House of Representatives

Explanatory Memorandum

(Circulated by authority of the Attorney-General, Senator the Hon George Brandis QC)

Regulation Impact Statement

Background

Australian Law Reform Commission Report on Privacy

33. In May 2008, the Australian Law Reform Commission ( ALRC ) concluded a 28 month inquiry into the effectiveness of the Privacy Act 1988 ( Privacy Act ) and related laws as a framework for the protection of privacy in Australia ^[1] . The ALRC's report, For Your Information: Australian Privacy Law and Practice ( ALRC report ), made 295 recommendations for reform in a range of areas, including creating unified privacy principles, updating the credit reporting system, and strengthening the powers of the Privacy Commissioner. The Government responded to the majority of these recommendations with the Privacy Amendment (Enhancing Privacy Protection) Act 2012, which introduced major privacy reforms and commenced in March 2014.

34. One of the ALRC's other recommendations was that a mandatory data breach notification scheme be introduced (rec 51-1). Submissions to the ALRC's inquiry indicated strong support for the introduction of a mandatory notification requirement, although some key private sector organisations in the banking and telecommunications industries were not supportive ^[2] .

35. The ALRC noted developments in international jurisdictions where legislative reform has been implemented. In particular, the ALRC considered that the United States, where at the time mandatory data breach notification was required in more than 30 states, was at the 'forefront in the development of such laws' ^[3] .

36. After considering submissions and consultations, the ALRC recommended that a data breach notification requirement be introduced in the Privacy Act. The ALRC considered that the test should set a higher threshold for notification than is provided in most other jurisdictions (i.e. a test based on a real risk of serious harm to an affected individual following a data breach, rather than a test that is satisfied whenever a data breach occurs). Amongst other things, the ALRC believed that a higher threshold for notification should also reduce the compliance burden on agencies and organisations.

37. The ALRC also believed that it would be appropriate to allow for a civil penalty to be imposed where an agency or organisation has failed to notify the national privacy regulator (currently the Office of the Australian Information Commissioner ( OAIC )) of a data breach. The rationale behind this recommendation was that it would provide a strong incentive for agencies and organisations to disclose data breaches where required, and encourage these entities to consult with the OAIC where a data breach has occurred to ensure they are in full compliance with notification requirements.

Government response to the ALRC Report

38. On 14 October 2009, the Government released a First Stage Response to the ALRC report, which addressed 197 of the Commission's 295 recommendations. Recommendation 51-1 was not part of the 197 recommendations and was identified along with a number of other recommendations as requiring consultation and consideration.

International trends since the ALRC Report

39. Since the ALRC Report, the trend in international jurisdictions has been towards the development and implementation of legislative requirements for notification of data breaches. In the United States, 47 states, the District of Columbia and three territories have implemented mandatory data breach notification ^[4] . In January 2015, U.S. President Barack Obama proposed a national data breach notification standard in the draft Personal Data Notification & Protection Act. The proposed scheme would require notification if there is any reasonable risk of harm or fraud to individuals following a data breach.

40. Elsewhere, the European Union has introduced regulations that mandate data breach notification. In May 2014, New Zealand announced plans to introduce a two-tier mandatory data breach notification scheme. On 16 June 2015, Canada passed legislation to introduce a national mandatory data breach notification scheme.

Voluntary data breach notification scheme

41. In 2008 the then Office of the Privacy Commissioner ( OPC ) released Data breach notification - A guide to handling personal information security breaches ( Data Breach Guide ) in response to requests for advice from agencies and organisations about data breaches, and in recognition of the global trends relating to data breach notification ^[5] . The Data Breach Guide encouraged entities to voluntarily notify the Privacy Commissioner of data breaches that satisfied the ALRC's recommended 'real risk of serious harm' test, and provided guidance about how to identify and contain a data breach.

42. The OAIC, which replaced the OPC as the national privacy regulator in November 2010, revised the Data Breach Guide in 2011 and 2014 to reflect changing attitudes and approaches to data breach management, and amendments to the Privacy Act. The OAIC also released a companion Guide to Developing a Data Breach Response Plan in April 2016 ^[6] , following a public consultation process.

43. The table below captures the number of voluntary data breach notifications made to the OPC/OAIC since 2009-10, when figures about the number of voluntary notifications were first reported separately from the total number of Privacy Commissioner investigations conducted. The number of notifications in 2014-15 was nearly 250% higher than in 2009-10, possibly reflecting increased awareness of privacy obligations among entities following the passage of the Privacy Amendment (Enhancing Privacy Protection) Act in November 2012, and the extensive amendments to the Privacy Act that occurred upon its commencement in March 2014.

Table 1: Voluntary data breaches notifications, 2009-10 to 2015-16

Consultation in 2012 and 2013

44. On 19 October 2012, the Government released a Discussion Paper for consultation ( 2012 consultation ) seeking public comments on whether Australia's privacy laws should include a mandatory data breach notification requirement and, if so, the possible elements of such a requirement. The 2012 consultation and the responses to it are outlined and analysed in more detail below.

Further 2013 targeted consultation

45. In April 2013, the Government undertook confidential targeted consultation ( 2013 targeted consultation ) on a more detailed legislative model. This consultation process invited comments on the legislative model that would form the basis of the Privacy Amendment (Privacy Alerts) Bill 2013 ( Privacy Alerts Bill ). The consultation sought particular views on the possible costs to business.

Privacy Alerts Bill

46. On 29 May 2013, the then Government introduced the Privacy Alerts Bill into the House of Representatives. If passed, the Privacy Alerts Bill would have introduced the requirement to notify the OAIC and affected individuals where there has been a data breach which gives rise to a 'real risk of serious harm' to an affected individual.

47. The Privacy Alerts Bill was intended to implement ALRC recommendation 51-1 and strengthen the existing voluntary data breach notification framework in order to counter underreporting of data breaches and to help prevent or reduce the effects of serious crimes like identity theft. The Privacy Alerts Bill was based on the general requirements of the Privacy Act's Australian Privacy Principle ( APP ) 11 in the Privacy Act, which requires regulated entities that hold personal information to protect the information from misuse, interference and loss, as well as unauthorised access, modification or disclosure. Sections 20Q and 21T of the Privacy Act impose equivalent obligations on credit reporting bodies and credit providers. Similarly, section 11(1) of the statutory Privacy (Tax File Number) Rule 2015 requires tax file number ( TFN ) recipients to protect TFN information from misuse and loss, and from unauthorised access, use, modification or disclosure.

48. On 6 June 2013, the House of Representatives passed the Privacy Alerts Bill with bipartisan support. On 17 June 2013, the Bill was introduced into the Senate and was referred on 18 June 2013 to the Legal and Constitutional Affairs Legislation Committee for inquiry. The committee reported on 24 June 2013, its sole recommendation being that the Senate pass the Privacy Alerts Bill. The Privacy Alerts Bill lapsed on prorogation of the 43rd Parliament.

Parliamentary Joint Committee on Intelligence and Security Reports

2013 Report

49. In May 2012, the then Government asked the Parliamentary Joint Committee on Intelligence and Security ( PJCIS ) to inquire into a package of potential reforms to Australia's national security legislation including a mandatory data retention regime for personal telecommunications data. The PJCIS reported a large number of the submissions to the inquiry objecting to data retention on information security grounds, including concerns about creating a 'honeypot' of information that would be vulnerable to a data breach ^[7] .

50. In May 2013, the PJCIS released Report of the Inquiry into Potential Reforms of Australia's National Security Legislation. The report recommended that, if a mandatory data retention regime should proceed, its introduction should include the introduction of a robust mandatory data breach notification scheme (Recommendation 42).

51. The Commonwealth Attorney-General's Department submitted to the inquiry that, if enacted, mandatory data breach notification laws could complement the current legislative security requirements and a data retention regime in a least four ways, by:

1.

mitigating the consequences of a breach;

2.

creating incentives to improve security;

3.

tracking incidents and providing information in the public interest; and

4.

maintaining community confidence in privacy laws ^[8] .

2015 Report

52. In November 2014, the Government referred the provisions of the Telecommunications (Interception and Access) Amendment (Data Retention) Bill 2014 ( Data Retention Bill ) to the PJCIS for inquiry and report. The PJCIS considered evidence provided by the Privacy Commissioner and others that, by creating a large repository of personal information, the proposed data retention scheme increases the risk and possible consequences of a data breach and that a mandatory data breach notification scheme is one way to manage the impact of any data breach on individuals ^[9] .

53. In February 2015, the PJCIS released the Advisory report on the Telecommunications (Interception and Access) Amendment (Data Retention) Bill 2014 ( PJCIS Report ). The PJCIS Report recommended the introduction of a mandatory data breach notification scheme by the end of 2015 (Recommendation 38). On 3 March 2015, the Government agreed to all recommendations of the PJCIS Report, including the introduction a mandatory data breach notification scheme. The Government stated it would consult on the draft legislation for the mandatory data breach notification scheme.

2015-16 consultation

54. In response to the Government's commitment to introduce a mandatory data breach notification scheme, the Attorney-General's Department drafted the Privacy Amendment (Notification of Serious Data Breaches) Bill 2015 ( Serious Data Breaches Bill ). The Serious Data Breaches Bill was based on the Privacy Alerts Bill with changes made to decrease the regulatory burden and further accommodate the feedback received during 2012 and 2013.

55. On 3 December 2015 the Attorney-General's Department released a Discussion Paper on the proposal to introduce a mandatory data breach notification scheme and consulted on the Serious Data Breaches Bill and a draft Regulation Impact Statement ( RIS ) for the proposal for a 13 week period until 4 March 2016.

56. The Attorney-General's Department responded to stakeholder concerns about the proposed mandatory data breach notification scheme raised during the 2015 16 consultation by revising the Serious Data Breaches Bill. This revision resulted in the Privacy Amendment (Notifiable Data Breaches) Bill 2016 ( Notifiable Data Breaches Bill ).

Status of the RIS at each major decision point

57. A RIS was prepared for the Privacy Alerts Bill that was assessed by the Office of Best Practice Regulation ( OBPR ) as meeting the Government's best practice regulation requirements. As indicated above, the Privacy Alerts Bill was introduced to Parliament in May 2013.

58. There was no RIS prepared in advance of the Government's commitment to introduce a mandatory data breach notification scheme in March 2015. However, the commitment was part of the Government's response, on 3 March 2015, to the PJCIS Report on the Data Retention Bill ^[10] . The Data Retention Bill was a package of reforms to prevent the further degradation of the investigative capabilities of Australia's law enforcement and national security agencies and was introduced to Parliament on 30 October 2014 ^[11] .

59. Subsequent to the Government's commitment to introduce a mandatory data breach notification scheme in March 2015, a RIS for the Serious Data Breaches Bill was prepared in advance of the decision to undertake the 2015-16 consultation. This RIS was submitted to the OBPR for early assessment. OBPR found the RIS suitable for consultation. In response to comments provided during the 2015-16 consultation the Serious Data Breaches Bill was redrafted as the Notifiable Data Breaches Bill.

What is the problem trying to be solved?

What a data breach is

60. Under the Data Breach Guide, a data breach is defined as the situation where 'personal information held by an agency or organisation is lost or subjected to unauthorised access, modification, disclosure, or other misuse or interference' ^[12] . The ALRC report noted that, with advances in technology, entities are increasingly holding larger amounts of identifying information in electronic form, raising the risk that a breach of this information could result in another individual using the information for identity theft and identity fraud. Stalking, embarrassment, or discrimination can also result from the unauthorised release or loss of information held by an agency or organisation. Currently, there is no mandatory requirement that an entity inform an individual following a data breach involving their personal information.

61. The Data Breach Guide notes that breaches are not limited to malicious actions, such as theft or 'hacking', but may arise from internal errors or failure to follow information-handling policies that cause accidental loss or disclosure. The Data Breach Guide provides some common examples:

•

lost or stolen laptops, removable storage devices, or paper records containing personal information;

•

hard disk drives and other digital storage media (integrated in other devices, for example, multifunction printers, or otherwise) being disposed of or returned to equipment lessors without the contents first being erased;

•

databases containing personal information being 'hacked' into or otherwise illegally accessed by individuals outside of the agency or organisation;

•

employees accessing or disclosing personal information outside the requirements or authorisation of their employment;

•

paper records stolen from insecure recycling or garbage bins;

•

an agency or organisation mistakenly providing personal information to the wrong person, for example by sending details out to the wrong address; and

•

an individual deceiving an agency or organisation into improperly releasing the personal information of another person ^[13] .

