Comprehensive credit reporting

Recommendation 20

Support industry efforts to expand credit data sharing under the new voluntary comprehensive credit reporting regime. If, over time, participation is inadequate, Government should consider legislating mandatory participation.

Description

Industry should continue to implement the new comprehensive credit reporting (CCR) regime on a voluntary basis. This would allow credit providers to share individuals’ ‘positive’ credit history data, such as loan repayment history.

Industry believes that CCR will not be operational until March 2015, at the earliest. Also, industry suggests that significant portions of credit data will not be exchanged until late 2016 or early 2017, reflecting, in part, major transitional issues for credit providers.105

In 2017, Government should review industry’s participation in CCR to determine whether a regulatory incentive or legislation for mandatory reporting is required. Government could also consider expanding CCR to include more data fields.

Objectives

  • Reduce information imbalances between lenders and borrowers, and facilitate competition between lenders.
  • Improve access to and reduce the cost of credit for borrowers, including SMEs.

Discussion

Problem the recommendation seeks to address

Industry participation in CCR

At present, credit providers have limited access to credit data on competitors’ customers. The previous credit reporting regime was based on sharing ‘negative’ credit events, such as an individuals’ history of defaults.

More comprehensive sharing of credit data would reduce information imbalances between lenders and borrowers. It would also facilitate borrowers switching between lenders and greater competition among lenders. Overall, more comprehensive credit reporting would likely improve credit conditions for borrowers, including SMEs. Personal credit history is a major factor in credit providers’ decisions to lend to consumers, but also to new business ventures and smaller firms.

Empirical evidence suggests CCR reduces the likelihood that originated loans will default (reducing interest rates) and/or increases the availability of credit.106 Most OECD countries have some form of ‘positive’ credit reporting, either via a public credit register or private reporting body, reflecting the benefits of more comprehensive credit reporting.107

In Australia, legislation for CCR came into effect in March 2014, although the regime is not yet fully implemented. Industry is developing a data-sharing agreement based on reciprocity between credit providers. Under the proposed agreement, each participant would select the data categories they wish to share, and in turn gain access to the same categories from other participants (via credit reporting bodies). Data exchange would be supported by a compliance framework, where participants would be able to raise instances of non-compliance by other participants.108 The Australian Retail Credit Association (ARCA) anticipates finalising the agreement by March 2015 at the earliest.109

Participation in CCR is voluntary, so the pace and extent of eventual participation in the regime is not yet clear.

For credit providers, participation will depend on the perceived net benefits, which will differ between different classes of credit provider. For a major institution with a relatively large customer base, early and full participation may provide, at least initially, relatively larger benefits to other, smaller participants than for the institution itself.

As participation and system-wide data grow, net benefits increase for all CCR participants. Further, credit providers that do not participate are at risk of adverse selection with respect to potential new borrowers; a risk that becomes more acute as industry participation increases.110

Ultimately, the system would be expected to deliver better credit outcomes for providers that participate relative to those that do not. It is difficult to determine ex ante the level of participation at which this would occur, but Veda suggests that this is likely to occur before participation reaches 50 per cent.111

Extension to SME data

Submissions generally argue that the costs of mandatory reporting of SME data would outweigh the benefits. Reporting of SME data would impose further compliance costs on credit providers. However, the additional data would not likely reduce information imbalances. This is because the credit health of the business owner(s) as an individual remains the primary information source for credit decisions, rather than information about the SME itself.

Expanding CCR data fields

Submissions generally support expanding CCR data with more data fields — particularly account balances. However, additional data fields would have to be balanced against privacy concerns, and would require amendment of the Privacy Act. The need for additional data fields could be considered in the proposed review of CCR participation and the proposed PC inquiry into data access and use (see the previous recommendation).

Conclusion

The Inquiry believes that CCR would lead to better credit decisions across the system including for SMEs, and supports industry efforts to expand credit data sharing under the new voluntary CCR regime. However if, over time, participation is inadequate, Government should consider legislating mandatory industry participation, or a regulatory incentive. The Inquiry does not support mandating reporting of SME data.

In principle, the Inquiry supports expanding the number of CCR data fields, as theoretical and empirical studies suggest that more, high-quality credit data lead to better credit decisions and improved credit conditions for borrowers.


105 Australian Retail Credit Association (ARCA) 2014, Additional material to the Financial System Inquiry, ARCA, Sydney, page 4.

106 International Finance Corporation 2012, Credit Reporting Knowledge Guide, International Finance Corporation (part of the World Bank), Washington, DC. Also see Barron, J and Staten, M 2003, ‘The Value of Comprehensive Credit Reports: Lessons from the U.S. Experience’, in Credit Reporting Systems and the International Economy, ed. Miller, M, MIT Press, Boston.

107 Expert Group on Credit Histories (to the European Commission) 2009, Report of the Expert Group on Credit Histories, DG Internal Market and Service, Paris; Rothemund, M and Gerhardt, M 2011, The European Credit Information Landscape, European Credit Research Institute, Brussels; Australian Law Reform Commission 2008, Australian Privacy Law and Practice, Volume 3, Report 108, Commonwealth of Australia, Canberra.

108 The Australian Retail Credit Association (ARCA) 2014, Second round submission to the Financial System Inquiry, page 3. Under the proposed agreement, there are three tiers of data: negative (data typically disclosed pre-March 2014); partial (information on current credit accounts, plus ‘negative’ data); and comprehensive (repayment history plus ‘partial’ data).

109 The Australian Retail Credit Association (ARCA) 2014, Second round submission to the Financial System Inquiry, page 4.

110 Johnson, S 2013, ‘Consumer lending: implications of new comprehensive credit reporting’, JASSA — The FINSIA Journal of Applied Finance, no. 3.

111 Based on modelling undertaken by Veda (a major credit bureau), which models the impact of rising industry participation in comprehensive credit reporting on lenders’ credit decisions.