Access to credit reporting information can have a critical impact both on lending decisions and the ongoing management of credit accounts. Borrowers may either inadvertently or deliberately under-disclose their liabilities, in which case the onus will fall on the lender to ‘fill in the blanks’ from other, possibly unreliable, sources.
The use of comprehensive credit reporting information makes a lenders’ job a lot easier, as this information provides an impartial, easily accessible source of accurate information about a borrower. For AICM members operating in a commercial environment, consumer information still has its role to play1. Commercial credit will often be advanced on the basis of a personal or directors’ guarantee, and that individual’s capacity to repay can be a significant factor in the credit decision.
In Australia, legislation allowing comprehensive credit reporting commenced operation in March 2014. Comprehensive credit reporting refers to two new data sets: consumer credit liability information (CCLI) and repayment history information (RHI). RHI can only be accessed by Australian Credit Licence (ACL) holders, which may exclude a number of AICM members. However, CCLI can be accessed by all credit providers, and provides valuable information about the consumer credit accounts held by a borrower, including the responsible credit provider, type of account, limit, date opened and date closed, and terms and conditions for the account. In a fully functioning credit reporting system, CCLI would include information about both traditional financial credit accounts, as well as telecommunications and utilities accounts.
To date, there has been limited exchange of comprehensive credit reporting information by lenders. There are a multitude of reasons for this, not least of which is the need for a set of rules to govern the exchange of this data.
The Australian Retail Credit Association (ARCA) has drafted the Principles of Reciprocity and Data Exchange (PRDE) as this set of rules. It is a voluntary set of rules, and was developed over a two year period by ARCA Members.
The PRDE is not yet operational, and is currently subject to an authorisation process by the Australian Competition and Consumer Commission (ACCC). This authorisation process commenced in February 2015, and ARCA hopes it will be concluded, and the PRDE operational, by about October or November 2015.
The rules in the PRDE are structured under six principles. The way these principles work is relatively straightforward:
- The PRDE sets up a data exchange of the new types of data (CCLI and RHI) which will only be accessible to other PRDE signatories. An organisation becomes a signatory by signing the PRDE deed poll, and notifying the PRDE administrator and their credit reporting body (CRB) (for credit providers), and their customers (for CRBs).
- Under the PRDE, information is structured in three tiers: negative (which includes defaults, bankruptcies, judgements etc), partial (which includes negative plus CCLI) and comprehensive (which includes negative and partial plus RHI). Once an organisation nominates a tier level, it can only exchange information at that tier level. It is also required to contribute all of its available information at that tier level within 12 months (with a requirement to provide 50% of its available information as soon as it starts participating in the exchange). One of the flow-on effects of this will be that the contribution of negative information will improve – as all signatories will have a minimum requirement to contribute all of their defaults across all of their portfolios.
- The PRDE information exchange is exclusive. This means that only signatories will have access to other signatory information (at partial and comprehensive tier levels). Negative information can be shared outside of the signatory base, without restriction.
- Signatories will know who else has signed, what level they are exchanging information and the date they should each be at full levels of contribution. This transparency provides the basis for the compliance framework.
- The compliance framework enables all signatories to raise issues of non-compliant conduct against all other signatories. When an issue is raised, it will be dealt with in a series of stages. In the initial stages, signatories will be encouraged to resolve issues between themselves. If that doesn’t occur, a dispute can progress through to peer review and, in exceptional cases, it may progress to review and determination by an independent eminent person. Outcomes of disputes (other than those agreed between signatories in the very early stages) will be published to the entire signatory network.
For AICM members, the impact of the PRDE will be twofold:
- As set out above, better contribution of negative information within the credit reporting system, regardless of whether the AICM member is a PRDE signatory or not; and
- For those AICM members who opt to become PRDE signatories, an ability to access more consumer credit information for use in both commercial and consumer credit lending decisions.
So what do AICM members need to do, on signing the PRDE, to get access to this information?
To access this information2, AICM members will need to be able to reciprocate by contributing the same tier of information they are seeking
to access. However, this requirement to contribute only applies to the available information held by the AICM member – so if the member does not generate the information it is seeking to access, this does not prevent it from participating in this exchange. The proviso to this is that, if the AICM member does ever generate that information – it must be able to contribute it to the PRDE exchange.
The best means to illustrate how this works is by means of an example:
Bob’s Tyres and Imports (BTI) has a process that requires, when setting up a trade account for a new client, that it runs a credit report for any negative information on that client’s consumer file.
BTI has heard about the PRDE exchange and wants to participate at partial tier level (which would mean knowing, for any new client, the amount and extent of all of their existing consumer credit accounts). However, BTI doesn’t provide consumer credit: it only provides commercial trade accounts for trade creditors.
If BTI does ever offer consumer credit, it understands that under the PRDE, it will be required to contribute information about those consumer credit accounts. In the meantime, BTI will be able to receive a credit report with both negative and partial information for its clients.
Again, it should be borne in mind that AICM members are unlikely to be able to participate at comprehensive tier – as this will mean the AICM member must have an Australian Credit Licence (ACL) issued by the Australian Securities and Investments Commission (ASIC). However, AICM members will be able to access CCLI, which is valuable information about the type and extent of a borrower’s current liabilities.
Why is this valuable information? Experience in overseas markets has shown that information about a borrower’s current liabilities results in better credit decisions – because a lender is able to use this information to more accurately assess a potential borrower’s risk, and make a decision which reflects this assessment. It also leads to efficiencies in ongoing account management and collections, as a lender can better assess the likelihood of a borrower experiencing and self-curing any delinquencies.
So what else would an AICM member need to do to participate in the PRDE exchange?
Pay an annual fee to the administrator of the PRDE exchange, which for smaller organisations will likely be an amount between $1,000 and $1,500.
Be included in the register of signatories, which will be accessible to other signatories. In turn, this may mean being subject to any complaint of non-compliance with the PRDE bought by another signatory.
Be satisfied that it is contributing all of its available consumer credit information. If it does have some consumer credit accounts, these will need to form part of its exchange of data (although noting if offering consumer credit accounts, it will also no longer be exempt from the External Dispute Resolution (EDR) scheme requirement – which will mean both being PRDE compliant, as well as being a member of an EDR scheme).
In summary, participation in the PRDE exchange looks likely to result in considerable benefits for AICM members, not least of which will be the ability to make credit decisions and manage credit accounts based on better client information. u
*Elsa Markula is Legal and Regulatory Affairs Manager, ARCA. For more information, please contact Robert Falvo, ARCA’s Industry Engagement Manager. Email: firstname.lastname@example.org. au; Tel: (03) 9863 7861.
- It should also be noted that in accessing this personal information, an organisation (whether a commercial credit provider or consumer credit provider) will be subject to requirements under the Privacy Act, and Privacy Credit Reporting Code in respect to the use and disclosure of that information.
- As noted in footnote 1 above, at all times, any access to credit reporting information will also need to be in accordance with the Privacy Act and Privacy Credit Reporting Code requirements.