The minister said New Zealanders were generally distrustful of the Government's use of their data.
"It is important that we regain that trust," Sepuloni said.
Sepuloni said that unlike the previous Government, the Labour-led coalition would not make funding for social services NGOs contingent on them sharing their data.
It would also not be seeking to base decisions and funding on individual-level data on vulnerable people - as the social investment approach did.
"We're not going down the same track as the previous Government with individual client-level data. That was a failure."
National Party social investment spokeswoman Paula Bennett said the proposals were ideologically-driven and ignored the extensive work the previous Government had done in the area.
That included the Data Futures Partnership report published in August, which outlined ways for organisations to work with data and build trust with the public.
"Now, the Government wants to ignore that and restart the conversation – presumably because it didn't tell the Government what it wanted to hear," Bennett said.
By blocking National's social investment model, the Government was throwing away "the greatest chance in a generation" to improve vulnerable Kiwis' lives, she said.
The consultation will take until August.
The Privacy Commission released a highly critical report last year about the previous National Government's policy of requiring community groups to give up data about their clients if they wanted state funding.
The policy was "excessive" and breached privacy rules, the report concluded.
Commissioner John Edwards said there was a risk that a new funding arrangement between MSD and NGOs could deter some people who were in need of support.
At the same time, there was an embarrassing privacy breach at the Ministry of Social Development last year which led to the information-sharing system being shut down.
