House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 2 Reporting financial hardship in credit reporting

Outline of chapter

2.1 Schedule 2 to this Bill amends the Privacy Act 1988 to permit reporting of financial hardship information within the credit reporting system and to make other minor changes to improve the overall administration of credit reporting.

Context of amendments

2.2 On 28 March 2018, the Attorney-General, the Hon Christian Porter MP, announced that the Attorney-General's Department would lead a review into the operation of financial hardship arrangements. The review considered how hardship arrangements (including hardship arrangements regulated under the Credit Act) intersect with the credit reporting system. A range of key stakeholders participated in this review, including consumer advocacy groups, regulatory agencies, major banks and credit providers, credit reporting bodies and peak industry bodies.

2.3 Following this review, the Government agreed to the reform model in schedule 2 to this Bill for reporting hardship arrangements in the credit reporting system that would improve the comprehensiveness of credit reporting and appropriately balance the interests of consumers, credit providers and credit reporting bodies. These reforms build on amendments to the Privacy Act 1988 that commenced in 2014 to introduce a more comprehensive credit reporting system that included both 'positive information' such as a consumer's ability to make repayments on time, as well as 'negative information' such as defaults on repayments.

2.4 Although hardship arrangements between consumers and their credit providers can be entered into under the Credit Act, the Privacy Act 1988 does not currently permit these arrangements to be reported as part of a consumer's credit report. This situation can reduce the efficacy of the credit reporting system by restricting the visibility of hardship information about a consumer that is relevant to their creditworthiness. This information asymmetry in turn affects the ability of credit providers to meet their responsible lending obligations.

2.5 Under the Credit Act, if a consumer considers he or she will be unable to meet their obligations under their credit contract, the consumer may give their credit provider notice (a 'hardship notice') of their inability to meet the obligations and seek relief.

2.6 The credit provider may respond to the consumer's request by not agreeing to provide relief or agreeing to permanently vary the contract. In practice, credit providers who refuse a hardship request may alternatively offer another form of relief such as a moratorium on repayments, waiver, 'forbearance' or 'indulgence'.

2.7 The measures in Schedule 2 to this Bill recognise an agreement to permanently vary the contact and the other forms of relief as a 'financial hardship arrangement'.

2.8 Under the credit reporting system, credit providers report 'repayment history information' to credit reporting bodies. Repayment history information reflects whether a consumer has been meeting their repayment obligations on a credit product each month. Repayment history information covers the previous 24 months, is reported on a monthly basis and is expressed as a code reflecting the age of the oldest outstanding payment: '0' no overdue payments (including the 14 day grace period), '1' is a payment 15-29 days late, '2' is a payment 30-59 days overdue etc. Under the credit reporting system, repayment history information allows consumers to demonstrate good credit behaviour through timely repayments.

2.9 In the absence of specific hardship arrangement information, there has been inconsistent industry practice in how repayment history information is reported-leading to potential distortions in credit assessments. Some credit providers may report a consumer's repayment history information against the original credit contract, others do not report repayment history information when a hardship arrangement is in place and other credit providers report repayment history information against the hardship arrangements that are in place. Consequently, consumers in otherwise similar financial circumstances can have markedly different repayment history information on their credit reports depending on their credit provider.

2.10 Schedule 2 to the Bill establishes a rule for reporting repayment history information in the month that a repayment is affected by a financial hardship arrangement. This will ensure that credit reporting is consistent and interpretable, and consumers in similar financial situations will have correspondingly similar information in their credit reports.

Summary of new law

2.11 Schedule 2 to this Bill amends the Privacy Act 1988 to permit reporting of financial hardship information within the credit reporting system. It also makes minor changes to improve the overall administration of credit reporting, including reducing regulation for businesses that do not participate in credit reporting.

2.12 Reporting hardship information gives credit providers an indication that a consumer is experiencing hardship (or has recently experienced hardship). This reporting facilitates better and informed lending decisions. The existence of hardship information should prompt prospective lenders to make further inquiries in order to assess a consumer's situation holistically and potentially offer them a more suitable product.

2.13 Schedule 2 to the Bill establishes a new category of credit information to accompany repayment history information known as 'financial hardship information'.

