In Australia, comprehensive credit reporting (CCR) is quite a new phenomenon. It was only in 2014 that CCR was even a possibility. Up until that time, Australia’s Privacy Act prohibited anything but limited, negative information, such as defaults and bankruptcies, to be shared with lenders. If you live in the US or the UK, you likely don’t realise that negative credit reporting is even a thing. Since CCR has been the norm for decades, you feel that, “of course that’s the way my credit score is determined.”
Australia has been doing things differently since the early 1980’s, when the US and the UK moved to the comprehensive credit reporting systems that they use today. The CCR methods used in America and the UK for determining your credit score are essentially the same. The scales used by different credit agencies do vary. Also, there are some factors included in one country that the other doesn’t report.
In the UK, for example, your electoral roll information is used to verify your identity. If you aren’t registered to vote, you’ll likely have trouble being approved for credit. Overall, however, both countries collect similar data within a comprehensive credit reporting system—positive information, like making on-time payments, gets reported alongside any credit dings, such as late payments.
In Australia, prior to 2014, lenders had a very limited amount of information to go on. Imagine two different borrowers. They both have a few hits to their credit. Maybe each has been rejected for a loan. One of them, however, has paid all of his credit cards and bills on time for the last two years. The other has continually made late payments on loans and utility bills. Under the old system, these borrowers would look exactly the same.
Changes made to the Privacy Act in 2014 allowed lenders and credit providers to get much more comprehensive information on potential customers. The aim of this change was to allow competitors of big banks to more accurately assess risk, price products, and broaden access to finance. This new regime, however, is currently voluntary, and big banks have largely been reluctant to give up their customer credit data.
The Productivity Commission recommended in March of this year that if comprehensive data is not supplied to at least 40% of all active credit accounts, the Australian Treasury should draft legislation to make CCR mandatory. According to the Australian Financial Review, only three firms are publicly reporting data. This translates to about 0.1% of all credit accounts, so it was not a surprise when Australian Treasurer Scott Morrison recently announced that in July of 2018, banks would be mandated to publicly share comprehensive data for credit accounts.
Morrison thinks CCR will be a win-win for both customers and lenders. In addition, the benefit won’t only be for traditional lenders, but for fintech players as well. My next post will cover in depth why CCR could be beneficial to Australian consumers. Part three will encompass how lenders may be affected by a CCR mandate.