This submission, from the New Zealand Council for Civil Liberties (NZCCL), concerns the addition of further powers to credit rating agencies proposed in Amendment 5 of the Credit Reporting Privacy Code 2004. Together with Amendment 4 this amendment brings the New Zealand Privacy Code in line with that of Australia. They are designed to provide the credit rating agencies with 'positive' data relating to people's financial transaction history, rather than the 'negative' reporting of the past, which related only to a person's debt history, where the debt had been referrred to a collection agency.
Amendment #5 in effect gives the credit rating agencies the right to collect personal transaction data relating to payment for utilities such as power and telecommunications, as well as credit card transactions, for a period of two years. This data can show not only where a person is in arrears in payments but also where they have a positive payment record.
While the inclusion of 'good' debt management as well as 'bad' debt management is an improvement on data that shows only a history of defaults on payment, NZCCL is concerned that such information can lead to a detailed but inaccurate picture of a person's financial position, and can also be used by debt agencies to target vulnerable people with instruments that can lead to increased debt and financial hardship.
Credit reporting and personal rights
NZCCL has concerns about the whole nature and purpose of credit reporting. These concerns relate to
the gathering of the information - the possibility that selected information can be gathered about people without their knowledge or consent
the use of that information in ways that may disadvantage those people whether by refusing a loan or by targeting people suceptible to borrowing money
the ability of people to challenge the information gathered about them
the transparency of the rating process.
From our examination of the privacy codes surrounding the current rating system, we are reassured that many of these issues have been better considered here than in many overseas jurisdictions. In many cases here, for instance, the person applying for credit must agree that the information can be gathered or used (thought there are also many exceptions). There are also in place clear processes for individuals to check on their credit history and challenge it (though we have cases that show that actually getting erroneous data changed may be a more difficult process).
The transparency of the rating process – the way in which a person is allocated a number on a scale – appears to be an issue. We found that the Veda Advantage website, though clear about the processes for people wishing to access and change their information, had little about the uses to which the information might be put, the constraints on organisations using the information, and the processes of arriving at the 'score'.
The encouragement of debt
NZCCL is concerned in a broader sense as well. The process is in place primarily for the benefit of the people wishing to provide debt facilities, and who make their money out of interest charged on people's debt.
That means that people who do NOT and have NOT had any debt in the past have no credit rating at all. Two cases of this have come to our attention. One involved a middle-aged couple who had all their lives lived in a house supplied by the armed forces. When they applied for a mortgage for a house of their own they were turned down on the basis that they had no credit rating. They needed to purchase something on credit and immediately pay it off before they were able to gain a mortgage. Another case involves a person wishing to open a bank account in England, who was turned down because of the lack of a credit rating in New Zealand.
There is therefore clear discrimination against those who should perhaps have the highest credit rating – those who are and always have been debt free. On the other hand there is encouragement for people to increase their debt. The people of most value to banks and credit agencies are not those who regularly pay off their credit cards each month, but those who pay the minimum amount on their cards each month, because those people are paying the most interest on their loan. Those people are the most vulnerable to schemes that 'consolidate' their debt, that increase their credit limits, that offer discounted credit cards, and that use loan sharks to meet repayment obligations. James Scurlock's book Maxed Out provides graphic accounts of how this occurs in the United States, and we see no reason that, with greater information available to them, credit agencies would not do the same targeting of the vulnerable.
While the credit rating agencies may not encourage such behaviour it is clear that where banks and other agencies that primarily deal in debt can use information about people's payment history regarding household utilities and especially credit card ownership, they are likely to target their credit instruments at the people most at risk.
The debt culture
NZCCL is concerned at the debt levels and culture of debt acceptance in New Zealand. The government tries to promote savings and spending at the same time, even though research shows that many householder incomes are inadequate to exist on, let alone save. In order to 'grow' the economy the government must increase private spending. The only way this can be achieved for many people is by increasing their debt level. Thus financial commentaries frequently laud the increase in credit card borrowing as a sign that the economy is improving.
The Veda Advantage website does not provide much data about New Zealand. It does however provide horrifying statistics about debt levels in Australia. On the Veda Advantage site is a press release about the biannual Australian Debt Study Report released in April 2011. This report identified that only 57% of Australians were managing their debt satisfactorily, and that “ almost three in every ten Australians who are looking to take on more debt are already in a position of financial hardship”. The figures are probably similar or worse in New Zealand.
The proposed amendment is in fact of limited value to the consumer but of immense value to providers of debt.
Its value to the consumer can only be viewed in the context of the previous powers of the credit rating agencies, which were primarily to inform debt providers of past debts and defaults of the consumer. This new amendment can mitigate the effects of the historical data by presenting a detailed recent history of thrift or good housekeeping.
Its value to the debt agencies is immense. It provides a great deal of personal information for organisations dealing in credit transactions, from insurance companies and mortgage brokers, to banks and investment companies. The changes being currently discussed provide these agencies with details of credit card transactions as well as payment records to utilities. Details of these transactions may be viewed or purchased by a variety of organisations dealing in credit, thus giving them access to people's purchasing processes on a day-by-day basis. They are also valuable in conjunction with other information collected by companies on the consumer, through store cards and purchasing profiles. The debt agencies are able from the information to segment the population on the basis of debt profiles and to target those profiles vulnerable to different approaches regarding debt management.
From our reading of the amendment and its place in the Privacy Code there is nothing to prevent this from occurring.
It means that the onus is now on consumers to check the information on a regular basis and challenge assumptions based on it.
Banks, credit agencies, stores, and ultimately the government itself, make their money from people's debt. If it were not for debt (another word for credit) people would find it difficult to buy houses or cars, they would think again about the second or fourth TV set or the latest electronic gimmick. Many households would not even be able to purchase basic necessities. Debt, not money, makes the modern economy go round. Credit reporting measures not the amount of money people have, but the amount of debt they can sustain. Thus people who have never been in debt are disadvantaged and those that manage large amounts of debt are seen as good risks.
The proposed new powers given to the credit rating agencies may at times be beneficial to some consumers. But unless the Privacy Commissioner places constraints on the collection of such information and on access by the debt agencies to such information, then they can readily lead to the targeting of vulnerable segments of the population by banks, debt providers and retailers, with specific instruments that may increase the consumers' debt levels and develop a cycle of poverty and dependence.
that the amendment requires the consent of the consumer at all times before it can be accessed
that the information can be accessed by debt agencies only in ways that prevent the ability to profile the population and to target specific sectors of it
that the changes brought about by the amendment are monitored carefully in terms, not of their benefit to the providers of debt, but of their effect on consumers.
Batch Hales, Chairperson, NZCCL. 25 June 2011