Kadre welcomes the opportunity to provide this feedback to the Attorney General’s Department on the review of Australia’s Credit Reporting Framework. While we have extensive experience and expertise to respond to all questions raised in the report, due to time constraints we have intentionally focussed on three important areas that we feel have impeded achievement of the benefits we expected to be delivered from implementation of Comprehensive Credit Reporting.
The Kadre community comprises former executives of financial institutions in the consumer lending sector who were at the forefront of the development and implementation of Comprehensive Credit Reporting (CCR) in its formative years.
Introduction and Background
It is the collective view of the Kadre community that the implementation of CCR and the introduction of the Credit Act has not delivered the expected efficiency or effectiveness improvements to the consumer credit ecosystem.
Our early arguments for the introduction of CCR were focussed on addressing the asymmetry of information between borrowers and lenders. Our aim was to improve fair access to finance across all socio-economic sectors while providing lenders with information to assist them prevent financial harm to those that may be financially vulnerable.
One of our aims was to develop a credit reporting system that would provide all lenders with a verifiable record of consumers, their associate credit liabilities and their history of meeting repayment obligations. Based on our experience in overseas markets, particularly UK and USA, it was our view that a complete record of the positive and negative aspects of a consumer’s finances would provide better outcomes for consumers and lenders.
There are three important areas where we feel the credit reporting framework has failed to meet the objectives of comprehensive credit reporting:
| Issue | Effect | Solution |
| Lack of a comprehensive and consistent registry of consumer credit facilities. |
Consumers are easily confused about what is on (and not on) their credit report while lenders are often blind to the full extent of a consumer’s credit exposure. |
Mandatory supply of full CCR information including RHI by all ACL holders. CRBs be accredited and all CCR data be supplied to each CRB. |
| Restrictions on the type of credit information that can be supplied and used in credit reporting. |
Lenders can only approximate the extent of a consumer’s monthly credit obligations and are blind to the extent of utilisation of credit limits. Credit availability is unnecessarily restricted for consumers with low limit utilisation. |
Include outstanding credit balances and repayment amounts as CCR data elements. |
| Limited ability for some consumers to influence their credit worthiness (thin file or no file). |
Shortfalls in access to credit at a fair price across some socio- economic sectors (particularly young people, recent immigrants and nonworking spouses). |
Extension of mandatory supply of CCR data by relevant non- ACL holders such as telcos and utilities. |
Mandatory supply of CCR data by all ACL holders
It is our view that supply of Comprehensive Credit Reporting (CCR) information (including CCLI and RHI) should be made compulsory for all Australia Credit License (ACL) holders.
If lenders are to meet their responsible lending obligations under the Credit Act, they need access to reliable and meaningful data about a consumer’s financial situation. It is impractical for a lender to comply with responsible lending obligations if they are unable to see the full extent of a consumer’s indebtedness. CCR plays an important role in addressing this by providing:
- A reliable source of the full extent of a consumer’s financial liabilities.
- A means of verifying financial liability data provided by the consumer (or their authorised
third party). - A mechanism for evaluating how well the consumer has managed their finances in the past.
Unfortunately, evolution of the credit reporting framework has led to a complex and ineffective system. In our experience, we have found that a lender can rarely obtain a true comprehensive view of a consumer’s credit liabilities and historic credit performance while consumers are faced with a complex task of piecing together credit information from multiple CRBs in order to understand their creditworthiness.
At the heart of this problem is that within the credit reporting framework a credit provider that is not a large bank can decide:
- Whether to supply credit reporting data at all;
- If they choose to supply, they can choose the level of supply (i.e. negative, partial, full); and
- They can choose the CRBs to which they will supply their data.
As a result, any single consumer may have credit facilities that are not be visible to a lender depending on which CRB the lender is using or whether the facilities are being reported at all.
While we have substantial anecdotal evidence of the size of this issue from our work with lenders and consumers, the true level is obscured because of the opaqueness of the complete system. CRBs and large Credit Providers (CPs) do not share this data because of competitive issues while ARCA is constrained by confidentiality arrangements with CRBs and CPs. In our view, the shroud of secrecy surrounding the contribution and use of CCR data needs to be lifted in order to provide transparency to all stakeholder and better understand the extent of the problem.
