Banks admit sending coded signals in credit references

Britain's high street banks are misleading customers by giving them coded credit references that contain hidden messages designed for easy interpretation by other lenders.

The British Bankers Association (BBA) has admitted that leading banks are using a standard series of statements about credit ratings designed to give key signals to other lenders without upsetting their customers.

As a result, many of the statements appear to be good references when they are actually a warning not to lend a particular customer money. The banks use six different statements but, while all appear to be positive references, they actually have very different meanings.

The top rating is "undoubted", though this is very rarely applied; only the Queen and super-wealthy clients are likely to get this reference.

Below this, "considered good for your figures" is the reference given to most customers who are known to the bank, have consistent spending patterns and are reliable with regular incomes, or have a healthy credit rating or balance.

The third rating is "should prove good for your figures". While this sounds positive, it is actually a warning and will be taken as a fail by many lenders considering applications for credit.

At the next step down, the banks use "although funds are fairly fully committed he would not enter in to an agreement he couldn't fulfil". This is a direct warning not to lend money to the customer in question, even though it sounds innocuous.

Statement number five sounds equally innocent: "Although funds are fairly fully over committed he would not enter into an agreement he couldn't fulfil". This is the same warning as applies at level four, but with the word "over" added to show that the customer is considered an even worse risk.

The lowest reference possible is "capital resources fully employed", which is another warning not to lend.

Bank insiders say the code has been adopted because of a drive for more openness with customers. In 1994, the banks bowed to pressure to give customers more information about credit references, amid rising concern about freedom of information and data protection issues.

Lenders agreed that references would not be supplied without the customer's written consent and that any reference would be on a standard bank form recognised by all clearing banks. As customers are now entitled to demand a copy of their references, the current code has been drawn up to avoid alienating borrowers.

"There are a number of standard responses that are used by banks as customer references," confirmed Brian Capon of the BBA.

"These references are just an opinion and are not meant to be definitive - there are more sophisticated ways to get a reference more accurately than this, such as credit reference agencies."

Capon said that the top-level rating - "undoubted" - was almost never used because the banks did not have a full picture of customers' other financial commitments.

"These standards are not so much a pass or a fail," he said. "I would refer to it as more akin to a set of traffic lights: red was a warning, green for go and amber sort of in between."

However, consumer groups said the references were dishonest. "It seems fairly incredible that the banks could not come up with a better solution than deceiving customers in this way," said Paul Witts, a credit expert with the campaigning group Scamsdirect.co.uk.

"Surely honesty is something we could hope to expect from our banks - after all, they expect honesty from us," Witts said. "And how much trouble are they causing people who are trying to cope with their finances not knowing what their real position is?"