2.14 This new category will be distinguished either by the fact that a monthly payment has been affected by a permanent variation to the terms of the consumer credit or an arrangement which provides temporary relief from, or deferral of, the individual's obligations concerning the consumer credit.

2.15 When a monthly payment is affected by a financial hardship arrangement, repayment history information will reflect a consumer's ability to meet their obligations under that arrangement rather than their original contract. When a consumer exits a hardship arrangement (either through completion of the arrangement, or where the credit provider terminates the arrangement because the consumer does not meet their obligations), repayment history information will reflect the consumer's position against the original credit contract.

2.16 Financial hardship information will attract the same protections as repayment history information, which can only be accessed in more limited circumstances than other forms of information about a consumer. Credit reporting bodies will be restricted from incorporating hardship into a consumer's credit score and will only be able to retain financial hardship information for 12 months.

2.17 Reporting financial hardship information in the credit reporting system is not otherwise intended to affect the legal rights of any party to a hardship arrangement, particularly in relation to their original credit contract.

2.18 Following passage of the Bill, variations to the Privacy (Credit Reporting) Code 2014 will be progressed with the OAIC and industry to provide detailed guidance on the implementation of new credit reporting obligations in schedule 2 to this Bill.

2.19 Schedule 2 to this Bill also requires the Attorney-General to cause an independent review of the credit reporting system as set out in Part IIIA of the Privacy Act 1988. The report must be completed and given to the Attorney-General before 1 October 2023, who must then table the report in Parliament within 15 sitting days.

Comparison of key features of new law and current law

Detailed explanation of new law

2.20 Schedule 2 of the Bill amends the credit reporting system under the Privacy Act 1988 to permit reporting of financial hardship information and to make other minor amendments to improve the overall administration of the credit reporting system.

New framework for representing hardship information in the credit reporting system

2.21 Schedule 2 to the Bill introduces a new category of credit information called 'financial hardship information', permitting this kind of information to be reported within the credit reporting system for the first time. [Schedule 2, items 1 and 2, subsection 6(1) and paragraph 6N(c) of the Privacy Act 1988]

2.22 If a credit provider is disclosing repayment history information to a credit reporting body and financial hardship information is available, the provider is also required to disclose the financial hardship information corresponding to the same month's repayment history information. Failure to comply with this requirement is subject to a civil penalty of 500 penalty units. [Schedule 2, item 12, section 21EA of the Privacy Act 1988]

2.23 The purpose of this provision is to ensure that the credit reporting body and other credit providers relying on the repayment history information will have a more accurate picture of a consumer's repayment obligations and whether they are meeting those obligations. This allows credit providers to make better decisions in respect of their responsible lending obligations under the Credit Act.

2.24 Financial hardship information is either:

•

Information about the first monthly payment affected by a financial hardship arrangement that is a permanent variation to the terms of the consumer credit; or

•

Information about each monthly payment affected by a financial hardship arrangement which is providing temporary relief or deferral of the individual's obligation in relation to the consumer credit.

[Schedule 2, item 4, subsection 6QA(4)of the Privacy Act 1988]

2.25 Permanent variation: consistent with the requirements which will be set out in a variation to the Privacy (Credit Reporting) Code 2014, an indicator would appear on a consumer's credit report in the month that they make the first repayment under a permanently varied contract. This indicator would only appear once-in the month that the varied contract takes effect. In conjunction with the permanent variation indicator, the repayment history information would reflect a consumer's ability to make repayments under their permanently varied contract, rather than the original contract.

2.26 Temporary relief from or deferral of payment obligations: consistent with the requirements which will be set out in a variation to the Privacy (Credit Reporting) Code 2014, this indicator would appear on a consumer's credit report from the first month that a hardship arrangement is in place. The indicator would then recur every month a hardship arrangement is in place.

2.27 A financial hardship arrangement may arise as a result of an individual providing a notice to the credit provider (a hardship notice), orally or in writing, of the individual's inability to meet the obligations under section 72 of the National Credit Code.