Why data breaches are a problem

62. As the collection of personal information by agencies and organisations increases the potential damage caused by data breaches increases. The potential damage includes damage to individuals, particularly through identity theft and crime, as well as the undermining of trust in the digital economy.

63. The ALRC found that, with advances in technology, agencies and organisations are storing vast amounts of identifying information electronically. The increased use of the internet and other current and emerging mobile technologies pose new challenges for privacy protection as Australians increasingly transact commercially and engage socially in the online environment. Personal information such as medical records, bank account details, photos, videos and details about individuals' personal preferences and occupational history is increasingly transitioning to web pages and data centres, with varying degrees of accessibility and security.

64. A number of reports indicate that, whilst the threat of data breaches is becoming increasingly clear, many organisations are not protecting themselves from cyber-attacks. A 2014 Telstra cyber security report found 36% of organisations were unprepared for a security incident ^[14] . A 2015 survey of 5,244 IT and IT security practitioners, including 200 from Australia, found that 57% of respondents do not think their organisation is protected from advanced cyber-attacks and that 63% do not think their organisation could stop exfiltration of confidential information ^[15] . A 2015 survey of over 700 Chief Information Officers, Chief Technology Officers etc. found a significant decrease in the implementation of effective data leakage policies. For example, organisations that have a data protection and privacy policy dropped from 87% in 2013 to 58% in 2015 ^[16] .

65. APP 11 requires organisations that hold personal information to protect the information from misuse, interference and loss, as well as unauthorised access, modification or disclosure. A breach of APP 11 would be an interference with the privacy of an individual and could be the subject of investigation by the Australian Information Commissioner as a result of a complaint from the individual or on the Commissioner's own initiative. Such an investigation can result in the Commissioner using his or her enforcement powers including powers to accept an enforceable undertaking, bring proceedings to enforce an enforceable undertaking, make a determination, bring proceedings to enforce a determination and to apply to the court for a civil penalty order for a breach of a civil penalty provision.

66. A civil penalty for serious or repeated interferences with the privacy of an individual will only be issued by the Federal Court or Federal Circuit Court of Australia following an application by the Commissioner. Serious or repeated interferences with the privacy of an individual attract a maximum penalty of $360,000 for individuals and $1,800,000 for bodies corporate.

67. However, whilst there are mechanisms in the Privacy Act to address the damage caused by data breach, organisations have no legal obligation to notify an individual if their personal information is breached (with the exception of eHealth information as discussed below). This is regardless of the sensitivity of the personal information and regardless of the risk of harm that may arise from the data breach.

68. The absence of a requirement to notify individuals of data breaches involving personal information does not align with the almost universal agreement from the Australian public that an organisation should inform them if their personal information is lost ^[17] .

69. The Data Breach Guide promotes the notification of serious data breaches. However, it is voluntary. A key issue is whether the Data Breach Guide is operating as an effective means to encourage widespread notification of breaches. In submissions to the 2015-16 consultation the OAIC and the Centre for Internet Safety both indicated that serious data breaches are being underreported in Australia. As numbers cited above demonstrate, voluntary notifications have increased by 250% since 2009-10, from 44 to 110. However, the OAIC predicts, based on comparisons with other jurisdictions, that notifications under a mandatory data breach notification scheme would nearly double to around 200.

70. Another issue with a voluntary scheme is potential inconsistency in how entities choose to participate. An example is a Privacy Commissioner investigation where an entity voluntarily notified a data breach three years after it occurred ^[18] . Although the Commissioner expressed concern about the significant delay between when the entity became aware of the data breach and when it chose to notify the breach, the Commissioner's current investigative and enforcement powers are based around requirements of the Privacy Act, and are not designed to deal with cases where a business's voluntary data breach notification practices possibly do not reflect community expectations.

71. This supports a conclusion that a continuation of voluntary data breach reporting will contribute to the extent of the data breach problem.

Identity theft and crime

72. Identity crime is amongst the most common and costly crimes in Australia, with an estimated annual economic impact of over $2 billion. Around 4-5 per cent of Australians experience identity crime each year that results in financial loss ^[19] . The Australian Government's National Identity Security Strategy ( NISS ) aims to prevent identity crime, assist victims to restore their compromised identities and to enhance the security and integrity of the systems used by government agencies to issue and maintain documents used by Australians as evidence of identity. The NISS supports a broad range of law enforcement, national security, government service delivery and broader digital economy policy objectives. This includes efforts to improve the systems and processes used to verify the identities of people seeking to transact with government agencies and other organisations with legislative requirements such as financial institutions or others with a reasonable need to verify a person's identity, such as recruitment agencies.

73. One of the key NISS initiatives is the Document Verification Service (DVS) which enables government agencies and private sector organisations to match biographic information on identity documents, such as driver licences and passports, against the records of the document issuing agency. The DVS is undoubtedly strengthening the ability of both government and the private sector to combat identity crime, by making it harder for criminals to use documents with fictitious identity information. However it does not prevent criminals using stolen information used on legitimately issued identity documents and substituting their own photos. Law enforcement agencies are already detecting cases of high quality fraudulent identity documents using this methodology - documents that would pass a DVS check. Preventing this type of fraud can be assisted by greater use of biometrics.

74. The Attorney-General's Department is establishing a facial biometric matching capability to facilitate sharing and matching of facial images from existing records between those agencies with a lawful basis to do so. This will assist agencies to protect people from identity theft, and help victims restore their compromised identities. However the system will only be available to government agencies (at least for the foreseeable future) and will need to be complemented by other risk mitigation measures, such as a mandatory notification scheme.

75. There is a link between the breach of personal information and identity theft and crime. A report released in 2014 indicated data breaches, whether accidental or deliberate, present significant opportunities for obtaining personal identifiable information that is used in identity crime. The types of personal information used to commit identity crime are increasingly being collected and stored in databases held by a variety of government agencies and private sector organisations and the aggregation of this information, particularly in electronic forms that are accessible online, increases the risk that information may be acquired through data breaches, either accidentally or through deliberate attempts to steal personal information ^[20] .

76. Identity theft involves the acquiring or collecting of an individual's personal information for criminal purposes. A 2015 review of data breaches found 53.2% of data breaches in the first half of 2015 were caused by identity theft amounting to 74.9% of compromised data records ^[21] . Stolen data was used for criminal purposes in the majority of data breach incidents ^[22] .

77. Stolen data is available for sale on dark web marketplaces. The type of data available includes PayPal and credit card accounts, bank log-in credentials and personal information including names, addresses, dates of birth and other information. Personal information is often traded in the form of scans of documents like passports, driver licences etc ^[23] .

78. In its submission to the 2015-16 consultation IDCARE, Australia and New Zealand's national identity support service, provided revealing statistics on the trade in identifying information. A physical Australian State or Territory Driver Licence, which is depended upon most by hackers and identity thieves, has a value of $417-$450 on the dark web marketplace Agora, whilst a physical Australian Passport has a value of $5110.

79. Any breach of the secure storage of personal information an entity holds may be sufficient to allow an unauthorised person to assume the identity of the victim and use that illicit identity to open, for example, new accounts in the victim's name. A stolen identity can be used to commit identity fraud where a fabricated, manipulated or stolen identity is used to gain a benefit or avoid an obligation ^[24] . In its submission to the 2015-16 consultation IDCARE stated that of the most recent 2,500 cases it managed where identifying information was reportedly breached, 32% of individuals detected a further misuse of this information, for example the exploitation by criminals of the identifying information.

80. Under the voluntary system, the notification of individuals can be delayed for years, as discussed above. Such a failure to notify an affected individual of a data breach in a timely manner increases the potential cost of the data breach on the individual. For example, a delay in notification increases the risk of an affected individual becoming a victim of an identity crime such as identity theft, as they may be unaware of the need to take action to mitigate the detrimental consequences of the data breach. Summary statistics for the last 12 months presented in IDCARE's submission to the 2015-16 consultation indicated that the average number of days between a data breach and an individual being notified of the breach was 405 days, whereas the average time between a data breach and the misuse of compromised information was 72 hours.

Underreporting of data breaches to individuals

81. There is a lack of empirical evidence on whether data breaches are being underreported to individuals as well as regulators. Submissions to the 2012 consultation and 2015-16 consultation varied on whether there is an underreporting of data breaches to the individuals to whom the data relates. However, given the link outlined above between data breach and identity theft and crime, an underreporting of data breach to the individuals to whom the data relates has the potential to cause harm to those individuals as it would deny them the opportunity to mitigate against any possible harm caused by the breach. As outlined above the harm from identity theft and crime can have significant financial and health impact on individuals.

82. The Privacy Commissioner has publicly stated that, based on media reports citing information technology security experts, that individuals and the OAIC have likely only been notified of a small percentage of data breaches that are occurring ^[25] .

83. In its submission to the Senate Legal and Constitutional Affairs Committee Inquiry into the Privacy Alerts Bill the OAIC provided evidence suggesting that in instances of admitted data breach 18% of interviewed organisations did not notify anyone outside the organisation of the data breach and 68% did not notify affected customers of the data breach ^[26] .

84. In its submission to the 2015-16 consultation the OAIC stated that without mandatory reporting of data breaches, some entities may not notify individuals that may be affected, or the OAIC. The OAIC suspects that many Australian entities do not voluntarily report all data breaches or recognise which incidents they should report and that data breaches regularly come to the OAIC's attention through the media and allegations from third parties rather than through notification by the entities.

85. In its submission to the 2012 consultation, the Centre for Internet Safety also asserted that significant amounts of underreporting had been occurring and that the voluntary system was not working. A number of submission to the 2015-16 consultation agreed that data breaches are underreported in Australia. These conclusions were supported by the relatively low number of notifications occurring under the current voluntary scheme compared with notifications in other jurisdictions and the fact that the low number of voluntary notifications contrasts with data breach trends being reported.

86. In its submission to the 2015-16 consultation IDCARE stated that the relatively small number of data breaches reported to the Commonwealth Office of the Australian Information Commissioner would suggest that much more work needs to be done to educate reporting entities on the real risks and harm caused from the unauthorised disclosure or loss of identifying information.

87. Importantly, statistics provided by IDCARE suggest that the content of voluntary notifications may be inadequate. IDCARE stated only 11% of organisations from a sample of 221 organisations within IDCARE's response library provided online guidance to impacted individuals about what they could do to mitigate harm following the compromise of their information.

88. On the other hand, some respondents to the 2012 consultation argued that the lack of clear information about the level of underreporting shows that there is no evidence of regulatory or market failure that has created a consumer protection risk warranting a response. A number of respondents to the 2015-16 consultation including the Association for Data-Driven Marketing and Advertising, the Interactive Games and Entertainment Association and the Digital Industry Group Inc. maintained that the voluntary data breach reporting scheme is sufficient.

The magnitude of data breaches

89. Studies and anecdotal evidence suggest that breaches of data security are increasing in frequency and scope. A 2014 Australian report found nearly a quarter of businesses surveyed had suffered an IT security breach in the previous 12 months, and 60% had suffered a breach in the previous five years ^[27] . A PwC report found 38% more security incidents were detected in 2015 than in 2014 ^[28] .

90. There have been a number of recent high profile data breaches that have highlighted the magnitude of the issue. Examples from Australia and abroad include:

a.

In 2012, 6.5 million encrypted passwords for LinkedIn users were the subject of a data breach as a result of unauthorised access and disclosure of the information. More than 100 million email and password combinations of LinkedIn members that were stolen in the 2012 breach were subsequently released on line in May 2016 ^[29] .

b.

In October 2013, Adobe reported that it had been the target of a cyber-attack that affected at least 38 million Adobe customers globally, including over 1.7 million Australians ^[30] .

c.

In June 2014, Optus reported 3 separate data breaches where the security of the personal information of over 300,000 of its customers was compromised ^[31] .

d.

In February 2014, a data breach at the Department of Immigration and Border Protection compromised the personal information of approximately 10,000 asylum seekers ^[32] .

e.

In November 2014, a hacking incident at Sony Pictures Entertainment was discovered that involved the personal information of employees, including social security and health information, as well as other Sony corporate information ^[33] .

f.

