Missed opportunity to address information asymmetry
When addressing the Responsible Lending and Borrowing Summit, the Hon Stephen Jones Assistant Treasurer and Minister for Financial Services missed a crucial opportunity to make real meaningful improvement to the protection of consumers from financial harm, debt spirals and vulnerability to predatory lending practices.
As we highlighted in our submission to the BNPL review, with minor changes to legislation, better use of Credit Reporting information could go a long way to solving financial hardship by removing a critical impediment for lenders to meet their responsible lending obligations.
Adding further “carve out” of regulation for products such as SACC, Consumer Leases and BNPL increases complexity and cost which will ultimately be borne by the consumer. While the government belatedly attempts to regulate financial products like BNPL to protect a small proportion of consumers that could be adversely affected, smart entrepreneurs are moving to the next area of regulatory arbitrage where myriad new technologies present loopholes in legislation to be exploited. Like BNPL, the future products will provide financial simplicity for some but financial hardship for others.
Adopting Option 2 for BNPL regulation continues the “carve out” process even though there are existing regulations that can be used if the regulators addressed the issue of what is meant by scalability. Clearer definition of scalability would benefit the entire consumer lending industry and create a more level playing field that provides greater protection for consumers.
In our submission, we asserted that scalability and assessing financial capacity is dependent on having a full picture of a customer’s liabilities which we contend would require a more robust Comprehensive Credit Reporting (CCR) regime. We suggested that the government mandate the contribution of Partial Data for Credit Reporting.
In our view, the government continues to force lenders to meet responsible lending obligation with one arm tied behind their back. As an organisation applying data science to credit risk settings, we have built models to forecast serviceability and identify customers that are financially vulnerable or approaching financial hardship. Unfortunately, because of restrictions within current legislation in relation to sharing credit data, these models and insights usually only benefit the institution with internal data abount the customer, clearly providing more benefit to lenders with larger customer databases such as the major banks. A full and complete view of consumer’s lending obligations that would be available through a mandatory partial credit reporting regime would provide significant support to enhancing consumer protection across all licensed credit providers.
There is an immediate need to address shortfalls in the Comprehensive Credit Reporting (CCR) regime. In our work with clients, we are seeing a growth in non-disclosure of information by consumers in lending applications as they attempt to deal with diminishing net income. Anecdotally, it appears that there are consumers who are desperate to obtain credit to relieve their immediate financial difficulties. Some of these consumers have identified weaknesses in the credit reporting regime whereby they can “hide” their financial liabilities from some lenders. This type of information asymmetry is not good for lenders or consumers and has the potential to exacerbate the growing affordability crisis.
In his address, the minister stated that “we want to work with you on the detail”. Many of the Kadre community were instrumental in the development and implementation of Comprehensive Credit Reporting. Most are disappointed that the many and varied compromises made during the legislative change process that significantly undermined the original benefits expected for lenders and consumers. The Kadre community would gladly work with the government to get into the detail.
The Kadre Community
The Kadre community includes former CROs of major banks and other financial institutions including fintechs, former senior executives of Credit Reporting Bodies, founding members and former directors of ARCA and subject matter experts who have been involved in ASIC investigations, helping lenders deal with enforceable undertakings and remediation programs. The community also includes leading data scientists who have a deep understanding of how to use data to achieve successful business outcomes.
Kadre has provided this submission as an independent group seeking only to protect consumers from financial harm by creating a fair credit regime that is in the best interests of the Australian economy.
The contact point for Kadre is Steve Johnson (steve@kadre.com.au M: 0419368326)