2.28 Within the credit reporting system, a 'financial hardship arrangement' is any kind of agreement, arrangement or understanding that defers or reduces the obligations of a debtor for a temporary period, such as 'simple arrangements' within the meaning of ASIC Order CO 14/41, indulgences, forbearances and waivers. This broad definition is intended to recognise the diversity of arrangements that may exist between consumers and their credit providers which take into account individual circumstances. [Schedule 2, item 4, subsection 6QA(3) of the Privacy Act 1988]

2.29 However, a financial hardship arrangement must reflect a mutual understanding between the consumer and their credit provider reflecting the nature of the credit relationship. The definition of financial hardship arrangement is not intended to capture 'promises to pay' and other forms of unilateral notifications by the consumer to their credit provider. For example, where, due to a mismanagement of funds in the short term, the consumer will not make a payment (or will make a late payment) for an amount that is due and payable. In such circumstances, the credit provider has simply acknowledged that consumer will be late with their payment without agreeing to an arrangement affecting the monthly payment obligations.

2.30 Financial hardship information would not be disclosed in a month where a consumer makes a payment of an amount equal to or greater than the amount due and payable under the original credit contract. This includes, for example, a period of 'catch up payments' where the consumer agrees with their credit provider to pay more than the amount due and payable under the original contract in order to reduce the arrears that accumulated during the months of the financial hardship arrangement. If a consumer can meet their original contracted payment obligations in a month they should not be reported as being in hardship in that month. [Schedule 2, item 4, subsection 6QA(5) of the Privacy Act 1988]

Reporting repayment history information when a hardship arrangement is on foot

2.31 In conjunction with financial hardship information, repayment history information will reflect a consumer's ability to meet their obligations against a financial hardship arrangement that is in place at that time rather than the original credit contract. [Schedule 2, item 5, subsection 6V(1A) of the Privacy Act 1988]

2.32 For example, if a consumer is not required to make a monthly payment under the financial hardship arrangement, the repayment history information for that month will be expressed as '0'.

2.33 When a consumer exits a hardship arrangement (either through completion of the arrangement, or where it is terminated by the credit provider through the consumer's inability to meet their hardship arrangement obligations), the repayment history information for the subsequent month would revert to show the consumer's position against the original credit contract.

2.34 The insertion of a discrete definition of repayment history information in the month that a payment is affected by a financial hardship arrangement is necessary to clarify the general rule for reporting such information.

2.35 An effective credit reporting system requires that like contracts and arrangements be treated alike and reported in a consistent and accurate manner. These amendments will ensure that industry practice is consistent and interpretable, and consumers in similar financial situations will have correspondingly similar information in their credit reports.

Example 2.1 - Consumer and credit provider permanently vary contract

Under the Privacy (Credit Reporting) Code 2014, repayment history information is expressed on a consumer's credit report as a code signifying the age of the oldest outstanding payment:

0: Current up to and including the 14 day grace period

1: 15-29 days overdue

2: 30-59 days overdue

3: 60-89 days overdue

4: 90-119 days overdue

5: 120-149 days overdue

6: 150-179 days overdue

7: 180+ days overdue.

Ash has a loan with Oak Bank making payments of $100 per month. In February, Ash loses his job and subsequently falls behind on his payments and is unable to make payments in February, March and April. This is reported in Ash's repayment history information (RHI) as an increasing RHI code, as the full payment is not being made. In April, Ash contacts Oak Bank and asks for hardship relief.

Oak Bank agrees to permanently vary Ash's loan to extend the length of the loan and allow Ash to make lower payments. Ash is able to make these payments each month. As May is the first month that Ash is required to make a payment according to the varied contract, a financial hardship information (FHI) permanent variation indicator is reported for the month (indicated with a 'V' below).

	J	F	M	A	M	J	J	A	S	O	N	D
RHI	0	1	2	3	0	0	0	0	0	0	0	0
FHI					V

Example 2.2 - Consumer enters into hardship arrangement then reverts to original contract

The circumstances are the same as in Example 2.1. However, instead of varying the contract, Oak Bank allows Ash to make payments of $50 for three months (May, June and July) as a financial hardship arrangement. Ash is able to make these payments and therefore has RHI of '0' reported for each month because Ash is meeting his obligations under the financial hardship arrangement on foot (even though Ash is actually falling $50 per month behind the original payment schedule).