In June 2015, the Privacy Commissioner finalised enquiries into a data breach of Australian online retailer Catch of the Day, expressing concern that the data breach, which occurred in May 2011, had not been notified to the Commissioner until June 2014 ^[34] .

g.

In July 2015, the US Office of Personnel Management outlined details of two data breaches that compromised personal information about more than 21.5 million current and former US Government employees and other individuals ^[35] .

h.

In July 2015, client data from dating website Ashley Madison was stolen and published online in August 2015. Media reports about the number of affected Australians range from 460,000-900,000. On 24 August 2016 the Australian Privacy Commissioner released a joint finding with the Privacy Commissioner of Canada highly critical of the dating website's privacy and personal data security practices ^[36] .

i.

In September October 2015, retailers Kmart and David Jones disclosed that their online stores experienced data breaches compromising names, email and postal addresses and order details of some customers. Both retailers publicly announced the breaches, voluntarily notified the AFP, the OAIC and affected individuals, and engaged expert IT security advice. In both cases the OAIC stated it would await further information from the retailers and praised the voluntary notification of the breaches ^[37] .

91. There are numerous reports providing details of the magnitude and costs of data breaches and the linked issue of identity crime. One 2015 report that collected data breach information from 70 organisations in 61 countries identified 79,790 security incidents and 2122 confirmed data breaches. It reported an overall cost of $400 million from the 700 million compromised records ^[38] . Another global report identified 312 breaches, with 348 million identities exposed, with an average of 1.1 million average identities exposed per breach ^[39] . A recent report estimated that $US16 billion was stolen from 12.7 million identity fraud victims in the U.S in 2014 ^[40] .

Who data breaches affect

92. The impact of data breaches and related identity theft and crime is widespread and affects businesses, individuals and government agencies.

93. A 2016 report specific to Australia commissioned by IBM and conducted by the Ponemon Institute assessed the cost of 26 government and non-government data breaches from 11 industry sectors and found the average total cost of a data breach to business was $2.64 million with a cost of $142 per lost or stolen record ^[41] . It appears that a considerable proportion of data breaches involve the loss or theft of personal information that is ultimately used in identity crime. A US study found that two-thirds of identity fraud victims in 2014 had previously received a data breach notification in the same year ^[42] .

94. Identity crime is one of the most prevalent types of crime affecting Australians. A report on the results of a 2014 Australian Institute of Criminology survey estimated the national economic impact of identity crime in 2014 to be $AUD2.4 billion. It found 8.9 percent of people surveyed experienced criminal misuse of their personal information in the previous 12 months and spent an average of 15.3 hours dealing with the consequences of having their personal information misused. Almost five percent of those surveyed reported actual out of pocket losses as a result of the misuse of their personal information. These out of pocket losses averaged $3,572 per incident. The survey found nearly 12 percent of individuals whose personal information was misused in the previous 12 months experienced mental or physical health impacts that led to them seeking counselling or other treatment ^[43] .

95. In its submission to the 2015-16 consultation IDCARE indicated that around one in five IDCARE clients present psychological or somatic symptoms and impacts following the compromise of their personal information with the most common impacts being heightened anxiety, depression and feeling uncommunicative.

Community expectations

96. According to a 2013 national privacy survey conducted by the OAIC, the security of personal information, particularly on the internet, concerns the majority of Australians ^[44] . Eighty-nine per cent of respondents worried about the security of their personal information when using the internet, 69% did not trust social media services to protect their information and, 8% avoided using credit cards online due to concerns about the security of their personal information.

97. The survey also found that two-thirds of Australians are concerned that they may become a victim of identity theft and fraud in the next year, and one third say that they have had problems with the way that their personal information was handled in the previous year. The survey identified that over 90% of the Australian public thinks that both government and private business organisations should inform them if their personal information is lost and how they protect and handle personal information in the first place.

Current data breach requirements

My Health Records Act

98. At present in Australia, mandatory data breach notification requirements apply only in the event of unauthorised access to certain eHealth information under the My Health Records Act 2012 ( My Health Records Act ). Under the My Health Records Act, certain participants (the System Operator, a registered healthcare provider organisation, a registered repository operator, a registered portal operator or a registered contracted service provider) are required to report data breaches that occur in relation to the eHealth record system to the OAIC and the System Operator. Failure to report a data breach could be a breach of the My Health Records Act, and penalties may apply.

Voluntary data breach notification scheme

99. In the absence of a legal requirement, entities are encouraged to adhere to the Data Breach Guide. The Data Breach Guide outlines key steps and factors agencies and organisations should consider when responding to a data breach involving personal information that they hold. The Data Breach Guide provides advice around obligations under the Privacy Act to put in place reasonable security safeguards and to take reasonable steps to protect the personal information that they hold from misuse, interference and loss, and from unauthorised access, modification or disclosure. Depending on the circumstances, those reasonable steps may include the preparation and implementation of a data breach policy and response plan.

100. The OAIC guide contains 4 key steps for an agency or organisation to take when a data breach occurs. These are:

1.

contain the breach and do a preliminary assessment;

2.

evaluate the risks associated with the breach;

3.

undertake notification (if appropriate); and

4.

prevent future breaches.

Why is government action needed?

101. APP 11 of the Privacy Act obliges regulated entities to take reasonable steps to maintain the security of the personal information they hold, while other provisions create equivalent obligations in regard to other kinds of information. However, the Privacy Act does not oblige entities to notify individuals whose personal or other information has been compromised. Entities that do not participate in the voluntary scheme face no legal sanction.

102. As outlined above there are concerns that under the current voluntary notification system data breaches are being underreported or notification is being delayed to the individuals to whom the breached information relates and that this affects an individual's ability to take steps to mitigate any possible harm associated with the breach. Given the link between data breaches and identity theft and crime outlined above, these possible issues with the voluntary notification system may be contributing to the cost associated with identity theft and crime.

103. The OAIC's view is that notification may be a 'reasonable step' where a data breach has occurred (with 'reasonable step' being a key term used in APP 11 and other Privacy Act security provisions mentioned above). However, it believes an express mandatory data breach notification law would provide agencies and organisations with greater clarity and certainty regarding their obligation to notify, and the circumstances in which notification should be made. The OAIC believes that a mandatory notification scheme is necessary to:

•

give confidence to all Australians that if they are affected by a data breach, they will be given a chance to protect their interests; and

•

signal to entities that protection of individuals' personal information should be a priority in the digital age.

104. The Privacy Act's information security requirements are aimed at encouraging entities to take reasonable steps to minimise the possibility that personal information could be compromised. Provided an entity meets these requirements, it would not be in breach of its existing Privacy Act obligations, even if it suffered a data breach involving large amounts of personal information.

Does the Government have the capacity to successfully intervene?

105. In terms of whether a mandatory notification scheme would operate to limit the harmful effects of a data breach, some private sector stakeholders in responses to the 2012 consultation and in the 2013 targeted consultation process queried whether there was empirical evidence to suggest that notification of itself has been effective in reducing the likelihood or impact of a data breach in overseas countries.

106. A number of respondents to the 2015-16 consultation including PwC, Electronic Frontiers Australia and the OAIC stated that a mandatory data breach notification scheme would assist in reducing the damaging effects of the data breach.

107. US cases are limited but provide some evidence on this issue. Of the limited studies to date, there is empirical evidence to show that notifying affected consumers can reduce harmful effects such as identity theft. A 2008 study appeared to show that connection between data breaches and identity theft does exist. In that paper, a study of US jurisdictions using data from between 2002 and 2007 showed that the adoption of data breach notification laws 'reduce the identity theft rate by just 2%, in average'. Although this figure may seem low, a 1.8% reduction in identity theft would lead to savings of approximately $US1 billion. When that study was updated in 2011, the conclusion was that, based on data from 2002 to 2009, an empirical analysis revealed that these laws have reduced identity thefts by about 6.1% ^[45] . It is therefore open for the conclusion to be drawn that data breach laws are a longer term effective measure in combating identity theft.

108. It is difficult to determine whether or to what extent mandatory data breach notification would produce similar results in Australia. However, if introduction curbed identity theft to the same extent as the US study results in the long term, the Australian Institute of Criminology figures cited above suggest savings of $AUD146 million per annum.

What is the alternative to Government action?

109. The alternative to government action is the maintenance of the current voluntary data breach notification scheme and its associated under-reporting of data breaches to individuals to whom the personal information breached relates. This alternative to action could see the costs of data breaches to organisations, government and individuals continuing to increase.

110. The Ponemon Report estimates the costs to businesses of data breaches have increased from $123 per compromised record in 2010 to $142 per compromised record in 2016 amounting to a total organisational cost of data breaches rising from $1.97 million in 2010 to $2.64 million in 2016. The cost associated with the business losses from data breach, such as abnormal turnover of customers, reputation losses and diminished goodwill, increased from $0.66 million in 2010 to $0.84 million in 2016 ^[46] .

111. As already outlined, information from the Australian Institute of Criminology and IDCARE, data breaches and associated identity theft and crime has a significant financial and health impact on individuals.

What are the objectives of Government action?

112. The objectives of a mandatory data breach notification scheme accord with the objectives of the Privacy Act. The objective of the Privacy Act is to promote the protection of privacy of individuals, while recognising that this protection should be balanced with the interests of entities carrying out their legitimate functions or activities. Government action will provide certainty and consistency to organisations and agencies when responding to data breaches.

113. The key objective of mandatory data breach notification scheme is to allow individuals whose personal information had been compromised in a data breach to take remedial steps to lessen the adverse impact that might arise from the breach. The ALRC believed that, by arming individuals with the necessary information, they will have the opportunity to take appropriate action, such as monitoring their accounts or taking preventative measures such as changing passwords and cancelling credit cards.

114. A key outcome of a well-balanced privacy framework is the provision of a safer and more transparent environment for Australians to entrust their personal information to agencies and organisations. Greater assurance about the safety of personal information will encourage consumers to more fully engage in e-commerce, thereby boosting Australia's digital economy.

115. Another goal of privacy policy is to enable an enhanced information and assessment process to better inform policy makers, regulators, law enforcement and researchers about trends in the handling of personal information. Among other things, mandatory data breach notification will provide the OAIC with information about trends in data breaches that may assist in the development of useful guidance material for entities about information security.

116. A mandatory data breach notification scheme would also likely result in an improvement in compliance with privacy obligations: the reputational damage that can follow a high-profile data breach, and the commercial consequences of such a breach, can provide powerful incentives to improve security. On the other hand, reputational damage is often cited as a reason why some private sector organisations do not notify regulators or affected individuals about data breaches.

117. Evidence suggests this concern is valid to some extent: the Ponemon Report found that the biggest financial consequence to organisations of data breach is lost business. The same report found that the cost of a data breach is lower for companies that have strong information security policies in place before a data breach occurs ^[47] . A 2016 Deloitte survey conducted in Australia found that 29% of survey respondents who had received a voluntary data breach notification trusted the notifying entity less. Importantly, however, these respondents were outweighed by the 33% of respondents who actually trusted the entity more, presumably because of the transparency shown in undertaking notification. Additionally, the Deloitte survey shows that a significant 71% of people who had been informed of a breach did not trust the organisation any less following the notification ^[48] . A 2016 report by the Rand Corporation on a survey of consumer attitudes to data breaches in the U.S. found that 11 percent of respondents stopped dealing with a company following a breach. Of the 89% who chose to remain with the company, 23% said they gave them less business than before and one percent gave them more business than before the breach ^[49] .

118. Given the figures from the OAIC's 2013 national privacy survey cited above showing strong community support for data breach notification, the potential loss of trust following a notification would also need to be balanced against the possible reputational risk of not notifying a data breach that later comes to light.

119. A mandatory scheme would also encourage agencies and organisations to be transparent about their information-handling practices. This would support the operation of existing APP 1 in the Privacy Act, which requires entities to make available a clearly expressed and up-to-date policy about how the entity manages personal information.

What policy options are being considered?

Option One - Retain the status quo

120. Option One is to maintain the status quo. This means that entities subject to the Privacy Act will have no legal obligation to report a breach of personal information except in relation to My Health Records Act. They will continue to be obliged under the Privacy Act to secure personal and other specific kinds of information they hold, and will continue to be encouraged to comply with the existing OAIC Data Breach Guide.

