Making decisions from past financial records

Keith Spiller – The Open University

As the financial problems in the Euro zone rein on, I am drawn back to a dispute I read about in December 2014 when I was completing some work on credit scoring in the UK. This dispute also revolved around credit and the likelihood of payments. In this case, Bev Oates was calling for an investigation into the affairs of UK Credit Referencing Agencies. Oates had been involved in a commercial dispute and had discovered the law firm representing those he was in dispute with, as well as private detectives acting on their behalf, had accessed his financially sensitive credit files held by the agencies. In Oates’s case, the law firm and private detectives claimed they wished to establish who Oates was and where he lived and also to confirm if he had the financial capability to pay his legal costs should he lose the case.  All of this was done without his permission. Under UK regulations Oates should have been notified when the searches were taking place, as his permission was needed each time a search was made.

Indeed, guiding the behaviours and practices of UK credit rating agencies is the Consumer Credit Act (1974) which requires those businesses dealing with credit to be licenced by the Office of Fair Trading (OFT). If the OFT deem, for example, a business to be ‘deceitful or oppressive or otherwise unfair or improper’ then trading licenses are suspended or revoked. A main duty of the OFT is the prevention of ‘irresponsible’ lending where credit is grated to those who can clearly not repay the loans. In addition, the Data Protection Act (1988) states that information and privacy of individuals must be upheld and that data is stored and used in a responsible manner. These legislative powers should safeguard financial decision-making and the management of data in the UK. Oates only discovered that searches had been made on his file when he applied to view the information the agency held on him. The Oates case at the time of writing has not been resolved and is still pending, whereas recent developments in Greece are very much present and require a speedy solution. Nevertheless, for me at least, these examples poses some interesting questions – namely, how checks against financial risk are performed, how secure is financial information and what, if any, are the likely regulatory repercussions triggered by the unfair or improper appraisal of financial information.

Credit reference agencies draw parallels here with the situation in Greece, as they are designed to balance, as Leyson and Thrift (1996) suggest, the ‘information asymmetry’ - the fact that there are two conflicting interests in any loan situation. The lender wants to protect their assets and the customer wants to gain access to those assets. Credit Reference Agencies compile and check information on individuals against databases such as, electoral rolls, court records and fraud data. They also check, the amount of credit already accumulated; late payment history; percentage of total credit in use; holding a mortgage account; the age of the applicant; their employment history; length of time at an address all help to reduce risk levels and effect the success of the application. From this information the agencies then calculate through the use of automated statistical and data-mining techniques the likelihood of repayment. Lenders use the information to inform their decisions; however they are keen to stress that lending decisions are not made solely on the credit scores provided by agencies; factors such as, the type of loan sought, the reason for the loan and the likely profitability of the loan are all influential.

Traditionally (or certainly in the a pre-digital era) the customer has greater knowledge of their capabilities to repay and the lenders reviewed this capability through face-to-face interviews or through personal knowledge, such as a bank manager experiences with the person or an examination of the customer’s account with the lending organisation – this of course can be flawed by personal bias. However with the increasing reliance on digitized records in the financial industry personal knowledge is weakened due to the practice of outsourcing of information and it collection – hence, readjustment of the symmetry and the increasing importance of systems such as credit scoring or credit history. Yet what does seem to prevail here is ‘social sorting’ as Lyon has called it - a distinctive feature of the surveillance society. The agency sorts the credit applicant ‘out’ and highlights their capability of repayment through precise and calculated decisions making; something that may have been overlooked in the Greece case. What difference would a credit reference agency have made for Greece? Probably very little; but for Oates his information was allegedly used with different motives in mind.

Two issues lurk in the cases of Oates and Greece; firstly prudent lenders should seek assurances in alleviating risk. However a legal firm assessing the likelihood of payments for their services is less certain. The asymmetry between winning and paying for legal costs is not something I am familiar with, but I would be surprised if Credit Agencies offer such services. Secondly, how is sensitive information managed; who has access to it and are individuals notified when requests for their information are made.  A consideration here is the lack of awareness Oates had on the compromises made to his information. Seven million credit applicants are rejected per year in the UK and I do wonder how many of these people know who is looking at their information and why? Moreover, did Greece know was looking at their financial records as they prepared for membership to the EU or the introduction of the Euro? Maybe the case of Oates will prompt something, or maybe the past loans made by the European Central Bank will transform the political and economic landscapes (as I am sure some moves will be voiced toward a more transparent system), but what I will keep a watchful eye on is whether Oates and Greece stimulate more probing questions about the management and decisions made regarding financial information.