Other credit providers viewing Ash's credit report are aware that Ash is not making full payments under his credit contract with Oak Bank because FHI (indicated with an 'H' below) is reported in each month that Ash makes a reduced payment under the financial hardship arrangement. Other credit providers are able to make further inquiries in order to understand the true state of Ash's financial affairs, but also know that Ash is still able to make timely repayments in accordance with the hardship arrangement on foot.

At the end of July, Ash finds another job and is able to make the original payments plus an additional amount to catch up to the original contract. For August, Ash's RHI is reported as '5' as Ash owes $450 (or the equivalent of five late payments, as credit reporting requires a full payment to be made for the payment to be considered made) behind the original payment schedule-being the three missed payments from February to April, then half a payment for each of May, June and July.

For the remainder of the year, Ash is able to make payments of $150 per month, meaning he gradually returns to the original payment schedule, and the RHI code reported reduces accordingly.

	J	F	M	A	M	J	J	A	S	O	N	D
RHI	0	1	2	3	0	0	0	5	5	4	4	3
FHI					H	H	H

Example 2.3 - Consumer enters into financial hardship arrangement then permanently varies contract

The circumstances are the same as in Example 2.2. However, at the end of July, rather than reverting to the original contract, Ash and Oak Bank agree to vary Ash's credit contract and extend it by five months to allow Ash to repay the full amount owing (accrued from February to July) without having to make additional 'catch up' repayments. Ash is able to make his monthly repayments.

The first month where Ash makes a payment according to the varied contract is in August. Subsequently, a FHI permanent variation indicator is reported once during that month to show that the contract was permanently varied. Each month thereafter shows Ash's ability to make repayments according to the varied contract.

	J	F	M	A	M	J	J	A	S	O	N	D
RHI	0	1	2	3	0	0	0	0	0	0	0	0
FHI					H	H	H	V

Protections for hardship information in the credit reporting system

2.36 Financial hardship information has generally the same protections under the Privacy Act 1988 as repayment history information, which can only be accessed in more limited circumstances than other forms of information about a consumer .[Schedule 2, items 6, 7, 9, 11 and 13, paragraph 20C(4)(e), subsection 20E(4), paragraph 20G(2)(c), paragraph 21D(3)(c) and subsection 21G(4) of the Privacy Act 1988]

2.37 However, unlike repayment history information, which has a retention period of two years, financial hardship information will be subject to a retention period of 1 year that starts on the day on which the monthly payment to which the information relates is due and payable.

2.38 This means, for example, that financial hardship information indicators will disappear from a consumer's credit report one at a time as each indicator expires on its 1 year anniversary. A shorter retention period than repayment history information appropriately balances the interests of consumers in financial hardship. [Schedule 2, item 10, section 20W (after table item 2) of the Privacy Act 1988]

Example 2.4 - Retention periods for financial hardship information

The circumstances are the same as in Example 2.3. FHI would remain on Ash's credit report for 12 months, while RHI would remain for 24 months.

When the FHI retention period comes to an end (in this example, September of Year 3), a credit provider viewing Ash's credit report would see the RHI for the hardship arrangement period (May to August of Year 2), but not the associated FHI (highlighted grey below).

Credit providers would have 24 months of RHI (September of Year 1 to August of Year 3) and 12 months of FHI (September of Year 2 to August of Year 3) to assess Ash's ability to meet their repayments (or potential lack of ability) when making a credit product suitability assessment.

Year 1

J

F

M

A

M

J

J

A

S

O

N

D

RHI

0

0

0

0

FHI

Year 2

J

F

M

A

M

J

J

A

S

O

N

D

RHI

0

1

2

3

0

0

0

0

0

0

0

0

FHI

H

H

H

V

Year 3

J

F

M

A

M

J

J

A

S

O

N

D

RHI

0

0

0

0

0

0

0

0

FHI

2.39 Credit reporting bodies will be restricted from incorporating financial hardship information into a consumer's credit score. [Schedule 2, item 8, section 20E of the Privacy Act 1988]

2.40 A credit score is a rating of an individual's credit worthiness based on an analysis of a credit report at a particular point, and is usually expressed alphanumerically. This restriction is intended to reinforce understanding in the community that suitability for credit is focussed on the information in a consumer's credit report as well as further relevant information that is sought by a credit provider. Although a credit score obtained from a credit reporting body may give preliminary guidance on a consumer's financial position, it is only one factor in a suite of considerations in the credit assessment process

2.41 The purpose of financial hardship information is to communicate to a credit provider that there is an alternative arrangement in place from the original credit contract. Reporting financial hardship information alongside repayment history information (as opposed to simply reflecting it in a credit score) prompts prospective credit providers to make further inquiries to ensure that a credit product is suitable for an applicant.

