would be at risk of becoming
financially overextended, due to lending offerings
being inconsistent with their true financial
position and capacity
17
Allows for erasure of data
at the choice of the citizen
Lenders would be prevented from making a
responsible lending decision due to missing data
19
Allows a consumer to object to
processing without justification
when using legitimate interests as
a basis for consent
Significant information relating to consumer
circumstances could be lost or blocked, resulting
in reduced or inappropriate credit granting
20
Requires human intervention
in automated or scoring
decision making
Requirement for manual review of applications
by the lender would increase costs, which would
be passed on to the consumer in the form of fees
and increased borrowing costs
MISSING
Sufficient exclusions in the legislation
to allow regulators and companies
to implement appropriate practices
on data access and sharing for
credit and risk
The FCA and consumer credit directive
mandates on responsible lending will be
inhibited by gaps and limitations on key
information on consumer circumstances