The Centre for Strategy & Evaluation Services (CSES), a UK-based consultancy, has issued its Report on the Study on Market Practices and Policies on SME Rating.  The study was carried out for the European Commission’s Directorate-General for Enterprise and Industry (DG ENTR), in order to provide the European Commission recommendations on possible measures related to SME rating and scoring with a view to improving SME access to finance.

The central subject analysed in the report is the implementation of Aricle 431(4)  of the EU Capital Requirements Regulation (CRR), which requires banks, if requested, to explain their ratings to SMEs and other corporate applicants for loans, providing an explanation in writing, when asked.

The Report indicates that clear benefits would derive for SMEs from obtaining such feedback: about half of SME respondents to the survey found the feedback received by banks useful as regards obtaining future funding.

The Report provides 16 recommendations to the European Commission, Member States and the market (including credit referencing agencies, banks, and industry associations). The following recommendations are particularly relevant for ACCIS members, since they directly concern the credit referencing industry:

  • Recommendation 3: Given that so many applying for finance are small enterprises that might not be trading as enterprises, but as private persons […], it is recommended that, as is the case in Germany, the provision of CRR 431 (1) be extended to natural persons (who are usual credit scored), so that they can benefit from increased transparency as well.
  • Recommendation 4: The research findings suggest that it will be neither practical, nor particularly relevant to design a standardised rating system that will be accepted by banks and approved by the relevant regulators.
  • Recommendation 7: Some Member States have supported the development of institutions such as Central Credit Registers, Credit Mediators, or Credit Review bodies. It is strongly recommended that where such institutions do not exist serious consideration be given to their establishment and to ensure that they cover micro credit applications as well as large sums.
  • Recommendation 8: Some Member States publicise how credit referencing data is used in lending decisions and encourage enterprises to learn what their scores are and improve them. Such an open approach can be very helpful and is recommended. Member State authorities should encourage commercial and public credit referencing agencies to help their customers check the accuracy of data held about them.
  • Recommendation 9: Member States should encourage SMEs to check the data held on them by credit rating agencies before making an application for credit facilities. In some cases, credit rating agencies make a material charge to SMEs if they want to get information to check. If a fee is charged by an agency to provide data to check it should be minimal.
  • Recommendation 13: Industry and financial industry associations should work with their members to develop a standard minimum content communication document for SMEs that have been declined finance (see recommendation 2 above for banks).
  • Recommendation 14: Where banks used external data to make a lending decision, it should be made clear in the feedback provided under CRR 431 (4). The name of the relevant agency, or agencies, should be provided together with contact details so that the enterprise in question can approach the agency to check the accuracy of data held. There should be standards for such agencies’ responses to enquiries to ensure that they are comprehensible to those making enquiries. Fees, where in question, should be very modest. If it emerges that a bank declined credit based on inaccurate information held by the agency, the agency should compensate the party in question.
  • Recommendation 15: Where a number of credit referencing agencies operate in a Member State, they should agree a means of cross checking data that is held about a particular company. It would be inappropriate to ask a company to check data on multiple agencies and to pay for that. Such a system could be developed under the auspices of the relevant industry body.
  • Recommendation 16: Some approaches to transparency and comparability in ratings such as that of the nationally integrated Initiativ Finanzstandort Deutschland outlined in the report might work in other Member States. National industry associations should consider whether such an approach would be useful and could work in their countries.

Next Steps:

  • The European Commission is planning to organise a roundtable in the course of 2014, in order to present the Report and discuss its recommendations with stakeholders, as part of its effort to “reanimate the dialogue between bans and SMEs”.

Courtesy:  ACCIS (Association of Consumer Credit Information Suppliers)