What are the legal and compliance requirements of business credit checks?

Conducting business credit checks is a common practice among companies seeking to understand the financial health and creditworthiness of their business partners, suppliers, or customers. 

However, navigating the legal and compliance requirements of business credit checks is crucial to ensure that these inquiries are conducted ethically and legally. Here, we aim to shed light on the essential legal frameworks and compliance requirements businesses must adhere to when performing business credit checks.

The legal framework

Firstly, let’s take a brief look at the legal framework surrounding the requirements for business credit checks. 

The Data Protection Act 2018 and UK GDPR

The Data Protection Act 2018 (DPA 2018) and the UK General Data Protection Regulation (UK GDPR) are at the heart of business credit checks in the UK. These regulations set the standards for processing personal data, including information obtained during credit checks. 

Businesses must ensure that their credit checking activities are conducted in a manner that is fair, and transparent, and respects the privacy rights of the individuals involved. So, if you need to conduct a business credit check, you need to ensure that you are following these regulations. For example: 

  • Businesses need to engage with credit reference agencies (CRAs) in how they intend to share their credit information to be able to inform customers as to how their personal data will be used and stored.

 

  • The information obtained from a business credit check needs to be held and dealt with lawfully and fairly. 

 

  • CRAs use this type of information to conduct credit reporting, which allows them to see if businesses keep on top of their debt repayments. 

 

  • CRAs also use this information to conduct affordability checks to understand whether or not a business can afford the loan applied for. 

Credit Reference Agency Information Notice

The Credit Reference Agency Information Notice (CRAIN) is an important document in the realm of credit reporting and data protection, particularly in the United Kingdom. This notice serves as a detailed guide, outlining how CRAs collect, share, and use personal data. Given the sensitivity of personal financial information and its impact on consumers' lives, the introduction of CRAIN is a significant step toward transparency and data protection.

CRAIN is designed to ensure that individuals understand the specifics of what information CRAs collect about them, why this information is collected, and how it is used. This includes details on how long data is kept and who it may be shared with, such as lenders, utility companies, and landlords. 

The notice is part of the broader compliance efforts under the UK's Data Protection Act 2018 and the General Data Protection Regulation (GDPR), aiming to protect consumers' privacy and rights in the digital age.

One of the key aspects of CRAIN is its emphasis on the rights of individuals concerning their personal data. It informs consumers about their rights to access the data held about them by CRAs, request corrections to inaccurate information, and under certain conditions, object to the processing of their data or ask for it to be deleted. Furthermore, CRAIN provides guidance on how individuals can exercise these rights, making the process more transparent and accessible.

CRAIN also plays a crucial role in maintaining the integrity of the credit reporting system. By standardising the information that CRAs must provide to individuals, it helps ensure that all parties are aware of their responsibilities and the rights of consumers. This contributes to a more fair and equitable financial ecosystem, where lending decisions are made based on accurate and up-to-date information.

Data protection law requires that CRAs conduct their business credit checks on a ‘lawful basis’. This means that there needs to be a reason for CRAs to conduct this research, for example: 

 

  • Is the processing necessary to pursue the legitimate interests of the CRAs and third parties? 

 

  • Is the processing necessary to comply with a legal obligation binding on the CRAs?

 

The way CRAs handle personal data is carefully controlled by a comprehensive set of protective measures. These measures are in place to ensure that individuals' rights are safeguarded. 

Compliance obligations

Now that you know a little more about the laws and regulations surrounding business credit checks, let’s take a look at other ways in which to appropriately conduct business credit checks. 

Obtaining consent

One of the key compliance requirements under the UK GDPR is obtaining explicit consent from individuals before conducting a credit check that involves personal data. 

Businesses must inform the individual about the specific purpose of the check and how their data will be used. This is particularly relevant when conducting checks on sole traders or partnerships, where personal and business credit information may be intertwined.

Purpose limitation

As we mentioned earlier, businesses should only use the credit information obtained for the specific purpose stated at the time of consent. Using this information for an unrelated purpose without obtaining additional consent could lead to compliance issues and legal challenges.

Accuracy and accountability

The UK GDPR requires that data processed needs to be accurate and, where necessary, kept up to date. Businesses must take reasonable steps to ensure the accuracy of any credit information they use or report. 

Additionally, businesses have a responsibility to correct any inaccuracies identified in the credit information they have processed.

Transparency

Transparency is a cornerstone of the UK GDPR. Businesses must provide clear and accessible information about their credit check practices. This includes informing individuals about their rights regarding their data, such as the right to access, correct, or erase their data.

Security measures

Ensuring the security of personal data used in credit checks is a critical compliance requirement. 

Businesses must implement appropriate technical and organisational measures to protect data against unauthorised or unlawful processing and against accidental loss, destruction, or damage.  For example, through data classification, strict access controls, security awareness training and through general cloud security. 

Best practices

So, we’ve seen that navigating the legal and compliance landscape of business credit checks in the UK requires a thorough understanding of relevant laws and regulations, particularly the Data Protection Act 2018 and the UK GDPR. 

Now, let’s take a look at some best practices that we recommend at Creditserve. By following these tips, you will be sure to conduct business credit checks lawfully and efficiently, and so will your team. 

 

  • Conduct regular audits: Regularly review your credit check processes and policies to ensure compliance with legal and regulatory changes.

 

  • Educate your team: Make sure your team is aware of the legal and compliance requirements related to business credit checks.

 

  • Seek consent appropriately: Develop clear consent forms and processes that comply with GDPR requirements.

 

  • Maintain records: Keep detailed records of consent, credit check reports, and any actions taken based on those reports to demonstrate compliance if questioned.

 

By adhering to these legal frameworks and embracing best practices for data protection and privacy, businesses can conduct business credit checks responsibly and ethically, fostering trust and transparency in their professional relationships. 


For more information on conducting business credit checks, contact our reliable team of experts at Creditserve today on 01992 414222.