121. The Data Breach Guide will continue to provide general guidance on key steps and factors for agencies and organisations to consider when responding to a data breach involving the personal information that they hold. Entities will also be able to draw on other relevant OAIC guidance material, such as the APP Guidelines ^[50] , which provide advice about key terms in the Privacy Act, as well as compliance with APP 11, and the Guide to Securing Personal Information ^[51] , which provides advice about 'reasonable' information security steps under the Privacy Act. This guidance material expresses the view that, depending on the circumstances, reasonable steps may include the preparation and implementation of a data breach policy and response plan (that includes consideration of whether to notify affected individuals and the OAIC).

122. In response to the 2012 consultation and the 2015-16 consultation, a number of private sector stakeholders argued that the voluntary scheme was sufficient in encouraging the reporting of significant breaches and in giving guidance to entities about how to effectively respond to these breaches. Many argued that private sector organisations have developed good privacy practices since the application of the Privacy Act to the private sector in 2001, and understand the importance of seeking the assistance of the Privacy Commissioner where appropriate and in dealing with the privacy concerns of their customers. They also argued that, contrary to anecdotal reports, there is no real evidence in Australia of underreporting of significant data breaches to the OAIC. Additionally, some argued that mandatory data breach notification laws effectively penalise regulated entities, which are often the targets of cybercrime attacks.

123. Maintaining the status quo would also allow the market participants to continue to develop good privacy practices consistent with the expectations of their customers. It is arguable that there is a sufficient commercial incentive for organisations to implement good privacy practice and notify their customers in the event that their information may become compromised. The reputational costs that come with failing to respond properly to significant data breaches are a strong incentive to notify the OAIC and consumers about breaches. In the current digital economy, consumers are more likely to consider the privacy track record and policies of a business when deciding whether to entrust it with their personal information ^[52] .

124. The Information Commissioner has an existing power under the Privacy Act to audit private sector organisations which could be used to investigate actual or suspected data breaches (for example, following complaints from affected individuals, media articles or other information). This has the potential to make it more difficult for an entity to hide a data breach. For reputational risk reasons, the possibility of being audited provides the incentive to report data breaches to the Commissioner and affected individuals proactively.

Option Two - Introduce a mandatory data breach notification scheme

125. Option Two is to amend the Privacy Act to introduce a mandatory data breach notification scheme that requires entities to report notifiable data breaches to the OAIC and to affected individuals. A notifiable data breach is one that would lead a reasonable person to conclude that there is a likely risk of serious harm to any of the individuals to whom the breached information relates, where no exceptions to notification apply. Option Two will make no changes to the mandatory notification scheme operating under the My Health Records Act.

126. Considerable consultation has been undertaken with stakeholders on the design of an amendment to introduce a mandatory data breach notification scheme. Following the 2012 consultation on the introduction of a mandatory data breach notification scheme the Attorney-General's Department drafted the Privacy Alerts Bill which was the subject of the 2013 targeted consultation. The Privacy Alerts Bill provided the basis for the Serious Data Breach Notification Bill, which was the subject of the 2015-16 consultation. To respond submissions received in the 2015-16 consultation the Serious Data Breaches Bill was redrafted as the Notifiable Data Breaches Bill in 2016.

Who should Option Two apply to?

127. There was broad consensus from submitters to the 2012 consultation, the 2013 targeted consultation and the 2015-16 consultation which entities should be subject to the scheme, with most submitters who commented agreeing with the ALRC's view that it should apply to entities currently regulated by the Privacy Act. A small number of submitters argued that all businesses that hold personal information should be subject to the scheme, or that, if the Government removed or amended exemptions in the future (e.g. small businesses, political parties), those entities should also automatically be subject to the scheme.

128. The proposed model has reflected these comments by only applying the data breach notification law to entities currently regulated by the Privacy Act. The proposed model would not include entities, or some of their activities, that fall within exemptions in the Privacy Act, such as political parties, media organisations and most small businesses.

Notification threshold

129. Under the proposal, a notifiable data breach occurs following unauthorised access to, disclosure of, or loss of, personal or other specific kinds of information about an individual, where a reasonable person would conclude that the access, disclosure or loss would be likely to result in serious harm to that individual, and no exceptions to notification apply. This is consistent with the ALRC's recommended trigger for notification, which was a test based on a 'real risk of serious harm' to an affected individual.

130. The vast majority of submitters to the 2012 consultation who commented on the possible design of a mandatory scheme were in favour of the ALRC's recommended trigger for notification, or a variation of that test, i.e. a test based on a 'real risk of serious harm' to an individual. This would not require entities to report less serious privacy breaches to affected individuals or the OAIC.

131. However, in the 2013 targeted consultation and the 2015-16 consultation support was expressed for more explanation about, or a definition of what constitutes, 'a real risk of serious harm'. Without this additional assistance, it was argued that some regulated entities may adopt a more risk adverse approach to notification by taking a narrow interpretation that could lead to notification fatigue and create resourcing issues at the OAIC.

132. To address this concern, the proposed model:

a.

modifies the ALRC's 'real risk of serious harm' threshold by introducing well-known legal concepts that involve an objective 'reasonable person' element and a reference to 'likely risk' rather than 'real risk' - retaining the core elements of the ALRC's recommended test while improving ease of compliance for regulated entities.

b.

has an exception providing that notification is not required if a reasonable person would conclude that serious harm is not likely as a result of remedial action taken by the entity; and

c.

provides a list of relevant matters, including encryption, when determining whether a reasonable person would conclude that there is a likely risk of serious harm to an individual.

133. The notification requirement under Option Two would apply to personal information held by APP entities, credit reporting information held by a credit reporting body, credit eligibility information held by credit providers, and tax file number information held by file number recipients. Where these types of information have been disclosed to foreign recipients, the requirement to notify in the event of a relevant data breach by the foreign recipient will remain with the disclosing Australian entity in certain circumstances.

When is notification required?

134. Option Two also provides that an entity should be required to notify as soon as practicable after it becomes aware of a notifiable data breach. This is in accord with the consensus amongst submitters to the 2012 consultation, the 2013 targeted consultation and the 2015-16 consultation who believed that flexibility, rather than a set time frame, was needed given the variable factors unique to each data breach. Where an entity is unsure of whether a serious data breach has occurred, Option Two also explicitly provides the entity with time to investigate the circumstances of the incident to determine whether notification is required (with no further action required if the notification threshold has not been met).

135. Option Two enables the Information Commissioner to provide an exemption, or a temporary deferral, to an entity from the requirement to notify a data breach. Submissions to the 2015-16 consultation supported the provision of additional flexibility to the Information Commissioner to consider the broader circumstances of an entity and a data breach. To address this concern, Option Two provides that the Information Commissioner can provide an exemption, or a temporary deferral, to an entity from the requirement to notify where the Information Commissioner is satisfied that it is reasonable in the circumstances to do so, having regard to the public interest.

136. Option Two contains a notification exception applying to all entities in cases where a law enforcement body, the Australian Security Intelligence Organisation or the Australian Signals Directorate advises the entity not to notify a notifiable data breach, or to delay notifying a notifiable data breach, because it would prejudice an enforcement related activity or raise national security concerns.

137. Option Two would also allow the Information Commissioner to direct an entity to notify a data breach. This power is primarily intended to operate in cases where an entity fails to comply with the mandatory notification requirement of its own volition. An entity would be able to seek review, at the Administrative Appeals Tribunal, of an Information Commissioner decision to issue a direction.

138. Submissions to the 2015-16 consultation supported a right of reply by entities to the Information Commissioner before such a direction is made. To address this concern, the proposed model now contains a requirement that the Information Commissioner must consult with an entity before making such a direction and give the entity an opportunity to either voluntarily notify the data breach or to contend that no data breach in fact occurred.

Who must make the notification?

139. The ALRC recommended that the entity involved in the breach should have the responsibility of notification. Most respondents to the 2012 consultation generally favoured this approach, noting that the entity was best placed to assess the breach, the adverse risks that might arise, and what mitigating action could be taken. Option Two incorporates this approach.

140. A number of submissions to the 2015-16 consultation referred to situations when more than one entity simultaneously 'holds' personal information that is subject to a breach: for example, if the information is stored in a joint database over which both entities have constructive possession, or if a particular form of subcontracting arrangement is involved. To address this situation the proposed model provides entities with the discretion to decide either which entity shall notify the notifiable data breach, or whether both of the entities should jointly notify (for example, by providing contact details for one or both entities in the notification).

Who should be notified?

141. Submissions to the 2015-16 consultation suggested that a requirement to notify all individuals whose information was subject to unauthorised access, unauthorised disclosure or loss in a notifiable data breach is unduly burdensome in cases where an entity is able to efficiently identify which individuals from a larger cohort are at risk of serious harm (for example, if the potential harm involves financial loss, and the entity only had payment details for a small number of individuals whose personal information was breached). To address this Option Two provides entities with the discretion to notify only individuals who a reasonable person would conclude are (or are assumed to be) at likely risk of serious harm as a result of a data breach, if it is practicable for the entity to identify those individuals.

Means of notification

142. During the 2012 consultation, the 2013 targeted consultation and the 2015-16 consultation there was general support from stakeholders for the proposition that the means of notification should be directly by phone, letter, email, in person, or by the normal means of communication between the entity and the individual. In the 2013 targeted consultation, industry groups expressed the wish for flexibility so that regulated entities could notify individuals in a variety of ways.

143. Option Two incorporates a flexible approach to notification as it provides entities with the ability to notify an affected individual using the methods of communication it would normally use to contact the individual. Where there is no normal mode of communication with the particular individual, the entity must take reasonable steps to communicate with them. Reasonable steps could include making contact by email, telephone or post.

144. Furthermore, should it be impossible or impracticable for the entity to notify each individual, the proposal does not require direct notification but rather requires the entity to publish the notification on its website (if any), and to take reasonable steps to publicise the notification. This will ensure that entities are not required to notify each affected individual if, for example, it would be impracticably expensive to do so. It also recognises that different kinds of notification techniques will be appropriate for different kinds of entities and data breaches (for example, it may be reasonable for some entities to publish information about a data breach via social media, whereas for others a newspaper advertisement may be reasonable).

Content of notification

145. The ALRC report recommended that, as a minimum, the notification should contain: a description of the breach; a list of the types of personal information that were disclosed; and contact information for affected individuals to obtain more information and assistance.

146. Submissions to the 2012 consultation provided a range of views on the content of notifications. In general, private sector submitters preferred less detailed information having to be provided, while privacy regulators/advocates believed more should be included. For example, Telstra believed it should be limited to the fact of the data breach, the information accessed/disclosed and what affected persons could do to minimise the impacts. On the other hand, the NSW Privacy Commissioner believed it should also include more details about the incident, the action that has been taken as a result of the breach and contacts at the agency or organisation.

147. The Notifiable Data Breaches Bill incorporates these suggestions, requiring a notification to contain the name and contact details for the entity notifying, a description of the breach, the kinds of information concerned and recommendations about the steps that individuals should take in response to the serious data breach. These requirements are based on the existing OAIC voluntary standards.

148. Submissions to the 2015-16 consultation from the Department of Immigration and Border Protection and the Department of Employment expressed the desirability of guidance material from the OAIC on the recommendations about the steps that individuals should take in response to the serious data breach. It is expected that the OAIC would provide guidance material on a mandatory data breach notification scheme.

149. Where the Information Commissioner directs an entity to notify a data breach, the Commissioner would also have discretion to direct the entity to include other information about the data breach in the notification. This discretion has been included because it is expected that the power to compel notification would be used where an entity has failed to voluntarily notify a data breach, in which case it may be appropriate in some cases to include additional information in the notification (such as information about complaint mechanisms available under the Privacy Act).

Failure to notify

150. The Commissioner's power to direct an entity to notify a data breach is expected to be the most likely first regulatory response in the event that an entity fails to comply with its mandatory notification obligations.

151. Option Two would also link into the existing penalty structure in the Privacy Act, where (should the direction power prove inadequate, or where a further regulatory response is appropriate) less severe sanctions could be used before elevating to a civil penalty. These less severe sanctions could follow a Commissioner investigation and include public or personal apologies, compensation payments or enforceable undertakings. A civil penalty would only be applicable where there has been a serious or repeated non-compliance with mandatory notification requirements.