Notwithstanding the results of a data study, there is sufficient evidence to justify the need for mandatory supply of CCR data by all ACL holders.
- Data diversity
Our work with credit models has found that predictive performance improves substantially with the inclusion of data from a diverse range of credit providers. We have found that the CCR data of major banks, which makes up around 75% of all CCR data, is largely homogeneous and does not provide good risk differentiation in high-risk segments. Under the current credit reporting regime, there is no single source containing all consumer credit accounts which is a limitation to the development of optimal credit models for the industry. Our work has demonstrated that credit scores of the CRBs would be significantly improved if they were able to develop models based on the entire CCR population rather than just their subset.
- Competitive disadvantage
Major banks have the scale and buying power to utilise all three of the CRB’s at a lower price than other lenders. The costs of using multi bureau together with volume discounts given to the major banks by CRBs provide significant advantage to the major banks. In addition, as a result of Part 3-2CA, major banks have access to data from all three CRBs and therefore are in a unique position to be able to determine which lenders are reporting to which CRBs, information that is not readily available to the rest of the industry.
Our experience shows that consumers with credit facilities at major banks are highly likely to have these liabilities included on the credit report regardless of which CRB is used. However, beyond credit facilities with major banks, a lender cannot be certain that they have complete information about other credit facilities because they are blind to facilities that are only listed with the CRBs to which they have not subscribed or facilities that are not listed at all by an ACL holder.
Small credit providers that do not have the scale of large banks are generally disadvantaged because
of the inhibitive cost of multi-bureau solutions and the price of credit enquiries.
- Credit Reporting Bodies
The mandatory credit reporting provision in Part 3-2CA of the Credit Act addressed information arbitrage of large banks across CRBs but has not solved the issue of differing data sets between CRBs. Under the current credit reporting framework, a lender that is not a large bank can choose which CRB they use for supply and use of CCR information. As a result, there are differences in the data available from each CRB. In order to obtain a complete picture of a consumer’s liabilities, a lender requires access to information from multiple CRB’s.
Consumers are disadvantaged by this arrangement because they need to search three CRBs to check their credit history. We have observed that differences in credit reports between CRBs often leave the consumer confused and unable to understand how they can improve their creditworthiness.
An effective CCR ecosystem would require the data to be available to any lender regardless of the CRB to which they are subscribed. In our view, ACL holders should be obliged to provide CCR data to all CRBs and, for this privilege, CRBs should be required to meet certain conditions such as accreditation or licensing.
- Consume Data Right (CDR)
The Consumer Data Right (CDR) and access to Bank Transaction Data (BTD) is sometimes suggested as having the potential the fill the gap exposed by shortfalls in the credit reporting framework. However, because CDR is a consumer opt-in system, it would still not guarantee that a lender will have visible of all of the consumers liabilities.
- Liar loans
We have seen that, despite of the introduction of mandatory reporting by large banks, the reported volume of “liar loans” has not materially changed. The survey conducted periodically by UBS suggests around 40% of loan applications are factually inaccurate and that around 30% of these applications under-represented financial commitments. These numbers are consistent with our experience working with lenders. Access to complete and reliable information about a consumer’s liabilities would reduce the overhead created by “liar loans” with consequent improvements in streamlined processes and lower costs.
- Consumers
Working with financial counsellors, we are aware that the credit report is often used as an effective way to start a conversation with a financially distressed consumer. When under financial stress, a consumer often mis-state the extent of their liabilities or could be unaware of debts (e.g. coerced into having loans taken out in their name).
Understanding a consumer’s complete debt position from a verified source rather than relying on the consumer recalling and disclosing their liabilities allows the counsellor to create a tailored solution for the consumer’s specific financial situation.
- Repayment History Information (RHI)
CCLI information is an important aspect of CCR because if allows lenders can verify the credit facilities held by the consumer. RHI is equally important and should be included in the mandatory supply of full CCR information by ACL Holder. There is abundant evidence (particular from submissions made at the original ALRC enquiry) to demonstrate that inclusion of RHI significantly increases the performance of lender credit models in predicting the probability of a consumer defaulting or missing repayments.
