12 August 2008
By Christine Christian, CEO - D&B Australasia and member of the ALRC Advisory Committee.
The consumer credit market has changed dramatically over the last decade. An increase in the number of credit providers and products has been rivaled only by the enthusiasm with which Australians have snapped up new credit offers.
This explosion of credit is not necessarily a bad thing. The Australian economy is heavily dependent on consumer spending which accounts for around 75% of the nation's gross domestic product. Much of this spending has been driven by the availability, and until recently cheapness, of credit.
Furthermore credit is the primary tool for wealth creation in Australia through its use to purchase the family home, shares and personal contributions to superannuation.
Yet for something which is so critical to the well being of the national economy and household budgets the information driving credit decisions in Australia is dangerously limited.
Most Australians understand that lenders will check a credit report when assessing new applications for credit. Yet very little is known about the information included in these reports. For many people American movies and television shows have left an impression that credit reports provide extensive information on a consumer's credit position. In addition most assume that they have an individual credit score.
This could not be further from the truth. Currently Australian credit reporting operates under what is known as a negative-only system. This means that a credit report can only include some basic identification details, a listing of credit applications and any negative events such as defaults or bankruptcies.
Importantly a credit report is not allowed to record whether an application has been approved or rejected.
This means that lenders are being asked to make credit decisions based on information that doesn't even include a brief overview of existing credit commitments. It is a recipe for disaster.
It is for this reason that Dun & Bradstreet, joined by a number of stakeholders, has called for reform of Australia's credit reporting laws so that some basic additional information can be included in credit reports.
Specifically D&B believes that credit reports should be allowed to record whether a credit application has been approved and if so what is the extent of the commitment.
If we are going to demand that lenders act in a responsible manner it is critical that they are provided with the basic information necessary to do their job. This is the essence of a comprehensive reporting system.
This is a principle accepted in almost all developed countries around the world. While each of them have established comprehensive credit reporting systems that reflect the unique attributes of their consumer credit markets, all have been convinced of the benefits of reform.
Those benefits can include reduced default rates, access to mainstream credit for under-served sections of the community and improved lending to small business.
Two recent demonstrations of these benefits come from Japan and Hong Kong. Research in Japan showed that comprehensive reporting reduced the delinquency rate for the mean loan by 34%. The shift to comprehensive reporting in Hong Kong in 2002 saw a decline in credit card write-off ratios from 13.6% to 3.7%.
Australia is now presented with this same opportunity following the release of recommendations from the Australian Law Reform Commission (ALRC) to adopt credit reporting laws that reflect the Dun & Bradstreet model.
If the Commonwealth Government accepts these recommendations then our consumer credit market will be placed on a firmer footing.
Lenders will be able to make credit decisions based on a clearer understanding of an applicant's existing commitments. Meanwhile consumers who have had a negative event in the past will be able to show when their credit position has improved and is more manageable thereby making them a safer credit risk than would be assumed under the existing negative-only system.
And there are broader macro-economic benefits to consider. Research conducted by ACIL Tasman found that a shift to a comprehensive reporting system would produce a $5.3 billion benefit to the economy over the next ten years. This would be driven by improved efficiencies and competition in the consumer credit market and the subsequent downward pressure on interest rates for both consumers and business.
The anniversary of the start of the global credit crisis is a timely reminder of the need to ensure that credit markets are built on a solid foundation of thorough credit assessment.
At the same time the reported slowing of the Australian economy, impacted by the rapid decline in credit demand, is an important demonstration of the critical link between the health of our national economy and the free flow of sustainable credit.
For these reasons there has never been a more important time for Australia to adopt a credit reporting system that allows lenders to make credit decisions based on the best available information.
Individuals can obtain a copy of their credit report by contacting D&B on 13 23 33.
For further information please contact:
Danielle Woods
D&B PR Manager Australia & New Zealand
(02) 8270 2926
About D&B
D&B is the world's leading provider of business-to-business credit, marketing and purchasing information and receivables management services. D&B manages the world's most valuable commercial database with information on more than 130 million companies.
Information is gathered in 193 countries, in 95 languages or dialects, covering 186 monetary currencies. The database is refreshed more than one million times daily as part of D&B's commitment to provide accurate, comprehensive information for its more than 150,000 customers.
The Australasian operations were bought out by the senior management group in August 2001. It was the first MBO of a wholly owned subsidiary in D&B's history worldwide.
Today Lazard Carnegie Wylie owns an approximate 90% stake in DBA and the local management team a 10% stake.
Strategies for future growth include developing DBA's commercial and consumer credit referencing business; expanding its receivables management outsourcing business; maintaining its lead in the development of unique credit and risk scoring products; and developing new products specifically tailored to the Australasian market. DBA currently employs over 500 people in Australia and New Zealand.