2.42 ASIC, the national regulator of consumer credit, considers that these further enquiries may include:

•

details of the consumer's changed circumstances that led to the hardship arrangement;

•

whether those circumstances have been addressed or are continuing;

•

how long the revised repayment obligations will continue; and

•

the likelihood that the circumstances which led to the arrangement will occur again.

2.43 By only permitting financial hardship information to be viewed together with repayment history information in its full context, prospective credit providers have greater information to make a proper assessment of a consumer's financial suitability for a credit product, assisting the credit provider to meet their responsible lending obligations.

2.44 Credit reporting bodies do not currently incorporate financial hardship information in the calculation of consumer's credit scores. The restriction on incorporating financial hardship information in the calculation of these scores ensures there is no change to the current position.

2.45 Recognising community concern about credit scores, and uncertainty about how certain information (such as financial hardship information) may be weighed up in the calculation of credit scores, consumers' interests are best served by excluding financial hardship information in credit score calculations by credit reporting bodies. This position maintains incentives for consumers to seek assistance when they are or will be struggling to meet their repayment obligations under a credit contract - that is, experiencing financial hardship.

Reducing the regulatory burden for non-participating businesses

2.46 Under section 6G of the Privacy Act 1988, a business that provides goods or services where payment is deferred by seven days or more is a 'credit provider'. A business is captured by this definition irrespective of whether or not that business actively participates in the credit reporting system. Such businesses must then comply with Division 3 of Part IIIA of the Privacy Act 1988, which at a minimum requires credit providers to have a policy on the management of credit information and to comply with certain notification and correction requirements.

2.47 Schedule 2 to this Bill excludes businesses from these requirements that have not and are not likely to disclose credit reporting information or credit eligibility information to a credit reporting body or other credit provider, and who have not collected such information from a credit reporting body or other credit provider. This would remove the unnecessary regulatory burden on businesses that do not, and have not, actively participated in the credit reporting system but are captured by the definition of 'credit provider'. The Australian Privacy Principles will continue to apply to non-participating credit providers who are 'APP entities' under section 6 of the Privacy Act 1988. [Schedule 2, items24, 26, 30 and 31, subsection 6(1), subsection 21B(8), subsection 21U(5) and subsection 21V(7) of the Privacy Act 1988]

2.48 If at a future point a business decides to participate in the credit reporting system, the exception would cease to apply to that business, and the business would have to comply with all the requirements of the credit reporting provisions.

Expanding the options for credit providers to participate in the credit reporting system

2.49 In order to participate in the credit reporting system, subparagraph 21D(2)(a)(i) of the Privacy Act 1988 provides that a credit provider (including for example an energy or water utility) must be a member of an external dispute resolution scheme recognised by the Australian Information Commissioner or a scheme prescribed by the regulations.

2.50 The policy intention of the credit reporting external dispute resolution scheme requirement and the Commissioner external dispute resolution scheme recognition process was to allow external dispute resolution schemes already in place to be recognised for the purposes of credit reporting. In the Australian energy and water utility sector, states and territories either had existing external dispute resolution schemes that were recognised by the Commissioner for the purposes of credit reporting, or the energy and water utilities in a jurisdiction have joined other external dispute resolution schemes that had been recognised by the Commissioner.

2.51 External dispute resolution schemes in relation to the Australian Capital Territory energy and water utilities is provided through the Australian Capital Territory Civil and Administrative Tribunal. The Australian Capital Territory Civil and Administrative Tribunal is not an organisation to which credit providers can become 'members'. As such, it is not possible for the Commissioner to recognise the Australian Capital Territory Civil and Administrative Tribunal as an external dispute resolution scheme under section 35A of the Privacy Act 1988, since subparagraph 21D(2)(a)(i) requires that a credit provider be a 'member' of the external dispute resolution scheme.