Option Three - Encourage industry to develop industry codes

152. Option Three is to encourage entities regulated under the Privacy Act to develop industry codes that provide a self-regulatory framework tailored to particular industry needs, taking into account existing reporting requirements and compliance issues. This could be complemented with increased efforts on the part of the OAIC to promote more awareness about the Data Breach Guide. This proposal would be assisted by OAIC guidance material, specifically its Guidelines for Developing Codes ( Code Guidelines ). Some industry groups have developed self-regulatory codes as a tool to promote standard practices and compliance.

153. The Ponemon Report found that the per capita cost of data breach incidents is different for particular industries, with financial, services, technology and energy companies incurring higher costs ^[53] . This finding is borne out in a separate 2016 Ponemon Report analysing worldwide data breach trends, though Ponemon found that healthcare and education entities experienced the highest data breach costs internationally ^[54] . Findings such as these may support the argument that particular industries are in a better position to identify what is reasonable in terms of developing their own data breach responses, having regard to their own compliance cost issues.

154. On the other hand, there were mixed views provided by key Australian industry groups in the 2013 targeted consultation process. Some believed that there would be no disproportionate adverse impact on different industry groups, while others believed that small businesses (i.e. those subject to the Privacy Act because they trade in personal information, or are health service providers) would be affected in that way.

155. Under Part IIIB of the Privacy Act, the Information Commissioner can approve and register enforceable codes which are developed by entities on their own initiative or on request from the Commissioner, or developed by the Commissioner directly. An entity (or a body or association representing them) can develop a written code of practice for the handling of personal information that sets out how one or more of the APPs are to be applied or complied with, and the APP entities that are bound by the code.

156. An entity bound by a registered code must not do an act, or engage in a practice, that breaches that code and a breach of a registered code will be an interference with the privacy of an individual under the Privacy Act and subject to investigation by the Information Commissioner. While the Privacy Act allows the development of codes which would allow particular industries to develop a more tailored approach to personal information-handling, these cannot derogate from minimum standards set out in the APPs.

157. Option Three would be complemented with increased efforts on the part of the OAIC to promote more awareness about the OAIC guide, and the importance of complying with it as good privacy practice. Furthermore, the OAIC's Guide to Securing Personal Information and Privacy Management Framework: Enabling Compliance and Encouraging Good Practice contains suggested standardised rules that may help industry to adopt a self-regulatory framework.

What is the likely net benefit of each option?

Option One - Retain the status quo

Who would be affected

Businesses

158. Businesses would continue to have the option to notify when data breaches occur and utilise the OAIC Data Breach Guide.

Individuals

159. The notification of individuals whose personal information is the subject of a data breach will continue to occur if an APP entity voluntarily undertakes notification.

Government

160. Government agencies would continue to have the option to voluntarily notify individuals if there has been a breach of the individual's personal information. If agencies choose to notify individuals they would be able to use the OAIC Data Breach Guide to inform their approach.

161. The OAIC would continue to provide guidance for the management of data breaches in the Data Breach Guide and other related guidance material.

Net benefit analysis

162. Option One is unlikely to have any additional effect. Agencies and private sector organisations under the Privacy Act will continue to operate in accordance with the APPs, and be encouraged to continue to report significant data breaches to the OAIC and affected individuals. Public perceptions about responses to data breaches are likely to remain in favour of prompt reporting, which may drive the development of stronger security measures and increased compliance with the voluntary Data Breach Guide.

163. Under this option, there is likely to be little impact on the OAIC, who will continue to acquit its functions under the Privacy Act including in relation to providing guidance on data breaches. The ability of the Information Commissioner under section 33C of the Privacy Act to undertake assessments of APP entities relating to the APPs may see data breaches coming to light in addition to those breaches subject to voluntary notification. Furthermore, information about breaches is now regularly revealed when hackers publicly report on their efforts.

164. There will be little change for individual Australians, noting that they face existing risks without a mandatory scheme. There remains a possibility that they may continue not to be informed in the event that their personal information becomes compromised, thereby raising the risk they could suffer serious harm. As noted above, more undisclosed breaches may begin to come to light because of the Information Commissioner's powers, and the trend in hackers revealing their work. As also noted above, the OAIC's 2013 national privacy survey found that the large majority of Australians expected entities to be transparent about information security practices, and wished to be informed following loss of their personal information ^[55] . These kinds of customer preferences may encourage more entities to err on the side of reporting where there has been a breach.

165. There will be no additional impact on businesses subject to the Privacy Act and they will continue to be able to notify the OAIC of data breaches if they choose to do so. There will be no impact on small businesses as they are generally not subject to the Privacy Act. Larger not-for-profit organisations subject to the Privacy Act (because they have a turnover of greater than $3 million) will be in the same position as organisations that are subject.

Option Two - Introduce a mandatory notification of serious data breach scheme

Who would be affected?

Business

166. Businesses regulated by the Privacy Act would be required to notify the OAIC and affected individuals when personal information has been the subject of a data breach that a reasonable person would conclude is likely to result in serious harm, unless an exception applies. Small businesses which are not subject to the Privacy Act will not be affected.

Individuals

167. Individuals would be affected by Option Two as they would be notified by entities when their personal information has been the subject of a data breach that a reasonable person would conclude is likely to result in serious harm.

Government

168. Government agencies regulated by the Privacy Act will be required to notify the regulator and affected individuals when personal information has been the subject of a data breach that a reasonable person would conclude is likely to result in serious harm unless the agency is subject to an exception. Exceptions would apply if notification would impact upon a law enforcement investigation or the operation of a secrecy provision in other legislation, if a data breach fell under existing notification requirements in the My Health Records Act, or if the regulator granted an exemption.

169. The introduction of the option will also affect the OAIC, as it will regulate Option Two.

Benefits

Businesses

170. Option Two would require mandatory notification following a data breach of personal information, credit reporting information, credit eligibility information or tax file number information - all of which are subject to existing security requirements in the Privacy Act - that a reasonable person would conclude is likely to result in serious harm to affected individuals.

171. Requiring notification may act as an incentive to the holders of the above information to adequately secure or dispose of that information. In other words, the adverse publicity occasioned by a notification may deter poor handling of such information, and increase the likelihood that adequate and reasonable measures are taken to secure it. This could thus be called the 'deterrent objective'. The ALRC viewed this as more of a secondary objective, although it has been part of the rationale for data breach notification laws in many other jurisdictions. A 2015 IT security and privacy survey identified increased regulation leading to improved data security as a developing trend ^[56] . Submissions to the 2015-16 consultation were divided on whether a notification requirement would support the 'deterrent objective'. Submissions from stakeholders including PwC and Electronic Frontiers Australia indicated Option Two would promote improved information security.

172. However, some submissions did not agree that a mandatory data breach scheme will result in widespread improvements to data security, stating that organisations intending to improve information security will do so regardless, and organisations with no such intention are unlikely to change this as a result of new legislation.

173. The creation of mandatory laws would also create a more level playing field for organisations. The Victorian Privacy Commissioner noted in its submission to 2012 consultation that only ethical and compliance-conscious organisations are likely to voluntarily report. Mandatory notification would assist in reducing (and possibly eliminating) incentives for organisations to suppress or deliberately conceal data breaches.

174. In its submission to the 2015-16 consultation, the OAIC identified consistent reporting of data breaches by entities as a significant benefit. The OAIC stated that, under the current voluntary or self-regulatory model, entities that tell their customers about a data breach may suffer disproportionate reputational damage compared with entities that deal with data breaches internally.

175. The OAIC submission provided an example of a security vulnerability on a relatively widely used platform that resulted in the exposure of several Australian entities' customer records. Some entities notified affected customers and the OAIC, and experienced adverse media coverage. However, the OAIC anticipates that as the platform was widely used, other entities may have also experienced a breach but did not notify affected individuals or the OAIC, thereby avoiding media scrutiny. The OAIC concludes that a level playing field introduced by a mandatory notification scheme will ensure that entities with good notification practices are not unfairly disadvantaged.

176. As identified by the OAIC in their submission to the 2015-16 consultation, a mandatory notification scheme would provide entities with greater clarity about what breaches need to be notified and may assist entities with their response to data breaches.

177. The proposed scheme would clarify for entities what sort of data breach is a 'notifiable breach', and help entities assess whether they have experienced a 'notifiable breach'. A requirement to notify individuals of a data breach may also benefit entities, as proactive and timely notification of a notifiable data breach:

•

allows the entity, rather than the media, to state what has happened and how the entity is managing the breach;

•

helps the entity rebuild public trust;

•

demonstrates publicly that the entity takes privacy seriously; and

•

demonstrates that the entity is working to protect affected individuals from the harm that could result from the data breach.

178. A key outcome of a well-balanced privacy framework is the provision of a safer and more transparent environment for Australians to entrust their personal information to agencies and organisations. Greater assurance about the safety of personal information will encourage consumers to more fully engage in e commerce, thereby boosting Australia's digital economy and benefitting businesses.

179. In its submission to the 2015-16 consultation the OAIC also identified further benefits where entities notify the OAIC of a breach. In such situations the OAIC could:

•

give the entity guidance on responding to the data breach;

•

assist the entity to determine whether the breach has been contained;

•

meaningfully respond to community enquiries about the breach; and

•

explain to individuals steps they may take to protect their personal information.

Individuals

180. Option Two would ensure that individuals whom a reasonable person would conclude are likely to be at risk of serious harm due to a data breach are notified of the incident, and receive recommendations about steps they should take in response. The individuals would then have an opportunity to take corrective action to change or otherwise 'resecure' the information. The ALRC considered that this could be referred to as the 'mitigation objective'. For example, this might allow an individual to change passwords where those passwords have been hacked, to cancel credit cards if details have been stolen, or to change telephone numbers where silent numbers have been revealed.

181. Support of the mitigation objective of a mandatory data breach notification scheme has been unanimous across the numerous consultations undertaken on the proposed introduction of a mandatory data breach notification scheme.

182. Submissions to the 2015-16 consultation agreed that being notified of a data breach would enable individuals to protect their interests and that a key objective of a mandatory data breach notification scheme is consumer protection. The OAIC stated a mandatory data breach notification scheme would allow individuals to take steps that may limit the risks that result when personal information is compromised and identified a number of steps notification would enable an individual to take to minimise the impact of a breach, such as:

•

cancelling credit cards,

•

changing online passwords, and

•

monitoring their credit reports.

183. The mitigation objective is expected to raise confidence amongst consumers about the entities that they are dealing with, and the increased transparency will provide consumers with more information to make informed choices about whether to transact with particular entities.

Costs

Businesses

184. The introduction of a mandatory scheme for entities regulated by the Privacy Act raises the question of what new compliance costs will be. It is expected that the overall impact of the option would be low for the following reasons:

•

research indicates notification costs amount to only 2.3% of the overall cost of a data breach ^[57] ;

•

the Privacy Act has a small business exception that would exclude around 94% of Australian enterprises from the proposed scheme ^[58] ;

•

the OAIC expects only 200 notifications in the first year of the proposed scheme's operation;

•

40% of voluntary notifications the OAIC currently receives are from government agencies and have no cost to businesses;

•

the proposed scheme's relatively high notification threshold, and provisions to allow entities to self-assess whether notification is required, will mean fewer notifications are required than comparable schemes in other overseas jurisdictions; and

•

a simple, streamlined scheme is proposed with the intention that entities who already participate in the OAIC's voluntary scheme will experience minimal change.

1. Administrative costs

185. In the 2013 targeted consultation and the 2015-16 consultation privacy and consumer advocates argued that the costs would be minimal. These respondents argued that the costs of preventing breaches are in any case generally lower than the costs of handling them once they have occurred; and that it is widely recognised that it is good business practice to proactively manage risks rather than to merely react when something goes wrong. Further, these groups argued that the costs are likely to be mostly one-off and should be considered a normal business overhead for any organisation handling personal information.

186. The 2013 targeted consultation and the 2015-16 consultation sought specific information in an attempt to quantify the regulatory burden of a mandatory data breach notification scheme. Stakeholders were asked what are the likely administrative costs (quantified if possible) to private sector organisations under a mandatory scheme for entities that have systems in place to notify under the voluntary OAIC Data Breach Guide, as well as those that do not. Respondents identified a number of administrative costs:

•

costs linked to notification methods (e.g. mail, telephone, resourcing) so that the actual costs would be incurred by specific business units within an organisation. It was noted that greater flexibility in the notification requirements would assist in containing costs associated with communicating to customers;

•

other costs could be in the time and effort in formalising the process (e.g. internal communications, directives, and process mapping);

•

increased insurance costs, which would be a consequence of an increased perceived business risk;

•

costs associated with the need to engage additional legal counsel.

