BIIA members may be interested in efforts of the Bank of England to improve the quality of the credit scores and limits provided by CRAs to trade creditors. The recommendation centers on the use of credit data / scores from CRAs, data from the public information sector, information shared by trade creditors (trade data) and relevant data from banks.
The Bank of England recently released a report on the subject. The report is not only relevant for the UK, but can serve as a role model for other credit markets. Please note the summary information, but we strongly urge members to read the entire report (click on the link at the end of this post), especially note the conclusions on industry response and next steps:
Bank of England Report on Enhancing the Use of Commercial Credit Data by Trade Creditors. Key points summary:
- As part of the Bank of England’s work in support of the Financial Policy Committee’s (FPC) medium-term priority to consider ways to improve the diversity and robustness of market-based finance, the Bank has been exploring whether or not access to commercial credit data could be widened to support the provision of trade credit.
- Under current information sharing arrangements, the credit scores and limits recommended by Credit Reference Agencies (CRAs) to trade creditors are based primarily on publicly available information and information shared by other trade creditors. In the past, these credit scores and limits have not included relevant data from banks and other financial intermediaries. Increased sharing of credit data would likely improve the quality of the credit scores and limits provided by CRAs to trade creditors.
- Following discussions between the Bank and the Steering Committee on Reciprocity (SCOR), the industry committee that oversees reciprocal data sharing protocols, two CRAs (Equifax and Experian) undertook a study to investigate the impact on credit scores and credit limits of including commercial credit data provided by banks and other financial intermediaries in the credit scoring algorithms used by the CRAs. The study demonstrated a marked improvement in the accuracy of the algorithms used to produce credit scores when the fuller dataset was used. This would, in turn, lead to improved allocative efficiency in trade credit and may have a beneficial impact on the pricing and other terms upon which trade credit is provided.
- The study also indicated a potential increase in aggregate trade credit limits of £2.4bn across the entire business population. The inclusion of this additional data was consistent with higher credit scores for over 50% of businesses in the sample, while only 8% of firms would have experienced a decline in their credit scores. The overall increase in credit scores arises because most of the additional credit data are largely positive (e.g. affirming payments taking place) rather than negative (e.g. arrears). In addition, around 50,000 mostly small firms would receive a recommended trade credit limit for the first time.
- Given the results of the study, SCOR decided to amend its rules to enable these benefits to flow. To obtain access to these enhanced credit scores, trade creditors will need to share their own credit data through the CRAs and have the permission of the borrower to access its credit score from the CRAs.
The full report can be downloaded from the Bank of England’s website