Australia Reviews

Australia’s latest credit report rumpus is soon to switch into overdrive as the deadline nears for the publication of proposals that may see big changes to the way Australians are credit checked.

Since 2006, Australia has been going through a major debate that is likely to see the overhauling of its privacy law.

As part of this wider discussion over the future of Australia’s privacy rules, the handling of the credit information of Australians has come up for review. Both the credit industry and privacy watchdogs have been lobbying hard, with each side keen to persuade the Australian government to back its respective plans for the future of the Australian credit reporting system.

What does all this mean for Australians?

At the moment Australian lenders are only allowed to share with the credit reference agencies identification information and ‘negative’ data – such as records of when consumers have failed to pay what is owed and bankruptcy type information.

In future, large sections of the credit industry would like to get their hands on much more of the Australian public’s credit information. Lenders have for some years been calling for the ability to see what they call ‘positive’ data, such as the payment history and credit limits of consumers.

Tensions run deep between the credit industry and privacy camps. Verbal brickbats have been thrown over what many would consider small matters. To illustrate the point, some advocates of tough privacy rules have been unable to agree over the labels ‘positive’ and ‘negative’ data. For some, such labels are seen as a part of the credit industry marketing campaign to get greater access to consumer credit information.

Those in favour of giving lenders greater access to the credit information of the Australian public strongly argue there would be less financial hardship for consumers. Lenders, they contend, would be in a much stronger position to spot people getting into financial hardship.

They also believe the Australian economy would be boosted by around $5 billion dollars as many consumers would find credit much easier to come by.

Those consumers who have built up a strong reputation for meeting their financial commitments each month would also likely see a reduction in their monthly credit bills. As lenders say more credit information – including payment histories – would allow them to price for risk. Low risk consumers, the argument goes, would see a corresponding drop in the price they pay for credit.

Privacy advocates say opening up access to a wider range of credit information to lenders would actually increase financial hardship among consumers, rather than reduce it.

The UK and US have been used as examples of what happens when credit reference agencies are allowed to share a wider range of credit report information with lenders. These two countries have seen an increase in the amount of credit available to consumers with a corresponding increase in the numbers of people facing financial trouble.

Opponents of giving lenders access to more credit information also stress it is fanciful to believe consumers who have to rely on Payday Loans would suddenly be granted access to mainstream credit products, especially in light of the recent credit crunch.

The Australian government is expected to have the Australian Law Reform Commission’s credit reporting proposals to ponder sometime in March. Until it makes its decision, this issue is guaranteed to generate a huge amount of steam, as Australians chew over the merits of allowing lenders access to more of their personal credit information.

Many Australians may be surprised to learn that Australia’s tradition of strong financial privacy laws is one of the key reasons Australian consumers pay more for credit, such as bank loans and credit cards, than consumers in the UK.

While Australia’s privacy laws are currently being reviewed, it is unlikely the latest proposals put forward by those in charge of the country’s privacy system will help give Australians access to cheaper credit.

The reason that Australian consumers have to pay more for their credit than their northern hemisphere cousins is that the Australian privacy system prevents lenders sharing with each other the type of information that would improve their ability to spot the people who are likely to fail to make their repayments.

Most lenders use a credit scoring system to decide who to lend money to. Credit scoring is a mathematical formula, which uses a consumer’s credit history and lifestyle to predict how likely a potential customer is to repay their debt.

Because lenders in Australia cannot share consumers’ credit payment performance information with the credit reference agencies, as they can in the UK and US, it is much harder for Australian lenders to weed out the people who are most likely to fail to make their repayments. As a result Australian lenders tend to charge higher interest rates to cover the cost of lending money to people who fail to repay.

In the UK and US the cost of credit is relatively cheap because lenders are able to access the credit payment performance information of potential customers. Lenders are able to keep bad debt levels to a minimum and are able to avoid having to pass on the extra cost of bad debt to their customers.

The type of information that Australian lenders are currently permitted to share with the credit reference agencies for credit checking purposes includes records of when customers are 60 days late with their payments, and information to help verify consumers’ identities.

Most lenders have called for Australian law to be changed to allow them to share a wider range of credit information, including how good consumers are at meeting their monthly payments. Lenders say they would be better able to identify those consumers struggling to meet their debts, which would allow them to reduce the price they charge for credit.

Privacy campaigners fear that a loosening of Australian financial privacy rules may lead to an increase in the amount of credit available to consumers. They are also concerned this could lead to a hike in the numbers of people facing financial meltdown.

The Australian Law Reform Commission, which is responsible for putting forward suggested changes to Australian privacy laws, is currently against increasing the range of permitted credit information made available to lenders to the levels permitted in the UK and US.

For Australian consumers the price for maintaining strong financial privacy is likely to be felt most keenly in their wallets.

Australia’s voluntary banking code, designed to protect consumers, is up for review amid concerns bank customers facing financial trouble are not being helped.

The Code of Banking Practice, which has been adopted by most of Australia’s banks, provides a framework of best practice for banks when dealing with individuals and small businesses. The code is legally binding on signatory banks.

A leading financial watchdog, The Banking and Financial Services Ombudsman, has said some banks need to improve the way they deal with customers facing financial hardship.

Among its list of concerns were reported cases of bank staff failing to respond to customers facing financial hardship, and failing to provide customers with the necessary information to get help. In some cases the customer had to use the words ‘financial difficulty’ and ‘hardship’ before bank staff responded.

The BFSO also felt some banks were being unhelpful by failing to give customers adequate time to return the required paperwork, and threatening them with debt collectors if they failed to return documentation on time.

A number of bank customers have been required to dip into their superannuation pots before an application for help has been accepted according to BFSO.

A number of banks have also failed to help customers with small business or investment loans, which they are required to do so under clause 25.2 of the code.

An example cited by the BFSO in its quarterly bulletin, described an incident where a bank customer renegotiating a loan found his bank had listed a default against his account before negotiations for assistance were over. It also told of how he had been repeatedly contacted by the bank’s collection department.

Another customer was asked to provide medical evidence to back up a claim of financial hardship caused by an illness.

The BFOS has advised a number of banks, it considered to be failing to comply with the banking code’s provisions for consumers in financial difficulty, to update their procedures to ensure genuine consideration is given to customer’s individual circumstances. They also advised banks to provide written reasons to customers for declining requests for help with financial problems, and to train staff to recognise when a customer is experiencing financial difficulties.

Another financial organisation with jurisdiction over the Code of Banking Practice has said it considers failings not to be with the code itself. The Code Compliance Monitoring Committee (CCMC) takes the view the banking code has set a high benchmark for banks, which they are working towards.

“In the CCMC’s view, the code has, overall, worked well to encourage subscribing banks to develop and implement policies and procedures to improve their handling of customers in financial difficulty,” it said.

The CCMC echoed the experience of the BFOS, stating it was aware some bank customers haven’t been informed of hardship provisions.

The review of the Code of Banking Practice should be completed by the 31st of May 2008. Among the issues it will examine are: how the code has operated since its last review; what barriers, if any, exist to stop banks signing up; and how any difficulties banks or customers face in interpretation or comprehension of the code can be tackled.