The UK has a relatively advanced credit information market, comparing favourably to many other countries both in terms of the depth and coverage of credit information, according to the FCA Credit Information Market Study. Credit information is vital to the SME finance market and has an important role in the process of credit assessment and availability of finance.

This is achieved by improving the availability of SME credit data to commercial lending providers, thereby leading to greater availability of credit for SMEs.  Under the Commercial Credit Data Sharing Regulations, nine designated banks are mandated to share relevant data on their SME customers with four designated Credit Reference Agencies (CRAs).

These banks and CRAs represented most of their respective markets at the time of designation. The CRAs must provide access to that data for alternative credit providers upon request, provided they commit to sharing their own data with the designated CRA within 12 months. In each case, the obligation is dependent on the SME customer having agreed to the provision of data.

The data provided by CRAs is a valuable tool for lenders because:

• It improves lenders’ ability to verify the identity a customer, mitigates against fraud, and supports anti-money laundering activities.
• It enables lenders to assess credit risk and affordability thereby helping lenders to assess an applicant’s risk of default and price for the risk.
• It helps to ensure the finance offered is affordable, so helping customers avoid over-indebtedness.
• It reduces the data advantage of individual lenders, particularly those that provide business current accounts. Without shared credit information, a lender would hold information about the financial standing of its own customers only, giving firms with a large market share of business current accounts a competitive advantage.
• It helps to improve the management of debt, as arrears and failures to pay are recorded and made available to other credit information users.

The Small and Medium Sized Business (Credit Information) Regulations 2015 has the policy objective of increasing competition in the SME credit market by lowering the barriers to entry for alternative credit providers. Has that objective been achieved?

Bank of England data points to just under 40 per cent of gross lending being provided by challenger and specialist banks. In 2022, this had risen to 55 per cent which suggests a material change in the market.

Commercial finance providers see CCDS as an important data source that supports a range of commercial credit decisions, including trade credit. Dun and Bradstreet, one of the designated CRAs has published a paper that discusses the effectiveness of the scheme from their perspective and suggests changes that could be made to increase effectiveness now the regulations are eight years old.

Their report is available here.