What is often understated is the value of RHI data in supporting both the prevention and the rehabilitation of consumers suffering financial difficulties. To illustrate this point, the diagram below compares the difference between negative credit reporting without RHI against CCR reporting with RHI. The availability of RHI as part of the credit scoring algorithm means the credit score of the consumer is more responsive to changes in circumstances which means that lenders, consumers and their advocates can initiate more timely actions when financial issues arise.
Prevention can be dealt with in a timely manner by lenders and consumers in the lead up to a serious credit event. Without CCR RHI, a lender is often blind to a consumer’s financial problems, particularly if these are spread across multiple lenders, which is often the case. Armed with CCR RHI information that reflects the consumer’s complete repayment history, a responsible lender can proactively support the consumer with tailored solutions as part of their debt management processes. We have seen this approach adopted with success by some major banks who have access wide CCR data sets (i.e. multi-bureau).
Rehabilitation can be supported by responsible lenders with the availability of RHI. Typically, once a consumer has incurred a serious credit event, they carry the stigma on their credit report and credit score for a long period of time, often getting trapped into a high-cost debt cycle. We have seen cases where a consumer has been able to repair their credit score in a timely manner by demonstrating positive credit performance through improvements to their repayment history. Managed appropriately, often with the support of a financial counsellor, the credit score becomes a tool for the consumer to move more quickly towards qualifying for mainstream credit.
Additional CCR data fields
There are two important fields that we advocated for during the development of CCR legislation in the 2000’s that we would like to see considered in this independent review. As former executives of UK and US financial institutions, many of the Kadre team have experienced the value of having these data fields in the credit reporting systems of these jurisdictions.
- Repayment amount
The repayment amount due on a debt is a key ingredient to assessing financial situation and suitability. Without this information today, a lender has little option but to estimate the repayment amount based on the credit limit of the facility as reported in CCR together with an estimate of the interest rate and term. The way these estimates are calculated often differ between lenders which can result in wildly fluctuating approximation of repayment amount, often leading to a point of contention with the consumer or having the lender seek additional verifiable information from the consumer (such as a copy of the credit contract, bank statements or other evidence of the amount of repayments).
- Outstanding balance
Currently only the credit limit of a facility is reported in CCR. The actual outstanding balance of the credit facility is not available through CCR to the lender but is an important indicator of the consumers true level of indebtedness. Presented as a time series in a credit report, it provides positive indications (e.g. continual reduction of balance against limit leaving the consumer with increasing headroom) and negative indications (e.g. continuous full utilisation of a line of credit or credit card).
Contribution of data by non-ACL holders
There are a number of non-ACL holders such as Telecom and Utility providers which participate in CCR by sharing CCLI data. While some of these debts are not significant relative to a bank loan, the data about them could provide useful indicators of the consumer’s financial management performance, both positive and negative.
The current legislation only allows for an ACL holder to provide RHI information to a CRB (Privacy Act clause 21D(3)(c)) however there is value in extending the provision of RHI to include non-ACL holders such as Telcos.
We have modelled that inclusion of RHI information from a Telco and found that it smooths the volatility of a consumer’s credit score. The Telco RHI data quells the sharp impact of other negative events while also incrementally improving a credit score when the consumer demonstrates good repayment history.
We have often seen that data from Telcos and some other non-ACL holders is the only information on a consumer’s credit report, particularly young people, recent immigrants and nonworking spouses. Often referred to as having thin file or no file, these consumers could quickly build a positive credit file is the RHI from there Telco was included in their file. Often, we have found that the lack of information on the credit file is an impediment to financial inclusion. Additional CCR+RHI information from non-ACL holders would provide a mechanism for a consumer to create a good credit history and potentially gain access to mainstream lender.
The Kadre Community
Kadre is a community of risk, retail credit, compliance, and data science specialists that provides advisory and consulting services to the financial services industry. The Kadre community comprises 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. Many of these executives were at the forefront of the development and implementation of major initiatives such as Comprehensive Credit Reporting and Responsible Lending Obligations. With this knowledge and experience, Kadre is well placed to offer practical and well-informed feedback on critical areas highlighted in the Treasury Consultation paper.
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.
Contributors to this paper from the Kadre community include Steve Johnson, Mike Cutter, David Grafton, Tim Brinkler, Michael Hartman, Ewa Baranowska and Thushare Dissanayake.
The contact point for Kadre is Steve Johnson (steve@kadre.com.au M: 0419368326)