2.52 Schedule 2 to this Bill recognises that being subject to the jurisdiction of a recognised external dispute resolution scheme is sufficient and enables providers who are subject to (but not 'members' of) such external dispute resolution schemes to participate in the credit reporting system on this basis. This reduces the compliance burden on credit providers such as state and territory energy and water utilities providers that are subject to the jurisdiction of a tribunal by preventing them from being required to join multiple dispute resolution mechanisms. [Schedule 2, items 25 and 27, subparagraphs 20E(3)(c)(ii); and 21D(2)(a)(i) of the Privacy Act 1988]

2.53 To facilitate the resolution of the issues by the tribunal, Schedule 2 to this Bill allows credit providers to disclose 'credit eligibility information' to that tribunal. An explicit permission to disclose this information is necessary because of subsection 21G(1) of the Privacy Act 1988 which creates a civil penalty for disclosure of such information by a credit provider if not otherwise permitted. [Schedule 2, item 28, subparagraph 21G(3)(e)(ii) of the Privacy Act 1988]

2.54 If external dispute resolution is available in a tribunal, Schedule 2 to this Bill requires that the credit provider state this when notifying the individual of a decision to refuse to correct or access credit information, or a provider's decision following an investigation of a complaint about an act or practice engaged in by the provider. [ Schedule 2, items 29, 32 and 33, subparagraph 21T(7)(b)(i), subparagraph 21W(3)(c)(i), subparagraph 23B(4)(b)(i) of the Privacy Act 1988]

Security requirements for credit reporting bodies storing data

2.55 Schedule 1 to the Bill amends the Privacy Act 1988 to require that a credit reporting body store credit reporting information in Australia or consistently with security requirements prescribed in regulations. The regulations may provide that data may be stored outside of Australia. [Schedule 1, item 11, section 20Q of the Privacy Act 1988 ]

2.56 The term 'store' is not defined but would take its ordinary meaning being to deposit in a storehouse, warehouse or other place for keeping.

2.57 Credit reporting bodies will not be in breach of section 20Q by undertaking routine business or operations such as sending and receiving correspondence (for example, email) containing credit reporting information or using an application to view and edit the information.

Independent Review of the Credit Reporting System

2.58 Schedule 2 to the Bill requires the Attorney-General to cause an independent review of the credit reporting system as set out in Part IIIA of the Privacy Act 1988. The report must be completed and given to the Attorney-General before 1 October 2023, who must then table the report in Parliament within 15 sitting days of receiving it. [Schedule 2, item 34, section 25B of the Privacy Act 1988]

2.59 The report will not be a legislative instrument because of the exemption in table item 12 in subsection 6(1) of the Legislation (Exemptions and Other Matters) Regulation 2015.

2.60 Schedule 2 to the Bill is not specific on the scope of the review so as not to limit the review when it is established. However, the Government expects the review would, having regard to contemporary community expectations of privacy and the consumer credit industry, consider and make recommendations about:

•

whether the provisions continue to meet the relevant objects of the Privacy Act 1988, including facilitating an efficient credit reporting system while ensuring that the privacy of individuals is respected

•

the roles, responsibilities and obligations of credit providers, credit reporting bodies, consumers and other relevant participants within the credit reporting system; and

•

the efficacy of the operation of the credit reporting system, including comprehensive credit reporting and financial hardship information.

Application and transitional provisions

2.61 The amendments which establish the reporting of financial hardship information and repayment history information on the later of the day after Royal Assent or 1 April 2021 and apply in relation to hardship arrangements entered into on or after commencement. [Schedule 2, item 14, Application of Part 1 of Schedule 2]

2.62 Once the amendments commence, a credit provider must include financial hardship information if it exists and the credit provider is disclosing repayment history information

2.63 The amendments which cause an independent review to be undertaken, place additional security requirements on the storage of credit information, reduce regulatory burden on business and allow more credit providers to participate in the credit reporting system, commence the day after Royal Assent.

2.64 Apart from the independent review, these amendments apply in relation to consumer credit applied for or provided after the commencement of the amendments. [Schedule 2, item 35, Application of Part 2 of Schedule 2]