Comprehensive credit reporting (CCR) – Recent developments

Credit reporting in Australia has traditionally involved the listing of ‘negative’ information about an individual (defaults, bankruptcies, court judgements), as well as a record of credit enquiries that the credit reporting body (or ‘bureau’) has received about an application for credit made by the individual.

This negative credit reporting system in Australia has been around for over 50 years. It started in 1967 with the formation of the joint venture Credit Reference Association of Australia (CRAA) by a group of retailers who provided credit and decided to pool information.

 This 50-year-old negative credit reporting system is well past its use by date. Negative-only credit reporting information provides few benefits for either industry or consumers. It has the effect of creating an information asymmetry, which for lenders will mean greater reliance on manual assessments and account statements to verify the veracity of the information in an individual’s credit application. In turn, this has led to higher lending costs.

 A negative-only credit reporting system has also put Australia behind most developed economies, with countries including the United States, the United Kingdom, South Africa having well-developed comprehensive credit reporting (CCR) systems.

Recognising this, in 2014, the Privacy Act was amended, expanding credit reporting to new ‘positive’ data sets: information about current credit accounts (including the name of the credit provider, the open and close date for the accounts, the credit limit, the type of account and the terms and conditions for the account), and repayment history for those accounts.

These positive data sets are referred to as comprehensive credit reporting (CCR)[1].

The use of CCR enables credit providers to better understand the risks of lending to any applicant. Once the bulk of lenders utilise CCR data exchange, a credit report should provide a rich source of information to accurately assess an individual’s creditworthiness and capacity to repay additional credit. In that way, under CCR it has been demonstrated that lenders can maintain current approval rates while reducing losses.

 CCR will also support a fairer lending system for consumers. With CCR data, a consumer is more easily able to demonstrate a good credit record, which is important for those with a prior default which stays on the system for five years. For consumers with either little or no current credit history on file, it also helps them to build or develop a credit record[2]. Further, under CCR, overall access to credit is improved - which is recognised as an important driver of economic growth.

 One of the barriers faced by new lenders is also reduced - because they don't have any customer history the riskiest customers tend to flock to them. If that new lender were able to access CCR data, this should mitigate or even avoid this risk. This promotes greater competition within the lending sector.  

 Both the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC) have been open in their support of CCR data. In expressing this support, it has been made clear that CCR places credit providers in a better position to fulfil their obligations to lend responsibly

 Even with the green light given to CCR in Australia, there has been very slow uptake of CCR data. Initially, it was considered industry could move towards CCR utilising its own set of industry rules for data exchange. The Australian Retail Credit Association developed the ‘Principles of Reciprocity and Data Exchange’ (PRDE) which were authorised by the Australian Competition and Consumer Commission (ACCC) in December 2015. These industry-developed rules sought to implement a CCR exchange utilising the principles of reciprocity (“you only get what you give”), consistency, transparency, and enforceability.

While the application made to the ACCC reflected that the PRDE had the strong support of industry, following authorisation, only a small number of credit providers have signed up to begin CCR data contribution.

Coinciding with these developments, in 2016 the Productivity Commission undertook an inquiry into Data Availability and Use in Australia. This inquiry highlighted the benefits of CCR data exchange, but also raised concerns with the slow embrace of CCR by the wider credit provider community.

The Federal Government responded with a warning to industry that if it failed to voluntarily move toward CCR, Government would step in and mandate participation. In November 2017, not satisfied that industry had heeded its warning, the Government confirmed its intent to legislate. Draft mandatory CCR legislation was tabled in Parliament in March 2018.

With this legislation likely to be enacted in May 2018, and coming into effect by 1 July 2018, Australia will finally have a functioning CCR system.

At this stage, the legislation will apply only to the major four banks (Westpac, ANZ, Commonwealth Bank and National Australia Bank), as well as the three main credit reporting bodies, being Equifax, illion and Experian. Much of the detail of the legislation will also be dealt with by regulation. At this stage, the draft regulations are yet to be released, however, based on the draft Explanatory Memorandum, it looks likely that the use of the PRDE industry rules will continue to be a key feature of mandatory CCR.

In the July 2018 edition of Credit Management in Australia, we will provide an overview of the mandatory CCR legislation, how it will operate and what impact it is anticipated to have on both the consumer credit market and commercial credit markets in Australia. We will also look to the impact of possible reform in credit reporting and SME lending, noting this was another issue flagged by the Productivity Commission as part of its Data Availability and Use Inquiry.

Elsa Markula

Legal & Regulatory Affairs Manager, Australian Retail Credit Association

April 2018

 

 



[1] It should be noted that what information is encompassed by CCR differs across the world. For instance, in the United Kingdom, CCR includes current credit account balance information, and in the United States, in addition to balance, employment information is exchanged.

[2] ARCA has developed the CreditSmart website (creditsmart.org.au) to provide consumers with an unbiased and fair explanation of the credit reporting system in Australia.

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