187. The 2013 targeted and the 2015-16 consultation did not receive specific costs estimates. There was no common view among respondents about the likely amount of costs, with respondents providing a broad range of general cost estimates on this issue. For example, one industry group respondent to the 2013 targeted consultation commented that larger organisations have stated clearly that the requirements of mandatory notification would involve capital expenditure running into millions of dollars, and the costs would vary depending on the amount of data held by the entity. Another industry group respondent believed there would be 'significant capital costs'.

188. Whilst the views above may be salient for companies without a data breach policy, it is relevant to note that many companies already participate in the voluntary scheme and/or have a relevant policy. A recent report assessed over 100 leading Australian consumer brands against privacy best practices and found over two thirds have a data breach policy ^[59] .

189. In the 2015-16 consultation, Telstra stated that establishing similar compliance programs is resource and time intensive, but can be implemented within existing frameworks by larger organisations. Telstra submitted that, unlike larger organisations, smaller organisations unable to implement reporting requirements into existing frameworks may incur substantive compliance costs from the introduction of a mandatory data breach notification scheme but these costs can be lowered by less complex legislative requirements.

190. The Notifiable Data Breaches Bill has responded to numerous submissions that well-drafted legislation will reduce the regulatory burden of Option Two. The numerous consultations conducted on Option Two have resulted in an iterative drafting process between the Attorney-General's Department and stakeholders. This design process means the Notifiable Data Breaches Bill removes unnecessary detail and procedural requirements, provides greater clarity about key terms, introduces more flexibility and reduces costs for entities. Furthermore, the proposed scheme will be largely based on the current voluntary scheme, meaning the cost of the proposed scheme will be minimal on entities participating in the current voluntary scheme.

2. Cost of notification of a data breach

191. Notification costs will have two components: the costs of notifying the OAIC and the cost of notifying individuals. It is expected that the OAIC will issue guidance material that will help entities assess what constitutes a notifiable data breach, and how to comply with the proposed scheme's notification requirements.

192. Given the magnitude of some data breaches, particularly in an online environment, it is expected that the main costs of notification of a data breach will be the cost of notifying affected individuals. The increasing ubiquity of electronic communication using email, social media and web publishing will decrease notification costs when compared to the more traditional forms of communication such as mail and telephone. Whilst a small and decreasing percentage of notification may continue to be by mail and telephone, it is expected that the vast majority of notifications would occur electronically.

193. Also relevant to the cost of notification is that the option would include mechanisms to ensure that direct notification to affected individuals would not be required if it was unreasonable (for example, if the associated cost to the business would be excessive in all the circumstances). In these circumstances, the business would be able to notify the serious data breach via its website (if any) and any other reasonable methods (such as posts on the business's social media channels, if any, or a newspaper advertisement if appropriate). Particularly in the expected small percentage of situations where a business could only notify affected individuals directly via mail and telephone, these mechanisms would be expected to reduce the cost of compliance for business and prevent businesses from incurring unreasonable notification costs.

194. Research indicates notification costs amount to a small percentage of the overall cost of a data breach. The Ponemon Report found that the average total cost of data breach for an entity was $2.64 million. In contrast, the cost of notifying regulators and affected individuals of a data breach was $0.06 million or 2.3% of the total cost ^[60] .

195. The projected amount of notifications under the option is relatively low. Based on the current voluntary scheme and statistics from other jurisdictions, in the first year of the proposed scheme's operation the OAIC expects to receive only 200 data breach notifications.

196. When assessing the impact of the proposed scheme on businesses it is relevant to note that around 40% of notifications under the current voluntary notification scheme are related to government agencies and have no impact on businesses. Furthermore, one in five notifications under the current voluntary scheme have involved only a single individual's personal information and roughly half of all notifications have involved less than 100 people.

197. The proposed scheme would only require notification when a reasonable person would conclude that an unauthorised access, unauthorised disclosure or loss is likely to result in serious harm to affected individuals. This threshold is based on the relevant recommendation of the ALRC report and is the same threshold is used in the OAIC's current voluntary scheme. This means that notification would not be required following a data breach where the risk of harm is unlikely, or the potential harm not serious. This will mean notification would be required less often compared to jurisdictions such as California and the European Union, and the impact on businesses would be decreased accordingly.

3. Cost to small businesses

198. The proposed scheme will only apply to around 6% of Australian businesses. The Privacy Act exempts small businesses (entities with an annual turnover of $3 million or less) from the operation of the Privacy Act. This exemption does not apply to some small businesses, including those that provide a health service, are a credit reporting body, or trade in personal information. The Attorney-General's Department commissioned statistical analysis from the Australian Bureau of Statistics that showed that in 2013 about 94% of entities on the ABS Business Register are below the $3 million threshold and are therefore not likely to be subject to the Privacy Act or the proposed scheme.

199. However, there are a number of small businesses in that category which are subject to the Privacy Act because of exceptions to the Act contained in provisions such as subsection 6D(4), e.g. they trade in personal information. In the 2013 targeted consultation process, it was argued that mandatory data breach notification would place a disproportionate cost on small businesses which are subject to the Privacy Act, particularly in the direct marketing industry, as they may not be in a position (unlike larger organisations) to absorb some of the costs internally.

200. Conversely, in a submission to the 2015-16 consultation the Australian Bankers Association observed that a mandatory data breach notification scheme may grant an unreasonable advantage to new entrants to an industry, such as new businesses and start-ups that have an annual turnover of less than $3 million per annum, as they are not required to comply with the notification obligation.

4. Cost to not-for-profit organisations

201. Larger not-for-profit organisations that are subject to the Privacy Act (because they have a turnover of greater than $3 million) will be in the same position as organisations that are subject to the Act.

5. Cost to particular industry groups

202. Respondents to the 2013 targeted consultation process had mixed views about whether particular industry sectors would incur disproportionate costs through a mandatory data breach notification scheme. Most believed there would be no industry sector impacted disproportionately, although others believed that there would be in the case of:

•

small businesses and start-ups (see Item 3 above); and

•

some members of the financial services sector, given that the coverage includes APP regulated entities, credit providers and tax file number recipients.

6. Competition costs

203. A possible negative impact for small business is that individuals may be more tempted to use larger private sector organisations in the knowledge that they are subject to mandatory requirements in the event of a data breach. In the 2013 targeted consultation stakeholders suggested that, in the US, bigger companies support data breach laws because smaller competitors cannot meet the compliance requirements and some cease doing business. The proposed amendments are unlikely to raise these issues as they do not change the small businesses exemption in the Privacy Act. In addition, individuals who are likely to prefer larger firms due to regulated privacy protections may have already made this choice due to the fact that the Privacy Act already applies to those firms.

204. Industry group respondents noted there could be some positive and negative impacts on competition as a result of a mandatory scheme. For example, customers may choose to 'vote with their feet' given the likely increased publicity around data breaches or lack of breaches, potentially impacting positively on competition. This is supported by the Ponemon finding that, following a data breach, 56% of the costs associated with a data breach were incurred through indirect costs including increased customer 'churn rate' (the percentage of customers abandoning a business) ^[61] . Ponemon also found (while acknowledging the small sample size) that post-data breach churn rate varied between industries, with the service and financial service industries experiencing a relatively higher churn rate and, as a result, also reporting a higher per capita cost per breach ^[62] .

205. In the 2013 targeted consultation another industry group noted that both general and specific competition issues would arise in the marketing and advertising industry. That group commented that, in general, data-driven marketing and advertising will be less competitive than alternate channels and platforms (such as mass marketing and advertising in traditional broadcast mediums and in print), if the costs of mandatory data breach notification results in a considerable increase in the price of data-driven marketing campaigns. As a result, the group's view was that mandatory data breach notification scheme would affect the most innovative companies working in Australia's digital economy.

206. Industry groups also commented that there was the potential for serious and costly reputational damage if the Commissioner directed an entity to notify a general form of notification (e.g. publication in a newspaper) rather than a targeted notification. A general form would bring exposure to a wider range of the public, including those that are not affected by the data breach.

207. Option Two responds to this concern by providing that the Information Commissioner, whilst being able to make directions about the information provided to individuals by entities, would not be able to direct entities on the form of notification. Instead, an entity would have discretion to undertake 'general publication' where notifying each affected individual of the data breach would be impracticable, in which case the entity would be required to notify the breach via its website (if any), and to take 'reasonable steps' to publicise the notification. This could include publicising the notification via a newspaper or online advertisement, a social media posting, or any other method that is reasonable in the context of the entity's operations and the circumstances of the data breach.

208. Finally, an additional competition issue identified was the creation of a higher cost of entry to market. These businesses would be in a similar state to start-up entities, and, if subject to the Privacy Act, would need to factor in the costs associated with a mandatory data breach notification scheme. However, it is arguable that these costs are likely to be minor compared with other privacy obligations that will need to be adhered to once a new business starts and becomes subject to the Privacy Act.

Individuals

209. There is the possibility that, as a result of the introduction of a mandatory scheme, some entities may need to make internal changes to improve compliance with the Privacy Act and these costs may be passed on to consumers, thereby making transactions more costly.

Government

210. There is likely to be an impact on the OAIC. As the regulator, the OAIC will be expected to receive a larger number of notifications, and will have additional powers to utilise in the event that a failure to comply with a data breach obligation requires investigation. The OAIC also expects to receive a higher number of privacy complaints due to complaints from individuals who receive data breach notifications, and that it will also be necessary to use other regulatory powers in some cases (for example, to investigate data breach notifications that suggest an entity has systemic privacy compliance issues). It is expected OAIC will issue new guidance on the new provisions and will have increased requests from entities that are keen to ensure they comply with the new legislative requirements.

Cost of Option Two

211. Table 2 calculates the cost to business entities subject to the Privacy Act of the introduction of a mandatory data breach notification scheme per annum. The figure is drawn from the OAIC's estimate of the amount of notifications that would occur under the option multiplied by the cost of notifying regulators and affected individuals as reported in the Ponemon Report less factors not included in the Regulatory Measurement Burden Framework being:

•

agency costs; and

•

estimated costs of relevant notifications (those that would satisfy the threshold for the proposed scheme) under the current voluntary scheme.

212. Costings for the proposed scheme have been limited to notification costs as:

•

the Ponemon Report amount is inclusive of costs for the 'determination of all regulatory requirements' ^[63] ;

•

the 2013 targeted consultation and the 2015-16 consultation was unable to quantify administrative costs to entities; and

•

other substantive and administrative costs associated with the proposed scheme would be absorbed into the costs entities incur for general Privacy Act.

213. This option will be offset by the PayPal Australia Pty Ltd exemption under section 248 of the Anti-Money Laundering and Counter-terrorism Financing Act 2016.

Table 2: Regulatory burden and cost offset estimate table for Option Two

Key cost assumptions

214. The OAIC projects that if Option Two is implemented the scheme will receive 200 notifications in its first year of operation. This information is based on the OAIC's experience handling voluntary data breach notifications, and comparisons with similar overseas jurisdictions.

215. The Ponemon Report found that, on average, data breach notifications cost $0.06 million per data breach. The report was drawn from an analysis of 26 data breaches in Australia in 2016 with the average number of records breached being 19,663 records. The study calculates notification costs to include IT activities associated with the creation of contact databases, determination of all regulatory requirements, engagement of outside experts, postal expenditures, secondary contacts to mail or email bounce-backs and inbound communication set-up ^[64] . The costing assumes that this is the average of an entity's costs under Option Two.

216. The OAIC estimates that 34% of notifications are made by Australian Government agencies under the current voluntary data breach notification scheme. The costing assumes the figure would be similar to the proportion of notifications made by Government agencies under this option.

217. The OAIC has indicated that approximately 40% of the notifications made under the voluntary scheme would satisfy the threshold of Option Two. As the OAIC expects a mandatory scheme will see data breach notifications double, the costing assumes this would mean 20% of Option Two notifications would also have been made under the voluntary scheme and excludes them from the costing.

218. Option Two will have an impact on community organisations with an annual turnover of $3 million or more. In Table 1 this impact is captured in the total costs to businesses.

