KEY POINTS:
The credit reporting industry has chosen a good time to push for reform of New Zealand's rules governing the privacy of debt. With the world financial system in the doldrums as a result of ill-considered lending, the providers of credit are facing closer regulation driven by the principle of transparency of risk. It follows that they will need more knowledge of borrowers.
This country and Australia are among the few jurisdictions that still deny potential lenders information that would be beneficial to them and creditworthy customers alike. The Credit Reporting Privacy Code allows lenders to find out little more than the number of loan applications a potential customer has made - not the result of the applications - and whether they have ever defaulted on a loan or been adjudged bankrupt. The industry would like to know much more, such as how much credit an applicant is carrying, the identity of the creditors and the credit limits applied to them.
Can there be any argument with that? The Privacy Commissioner clearly thinks so. The review looks to be a laborious procedure involving the formation of a "reference group" comprising government agencies, credit providers, credit reporting agencies and consumer advocates. The group is to produce a report in May, after which the public will be invited to register its views. By the time a new code is promulgated, the country could be climbing out of the economic trough and "full file" credit disclosure could make the climb temporarily harder.
Advocates of full disclosure admit that for a transitional period the availability of credit would contract. But once the more complete credit records were established the system would work better for both sides, they say. Proprietors of small companies should find it easier to start and operate the business without relying on their personal credit.
The only parties likely to suffer under a full disclosure regime would be applicants who are in the habit of borrowing from one creditor to pay another, getting themselves deeper into debt at each step. Sound borrowers with debt they can service would have little to worry about.
Transparency will be greatly in their interest, and that of the economy, as credit providers recover from the worldwide financial crisis and need to put investment capital back to work. They will be more careful in their assessment of risk and more wary of assets such as property that seemed a one-way bet for so long. They will need much more information about companies seeking credit and the sooner they are given access to that information, the sooner capital might start flowing again to ventures that offer reasonable prospects.
Regulators such as the Privacy Commissioner will need to play their part in the recovery by recognising that the interests of investment information must override the philosophical principles that might guide their rulings in more comfortable times. We have not got the luxury of protecting the privacy of over-stretched borrowers when the financial arteries of the economy need to be as open as they can reasonably be.
There is a tendency to regard the recession as a cyclical event from which economies will emerge much as they were. It is not so. The world financial system has suffered a shock that will change it profoundly, causing it to reassess risk and to channel investment into productive activities that offer reasonable returns.
The rules of disclosure must work both ways, helping financial intermediaries as well as those who entrust their savings to them. New Zealand's Credit Reporting Privacy Code looks like a hindrance to the recovery. It should be rewritten as quickly as possible.
