The Government’s decision to make comprehensive credit reporting compulsory for large financial institutions may not be the win for consumers that the Treasurer Scott Morrison claims it will be, with plenty of evidence to suggest that this change is by no means all good news for borrowers.
Morrison announced last week that the Government would legislate for mandatory comprehensive credit reporting to come into effect by July 1, next year. He says giving lenders access to more information about consumers will encourage competition and bring down the price of credit for customers with good credit histories.
However, the system the Treasurer calls a “game changer” has a history of poor outcomes, including credit reports full or errors, higher household debt levels and an increase in predatory lending practices.
Australia’s credit reporting system changed in 2014, when we switched from so-called “negative” reporting to comprehensive. The new system operates on a voluntary basis and to date it is not widely used.
Under the old system, credit providers reported negative data, such as defaults or bankruptcies. Under the new system they can report a wider range of data, which widens coverage to a bigger group.
Negative reports could include the following: payment on a credit contract is at least 60 days overdue; a cheque for $100 or more has been dishonoured twice; a bankruptcy order has been made against the individual; a credit provider considers that the individual has committed “a serious credit infringement”; and details of recent credit inquiries by the consumer.
Since the introduction of the comprehensive scheme, credit providers have been able to add the following additional information to credit files: the date a credit account was opened; the type of credit account opened; the date a credit account was closed; the current limit of each open credit account; and repayment performance history.
All this data is provided to credit bureaus, Equifax, Experian and illion (formerly Dun & Bradstreet), and can be used as a reference by banks and other financial institutions when a consumer applies for credit.
In a report on the use of public and private sector data released last year, the Productivity Commission recommended that the Government should make the comprehensive credit reporting system mandatory if it did not reach “critical mass”.
It recommended that the Government adopt a minimum target for voluntary participation of 40 per cent of accounts by June this year. The Government accepted this recommendation, pushing the target date out to the end of 2017.
In the statement he issued last week the Treasurer said the participation figure was currently less than 1 per cent and it was clear the target would not be met.
The four major banks will be the first to face mandated reporting. They will be required to have 50 per cent of their credit data ready for reporting by July next year, increasing to 100 per cent a year later.
The Treasurer said the Government would allow smaller financial institutions some “flexibility” and it is not yet clear whether they will be covered by the mandatory reporting rule.
The Government sees several benefits in this move. It should create an environment in which consumers with good credit histories can get better deals on credit products. It will give small credit providers more data, allowing them to be more competitive.
And it will improve the capacity of all lenders to meet their responsible lending obligations.
The Productivity Commission is a fan of comprehensive credit reporting, saying that addressing the “information asymmetry” between lenders and borrowers leads to better credit decisions.
“The case for CCR rests on the public interest that is likely to be served if the system is more complete, enabling both more accurate rating of a consumer’s credit status and more efficient allocation of resource,” its report said.
So what’s not to like? There are a few things:
A mixed bag for consumers. Comprehensive credit reporting in New Zealand, which was introduced two years earlier than Australia, has been a mixed bag for consumers. More people succeed in their credit applications when dealing with a financial institution for the first time but a very high proportion of people having late payments recorded on their credit files.
Equifax reported on the progress of the New Zealand system last year. It said a significant change under CCR in New Zealand was that it was easier for consumers to change financial institutions. Historically, if a consumer was “new to bank” a credit application would be approved in 40 per cent to 50 per cent of cases. Under CCR, the approval rate for new to bank customers was closer to 50 per cent to 65 per cent now.
This is because in many cases the consumer might not have a borrowing history for the credit provider to refer to, but under CCR the credit provider could look at how they met obligations such as paying telco bills on time.
Equifax said this change had occurred without any observable change in risk profiles.
On the downside, about 30 per cent of Equifax’s credit reports showed a late payment. In the majority of cases the consumer is only one payment in arrears, which would not necessarily rule out credit approval.
Equifax conceded that with one in three reports showing payment arrears the message about comprehensive credit reporting had not got through to a lot of people.
Credit reports are full or errors. In 2015, both the Credit & Investments Ombudsman and the Office of the Australian Information Commissioner reported big increases in the number of consumers making complaints about errors in their credit reports.
As awareness of credit reporting has grown, more consumers have requested copies of their credit files and they have not been happy with what they have found. The CIO said complaints about incorrect credit filings ranked as one of its biggest issues.
When the Government amended the Privacy Act to allow credit bureaus to collect and disseminate comprehensive data it also imposed stricter requirements for data accuracy.
The industry is taking its time getting it right. The Financial Ombudsman Service reported that as a result of complaints it received during 2016/17 more than 2500 credit listings were amended or removed. FOS said the problem of errors in credit listings was a “systemic issue” and one of its “key focus areas”.
It won’t get you a cheaper loan rate. The marketplace lenders that have pushed hard to get access to more of the big banks’ customer data offer some very competitive personal loan rates (which is the bulk of their business). But a quick check of any comparison site will show that any number of credit unions and mutual banks offer personal loans rates that are as cheap or cheaper than what the fintechs are offering. Comprehensive credit reporting is unlikely to change the competitive landscape as much as its advocates claim.
It may encourage predatory lending. A long-standing criticism of comprehensive credit reporting is that it may result in vulnerable consumers being targeted by lenders whose business model involves offsetting the high risk of delinquency by charging high fees and rates.
In 2006, consumer advocate Carolyn Bond, said: “I don’t have any argument with the research that shows more information could improve risk assessment. Lenders could lend more responsibly but they could, instead, target a segment of the market where defaults are high because the price of the credit is also high.
“One thing we all agree on is that access to more information will increase the overall level of consumer debt. Some of this would be responsible lending but I suggest that we would see a significant increase in irresponsible lending as well.”
ANZ took up this theme in a submission to an Australian Law Reform Commission inquiry into credit reporting in 2008. It said: “The development and significant growth of the sub-prime mortgage market in the United States can, in part, be attributed to comprehensive credit reporting.
“While this has afforded access to home ownership to a greater number of people, it has also exposed consumers to the declining housing market. While delinquencies have risen for all mortgage categories in the US, the strongest growth has been in the sub-prime market.
“Positive [comprehensive] credit reporting may lead to the increased availability of lending to previously excluded borrowers at higher interest rates than mainstream borrowers, who may experience a higher default rate.”
Those concerns about comprehensive credit reporting have not gone away.
Following the Treasurer’s announcement last week, the Consumer Action Law Centre issued a media release, saying: “We may see an influx of expensive priced-for-risk products, like credit cards charging up to 50 per cent, for those deemed not to be good payers. These sort of toxic products exist in other countries like the USA and the UK.”