Net benefit analysis

219. Option Two, the introduction of a mandatory data breach notification scheme, would be likely to have a net benefit.

220. Whilst there will be a regulatory impact on organisations from a scheme that compels them to notify individuals when their personal information has been breached, this impact will be decreased by a number of factors including the high notification threshold of Option Two and its considerable replication of the OAIC voluntary data breach notification system. The regulatory impact of a mandatory data breach notification scheme will be likely to be offset by the benefits of individuals being able to mitigate against the threats associated with the breaching of their personal information, particularly the threat of identity theft and crime, as well as the wider benefits associated with an improvement to the personal information security practices of organisations and increased consumer confidence in the digital economy.

221. The 'mitigation objective' outlined above is the primary benefit to individuals from the introduction of a mandatory data breach notification scheme. The main cost to individuals would be organisations passing on the regulatory impact of a data breach notification scheme to individuals, for example through increased costs. Given data breach can lead to identity theft and crime, which can have high financial and personal costs, the benefit of a mandatory data breach notification scheme is considerable and would offset any costs to individuals.

222. The 'deterrent objective' outlined above is likely see an improvement in the information security practices of businesses. Option Two will create a level notification playing field for businesses, provide certainty about the types of data breaches businesses should notify, build consumer trust in businesses that notify proactively, enable businesses to control messaging around data breaches, demonstrate that compliant businesses take privacy seriously and increase consumer trust and engagement in the digital economy.

223. The growth of specific 'cyber insurance' products could also mean that the cost of data breach notifications will not be a burden borne directly by an increasing number of businesses with cyber security coverage. As the frequency and magnitude of data breaches increase insurers' underwriting responses are adapting ^[65] . Cyber insurance exclusions are being added to general policies, protection is being provided in specific cyber security policies and the purchase of these policies, which can include coverage of the cost of privacy notifications, is increasing ^[66] . A 2015 global survey with more than 10,000 participants found 59% of respondents had purchased cybersecurity insurance. The survey projected that the cyber insurance market will increase from $2.5 billion this year to $7.5 billion in 2020 ^[67] . The coverage of cyber insurance in Australia is increasing, with one leading broker of cyber insurance policies stating it had written 750 policies from January to August 2016, up from just three policies in total in 2013 with an expectation that this will increase should a mandatory data breach notification scheme be introduced ^[68] .

224. There will be an impact on the OAIC, as the regulator of the Privacy Act, through an increase in the number of data breach notifications and subsequent privacy complaints, the increased use of its regulatory powers and the need to provide guidance on a new mandatory data breach notification scheme. However, as more entities improve privacy practices, and more information about preventing data breaches is available, there may be a longer term decline in the number of notifications reported to the OAIC and affected individuals. Similarly, while entities may be more cautious in the shorter term and report more instances to the OAIC, that may decline over time as they more fully understand their obligations.

Option Three - Encourage industry to develop industry codes

Who would be affected?

225. Private sector organisations and agencies under the Privacy Act could be encouraged to consider developing industry codes that provide a self-regulatory framework tailored to particular industry needs. Such codes would be developed under Part IIIB of the Privacy Act, which allows for the Information Commissioner to approve and register enforceable codes which are developed by entities, on their own initiative or on request from the Commissioner, or by the Commissioner directly.

226. Part IIIB codes do not replace or override existing requirements in the APPs. Instead, a code clarifies how particular APPs are to be applied or complied with in a specific industry context. A code may also include obligations that go beyond the requirements of the APPs or the Privacy Act, such as a commitment to undertake data breach notification in specific circumstances.

Benefits

Businesses

227. There could be a number of benefits to a particular industry sector in developing an industry code. Firstly, an industry code could give entities a sense of active ownership of their privacy obligations. Secondly, a code may send a positive statement to the community that a particular entity or group of entities are mindful of the privacy concerns of individuals and are pro-active in protecting their privacy rights. A code may also change the culture of an entity or industry by raising awareness of privacy and introducing a compliance regime. It may serve as a guide to privacy regulation by providing entities with a single document that incorporates all its related legislative requirements and is written in a way that is applicable to a particular industry. Finally, it may provide clarity, certainty and satisfaction to consumers seeking redress by incorporating privacy complaint handling procedures in a code.

228. A code-based approach would allow government and industry sectors to examine more carefully how data breach incidents impact directly on their own particular sectors, and tailor a framework that takes into account existing reporting requirements and compliance issues. This would recognise the need for a flexible approach over a one-size-fits-all legislative approach that may be more a burden for particular industries.

229. A confidential submission to the 2015-16 consultation supported option three over option two on the basis that an industry sector generally containing smaller businesses should be able to develop reporting processes that are administratively efficient for that sector.

Individuals

230. The development of codes may raise the expectations of individuals that entities will increasingly improve their privacy practices and that complaint mechanisms will be available.

Costs

Businesses

231. Entities subject to the Privacy Act may support the opportunity to create their own code, although this would require those entities to set aside resources to meet with industry counterparts to develop a relevant code. For codes developed under Part IIIB of the Privacy Act, the Code Guidelines noted that significant resources may need to be allocated to the development and maintenance of a code, including the following matters:

•

establishing an administrative mechanism responsible for developing the code;

•

scoping and drafting the code;

•

seeking legal or professional advice;

•

involving all stakeholders (including consumers) in an effective public consultation on the draft code;

•

establishing and financing a code administrator to oversee the operation of the code, including reporting on the operation of the code and initiating regular reviews of the code; and

•

maintaining information about the code on a website, including a list of the entities bound by the code, where relevant ^[69] .

232. It is possible that the costs associated with the development of a code may outweigh the costs of complying with a mandatory data breach notification scheme, particularly if the new model is largely based on the existing voluntary model.

233. The Privacy Act regulates a wide variety of industries. The Australian and New Zealand Standard Industrial Classification ( ANZSIC ) contains 19 broad industry divisions. There are entities regulated by the Privacy Act in all 19 divisions with numbers ranging from a few hundred to over 10,000 depending on the category. Therefore, any attempt to provide code coverage similar to Option Two would require multiple codes across multiple industry sectors with what would appear to be a duplication of resources.

OAIC

234. The impact on the OAIC is likely to be moderate to high, depending on its level of involvement in developing and approving each code. As the regulator, it will be expected to promote greater awareness of the OAIC Data Breach Guide and would be likely to receive an increase in requests from industry bodies seeking assistance in developing a code. If industry codes are successful in encouraging entities to improve privacy and information security practices, there may be a longer term decline in the number of data breaches entities experience, which would result in fewer notifications reported to the OAIC and affected individuals.

Cost for Option Three

Table 3 calculates the cost to business entities of the creation of industry specific codes for data breach notifications and the cost of subsequent notifications. The costing includes the estimated cost of code development and the cost of notification under the codes.

This option will be offset by the following measures:

•

PayPal Australia Pty Ltd exemption under section 248 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2016.

•

HCL Australia Services Pty Ltd exemption under section 248 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2016.

•

Telstra Corporation Ltd exemption under section 248 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2016.

•

Anti-Money Laundering and Counter-Terrorism Financing (Prescribed Foreign Countries) Regulation 2016.

•

Statute Update Bill 2016.

Table 3: Regulatory burden and cost offset estimate table for Option 3

Key cost assumptions

235. Based on stakeholder consultation, the costing assumes the cost of developing and administering an industry code to be $1 million.

236. The costing assumes the creation of 19 codes to cover-off all of the industry sectors in ANZSIC.

237. The costing assumes the cost of notification to businesses would be the same as those under Option Two.

238. Option Three will have an impact on community organisations with an annual turnover of $3 million or more. In Table 2 this impact is captured in the total costs to businesses.

Net benefit

239. If a Part IIIB of the Privacy Act code was developed, it would have to meet equivalent standards that are currently contained in the OAIC Data Breach Guide, otherwise it is unlikely to receive the Information Commissioner's approval. Given that the mandatory data breach notification scheme is largely based on the existing voluntary model, it is likely that many of the same costs issues identified under Option Two will be raised.

240. There is a risk is that there may not be a consensus among industry participants on a final draft code, which would leave personal information without important privacy protections. It is also unclear whether it would be feasible to develop industry codes which cover a significant proportion of the entities in each of the 19 individual ANZSIC sectors. In any case, the small amount of codes developed under the existing Privacy Act to date indicates that the code regulation framework is not a solution for all industry sectors.

241. Further, given the different range of industries regulated by the Privacy Act, and the different types of personal information being collected, this approach gives rise to the possibility of an inconsistent and fragmented approach being adopted. This raises the risk that a standardised approach to the handling of personal information will not be achieved, which would be generally inconsistent with the approach to privacy regulation. That may create confusion amongst consumers, who might be notified about a data breach that has occurred with a particular entity in one industry sector, but not another. Some entities may also be subject to more than one industry code (e.g. telecommunications providers) and may be required to implement different responses to data breaches that occur depending on which code is applicable.

242. The benefits of Option Three for individual Australians are uncertain, given the difficultly in predicting the number of codes likely to be developed, the quality of those codes, and the number of entities in each industry sector likely to be covered by those codes. Individuals' data breach notification experiences would most likely vary depending on the particular industry that experiences the breach and the nature and coverage of any data breach notification code applying to that industry. Although the OAIC's regulatory oversight and advisory role in a code-based approach might generate consumer confidence (to the extent consumers are aware of that role), unless codes are uniformly adopted across a range of industry sectors, there remains a risk that individuals may continue to be kept unaware in the event that their personal information becomes compromised.

243. It would also be possible for industry to develop data breach notification codes outside of the process in Part IIIB of the Privacy Act. Such codes would have no bearing on entities' obligations under the Privacy Act, and the OAIC would have no direct regulatory oversight and advisory role over such codes. However, if non-Part IIIB codes are developed, individuals will have no guarantee that industries will develop codes that require notification in the event of a data breach, or at least require data breaches to be notified at the standard that would be introduced under Option Two. The different requirements that would apply across industry sectors would also be likely to raise confusion amongst the general public.

244. A non-standardised and inconsistent approach is also less likely to provide the necessary information to meet the 'informational objective', which is intended to provide better information to combat data breaches in the future.

Consultation

245. The Attorney-General's Department has undertaken extensive consultation of a mandatory data breach notification scheme:

2012 Consultation

246. On 19 October 2012, a Discussion Paper was released seeking public comments on whether Australia's privacy laws should include a mandatory data breach notification requirement and, if so, the possible elements of such a requirement.

247. The Government received 62 submissions in response to the issues paper. There were 24 submissions either strongly, or conditionally, in support of the introduction of a mandatory reporting scheme. There were 12 submitters who did not express a definitive view although most of these did not expressly oppose a mandatory scheme. The group supporting a mandatory scheme included Commonwealth and State privacy/information regulators, privacy and consumer advocates, academics, IT software and security companies, and some individuals.

248. There were 27 submitters that opposed a mandatory scheme on the grounds that the existing voluntary scheme is operating effectively, and that a mandatory scheme could bring additional compliance obligations. This group comprised private sector industry groups and individual companies in the banking, telecommunications, retail and online industries, and two key government agencies.

2013 targeted consultation

249. In April 2013, an Exposure Draft Privacy Alerts Bill was provided on a confidential basis to a targeted group of stakeholders. The purpose of the consultation was to obtain more information to assist the Government in making a decision about whether to introduce a mandatory data breach notification scheme.

250. The targeted group was invited to make any comments on the legislative model. It was also asked to make comments on how the legislative model would impact on the costs that regulated entities might incur as a result of a new legislative requirement.

251. The Government received nine submissions in response to the issues paper. These came from a range of industry groups representing banks, telecommunications providers, financial service providers, internet companies and direct marketers. Submissions were also received from privacy and consumer advocates.

2015-16 consultation

252. In response to the Government's commitment to introduce a mandatory data breach notification scheme, the Attorney-General's Department drafted the Serious Data Breaches Bill. The Serious Data Breaches Bill was based on the Privacy Alerts Bill with changes made to decrease the regulatory burden and further accommodate the feedback received during the 2012 consultation and the 2013 targeted consultation.

253. When it committed to introduce a mandatory data breach notification scheme, the Government also committed to consulting on the legislation. Accordingly, the Serious Data Breaches Bill was the subject of extensive consultation.

