Context
A blog by Alison Walters, Director of consumer finance, explains how the FCA is using credit-file data and innovative analytics to track consumer journeys and more effectively understand financial distress. The FCA’s goal is evidence-based, targeted regulation that achieves good outcomes for consumers and this blog explains one way it has been doing that, in a proof-of-concept undertaken by the team of Isabela Barra, Daniel Bogiatzis-Gibbons, Lawrence Charles, and Wenjin Li (detailed results in the Technical Annex (PDF)).
Key points to note and next actions
The FCA draws on credit file information from a major Credit Reference Agency (CRA), applying advanced statistical methods to draw new insights about which consumers are likely to fall into distress on their credit products and when, which enables the FCA to spot patterns that reveal emerging or disproportionate harm, sharpen focus on affordability and vulnerability, and get ahead of risks with earlier, more targeted supervision and timely engagement with firms.
The FCA is looking at whole credit journeys, not snapshots. New datasets and uses of existing ones are driving analysis improvements. Traditional credit indicators include delinquency rates, credit scores, and payment histories which tend to flag problems that have already happened.
This new approach tracks how people move between different states of financial stability, emerging stress, and acute distress. By spotting those common patterns in consumers’ credit journeys early, it helps prioritise groups of people and firms where financial stress is emerging. The FCA assigns each person to one of 5 segments:
- Distress (about 5% of users).
- At Risk (about 5% of users)
- Secured Credit Users (about 1 in 3 users)
- Unsecured Credit Users (about 1 in 5 users)
- Low Credit Engagement (about 1 in 3 users)
Building on this work, the FCA will monitor how consumer journeys in credit develop over time. It will help understand how people are accessing credit products and can proactively identify potential risks, allowing the FCA to target supervision more effectively.