254. An exposure draft of the Serious Data Breaches Bill and a consultation draft of the Regulation Impact Statement ( RIS ) were published on the Attorney-General's website accompanied by a Discussion Paper. The RIS set out the general policy problem the Serious Data Breaches Bill sought to address, explained why the Serious Data Breaches Bill was the preferred solution to that problem, explored the expected regulatory impact, and sought to consult on general and specific regulatory matters.

255. Public submissions on the exposure draft of the Serious Data Breaches Bill and the RIS were sought for a 13 week period between 3 December 2015 and 4 March 2016. The Attorney-General issued a media release announcing the consultation, and the Attorney-General's Department announced the public consultation on its Facebook page and via its Twitter account. In addition to this public consultation the Attorney-General's Department contacted relevant businesses, civil society organisations and government agencies directly seeking submissions. Submissions on the consultation draft of the RIS were also sought on the Office of Best Practice Regulation's Best Practice Regulation website.

256. During the 13 week consultation period direct communication with relevant entities such as industry and advocacy groups were undertaken to assess the regulatory impact of the proposal. As with the public consultation, these stakeholders were provided with an exposure draft of the Serious Data Breaches Bill and the RIS to comment on. This direct consultation took the form of meetings and teleconferences with various industry and civil society stakeholders.

257. In addition to seeking general submissions on the RIS, the Department also sought specific information in an attempt to quantify the regulatory burden of a mandatory data breach notification scheme. To this end, stakeholders were invited to respond to the following questions:

1.

What is likely to be the 'paper burden' or administrative costs (quantified if possible) to private sector organisations under the mandatory scheme in the Serious Data Breaches Bill? In particular, what will be the burden to ensure compliance with the mandatory scheme for entities that:

i.

have existing systems in place to make notifications (where necessary) consistent with the existing Data Breach Guide; and

ii.

have no existing data breach notification systems in place?

What will be the ongoing compliance burden?

2.

What form of communication would organisations foresee utilising to notify affected individuals of a serious data breach?

3.

How can a mandatory data breach notification scheme be implemented in a cost effective manner?

258. The 2015-16 consultation received 56 written submissions from businesses, industry groups, individuals, academics, privacy advocates and government agencies and the Attorney-General's Department consulted with numerous stakeholders in meetings held in Sydney and Melbourne. In addition, the Attorney-General's Department offered all of those who provided written submissions with the opportunity to discuss their written submissions. The full and open consultation undertaken by the Attorney-General's Department is best practice and was identified as the optimal way of obtaining an understanding of the regulatory impact of the proposal as well as encouraging openness and trust in the process.

259. The 2015-16 consultation garnered widespread support for Option Two, the proposal to introduce mandatory data breach notification reporting. Of the 56 submissions received 38 strongly or conditionally supported the proposed mandatory reporting scheme. These submissions were received from a wide range of sources including businesses from varied industry sectors, industry bodies, civil society groups, individuals, academia, regulators and government agencies. There were 12 submitters who didn't express a definitive view although most of these did not expressly oppose a mandatory scheme. The majority of these were from industry groups. Six submissions opposed the proposed mandatory reporting scheme. Of these six, three were from digital marketing and games/entertainment businesses, two were from the health industry and one from the insurance industry.

260. Submissions to the 2015-16 consultation provided valuable feedback on the proposed provisions of the Serious Data Breaches Bill. The consistent theme in submissions on the regulatory impact of the introduction of a mandatory reporting scheme was that this impact would be lessened if identified issues including those above could be resolved and the scheme is as streamlined as possible. The Department has responded to this feedback, redrafted the Serious Data Breaches Bill as the Notifiable Data Breaches Bill, and made changes in order to improve the scheme and reduce its regulatory impact. In addition, a number of smaller changes have also been made to respond to submissions to the 2015-16 consultation.

261. Detailed discussion and analysis of the responses to the 2012 consultation, the 2013 targeted consultation and the 2015-16 consultation are outlined in the relevant sections of this RIS.

What is the best option of those considered?

262. In this RIS, three options have been considered:

•

Option One: Maintaining the status quo; or

•

Option Two: Introduce a mandatory data breach notification scheme.

•

Option Three: Encourage industry to develop industry codes.

263. The best option is Option Two; the introduction of a mandatory data breach notification scheme. It would address concerns that under the status quo data breaches are being underreported and, given the link between data breaches and identity theft and crime, address the concerns that the underreporting of data breaches adds to the impact of identity theft and crime on individuals and the economy. Unlike Option One and Option Three it could provide certainty about what entities are subject to the requirement to notify, what data breaches should be the subject of notification, when notification should occur, who should be notified and how. It would have less regulatory impact than Option Three.

264. Option Two has been the subject of extensive consultation, including consultation on two iterations of an exposure draft Bill for a mandatory data breach notification scheme. Consultation submissions have informed the design of the Notifiable Data Breaches Bill that is proposed to implement Option Two. This extensive consultation will ensure the mandatory data breach notification scheme, if implemented, is as suitable as possible to addressing the issue of data breach and its associated risks and costs.

265. Option Two would require the introduction of a legislative requirement which would have impacts on businesses, individuals and the OAIC. Option Two would provide individuals with notification if a notifiable data breach of their personal information occurs. Concerns about the safety and security of personal information in the online environment have been identified as key issues for individuals (as evidenced in the findings of the OAIC's 2013 national privacy survey cited above). Notification would place individuals in a better position to take steps to mitigate against the possibility of identity theft or fraud, which might cause them financial loss. This will be an important measure to assist in combatting cybercrime and identity theft which have a considerable toll on the Australian economy, businesses and individuals.

266. Option Two is likely to improve business compliance with responsibilities under the APPs. Specifically, Option Two will likely see entities improving their information security practices in line with APP 11 and the requirement to protect the personal information the entity holds from misuse, interference and loss and from unauthorised access, modification and disclosure. Ponemon's analysis suggests that better information security practices would help reduce the cost of data breaches. For example, extensive use of encryption reduced the average cost of data breach by $13.50 or 10% per breached record of information ^[70] .

267. A mandatory notification scheme may also make entities focus on how long personal information needs to be retained. APP 11 requires organisations to destroy or permanently de-identify information that is no longer needed for the permitted purposes for which it may be used or disclosed. Improved compliance with this requirement may help avoid data breaches involving information that an entity no longer has any lawful purpose to retain: for example, of the Privacy Commissioner's 16 investigation reports about data breach incidents between 2011 and 2016, five involved failure to comply with the Privacy Act's destruction/de-identification requirements as they applied under the now-repealed National Privacy Principle 4 (requirements that have been replicated in the current APP 11.2).

268. A mandatory notification scheme may also result in improved compliance with rules relating to the collection of personal information. First, an entity is likely to more carefully consider what personal information it is necessary to collect. APP 3 requires private organisations to only collect personal information that is reasonably necessary for one or more of their functions or activities. As noted in the OAIC Data Breach Guide, personal information that is never collected cannot be mishandled ^[71] .

269. Whilst the introduction of a mandatory data breach notification scheme may see businesses improving compliance with their obligations under the APPs, the cost of these improvements is not a burden being imposed by the scheme. Rather, any such costs are linked to compliance with extant obligations under the APPs and the Privacy Act that pre-date the introduction of the scheme.

270. As noted in the analysis, there will be cost impacts on businesses. The Privacy Act applies to private sector organisations that have a turnover of more than $3 million, and to some small businesses which are subject to the Privacy Act (e.g. those that trade in personal information). Whilst not quantified, a number of administrative costs have been identified by industry groups, such as creating notification methods, formalising internal processes and increased insurance and legal costs. To address some of these concerns, Option Two makes the means of notification more flexible.

271. Consultation feedback on the costs estimates of Option Two varied from a small group of stakeholders who believed there would be large costs amounts to most who believed there would be modest cost implications. Privacy and consumer advocates believed costs would be minimal, and should be considered necessary where an entity handled personal information. The Ponemon Report found the notification costs of data breaches is reducing ^[72] .

272. Whilst Option Two would have a regulatory impact on businesses, it would also have benefits. Option Two would provide consistent obligations on entities to report data breaches. This is in contrast to Option One and Option Three. Option One provides a voluntary system that has been identified as causing disproportionate reputational damage to entities that voluntarily notify data breaches as opposed to those that deal with breaches internally. Option Three would complicate rather than simplify notification requirements by creating multiple industry codes, with entities possibly being subject to multiple codes. In contrast Option Two will provide clarity around an entities' obligations to notify through legislation and guidance in a way that is absent under Option One and not possible under Option Three.

273. As identified by the OAIC in its submission to the 2015-16 consultation, Option Two will contribute to a well-balanced privacy framework, provide a safer and more transparent environment for Australians to entrust their personal information to agencies and organisations, encourage consumers to more fully engage in e commerce, and boost Australia's digital economy.

Implementation and evaluation

Amendment to the Privacy Act

274. Option Two would be implemented through amendment of the Privacy Act. The 2012 consultation, the 2013 targeted consultation and the 2015-16 consultation have provided the opportunity for stakeholders to comment on the scope of Option Two, as well as provide specific feedback on multiple iterations of draft amendments to the Privacy Act to implement Option Two. Feedback has been received from businesses, industry bodies, civil society, academia, individuals, regulators and agencies.

275. The 2013 targeted consultation provided feedback on the Privacy Alerts Bill. The Privacy Alerts Bill provided the basis of the Serious Data Breaches Bill which was the subject of the 2015-16 consultation. Feedback on the Serious Data Breaches Bill was used as the basis for the Notifiable Data Breaches Bill. It is expected that the Notifiable Data Breaches Bill will amend the Privacy Act to introduce Option Two. The Notifiable Data Breaches Bill has been designed in collaboration with those it will affect. This will ensure the Government will implement the most suitable mandatory data breach notification scheme.

Option Two based on current voluntary system

276. Importantly, the Notifiable Data Breaches Bill will implement a mandatory data breach notification scheme based in large part upon the voluntary system that currently operates. This will mean many agencies and organisations that participate in the voluntary system will have a minimal compliance burden. This fact, in tandem with the 12 month transition to commencement of Option Two, will reduce the impact of implementation on agencies and organisations.

12 month transition to commencement

277. Amendments to the Privacy Act to introduce Option Two would commence 12 months after the amendment receives Royal Assent. This will allow agencies and organisations a full year to transition to the commencement of a mandatory data breach notification scheme. This 'lead in time' before commencement will allow agencies and organisations to make necessary arrangements in advance of commencement and will reduce the immediate regulatory impact of Option Two.

278. The 12 month transition period to commencement was included in the exposure draft of the Serious Data Breaches Bill and was therefore subject to the 2015-16 consultation. Whilst some submissions to the 2015-16 consultation felt a mandatory data breach notification should commence as soon as possible, and others felt it should be further delayed, there was general support from agencies and businesses for a 12 month transition to commencement.

OAIC guidance

279. The OAIC has a number of guidance related functions regarding acts or practices that may have an impact on the privacy of individuals under section 28 of the Privacy Act, including the power to issue guidelines. In the lead up to commencement of the amendments to the Privacy Act to introduce Option Two, it would be expected that the OAIC will develop and publish guidance about the operation of the new scheme to assist agencies and organisations respond to the scheme and promote ease of compliance.

280. This guidance may be in the form of a modified Data Breach Guide, which underpins the current voluntary notification system. It is expected that the guidance material would provide guidance about the practical aspects of the scheme.

281. It would be expected that the OAIC will undertake consultation as necessary with stakeholders, including private sector organisations, in the development of that guidance material. A number of submissions from agencies and organisations to the 2015-16 consultation identified the importance of OAIC guidance material on a mandatory data breach notification scheme and the importance of OAIC consulting with stakeholders when developing this material.

Evaluation

282. It is expected that the OAIC will keep statistics on the operation on a mandatory data breach notification scheme. It is expected that such statistics could include the amount and severity of data breaches notified under the scheme as well as the type of industry that makes the data breach notification. These statistics are similar to those currently maintained by the OAIC for the voluntary data breach system. These statistics will assist evaluate a mandatory data breach notification system.

283. To review the effectiveness of the changes instituting Option Two it is proposed that these measures be reviewed 12 months after commencement. The review would include an assessment of the impact of the proposal and its effectiveness in meeting its objectives. The review will be assisted by the statistics maintained by the OAIC discussed above and would include consultation with relevant stakeholders.