Department consults on central credit register

Back in the days when credit was more plentiful than summer rain and the issue of borrower creditworthiness was as remote as Ireland’s chances at Euro 2012, the question of credit infrastructure seemed almost superfluous to the financial system.

Now that the reckoning from that era has been tallied, attitudes to credit information have been radically modified and the Minister for Finance, Michael Noonan, has just issued a Department of Finance consultation document relating to a proposed Credit Reporting Bill scheduled be published by end September. The Department has also published the report of the Inter-Agency Working Group on Credit Histories, which was submitted to the Minister at end June 2011. It was that report which formed the framework for the drafting of the consultation document.

It would be good to be able to praise the Department’s initiative, but in fact the consultation document and forthcoming bill was a condition of the EU/ECB/IMF (Troika) Programme of Financial Support for Ireland, who presumably made a connection between the credit default meltdown and lack of due diligence not previously appreciated.

Central to the Bill will be the formation of a new Central Credit Register (CCR). In the words of the Minister the CCR “will support more informed lending decisions and development of improved insolvency procedures, while also providing an important tool for banking supervision. The data set to be collected will be comprehensive in scope, will include information on restructured as well as new loans and will be covered by robust measures to protect personal information.”

But the CCR can only be as effective as the information it has to hand.

Following the Minister’s publication of the documents, the bank-owned Irish Credit Bureau (ICB) was quickly identified as a potential operator of the new CCB. This is the same outfit of who Jonathan McMahon, Assistant Director General – Financial Services Division at the Central Bank, said in 2010: “The key player in the credit information market is currently owned by a subset of the lenders that provide it with information and use its services. Internationally, this structure would be considered sub-optimal as it lacks incentives to innovation and efficiency that competition would provide. Moreover, an entity the data providers and users own is less likely, we think, to be able to impose rules of operation on these owners.”

While the Central Bank agrees there has been progress in the collection, dissemination and use of credit information in recent years, “there remains room for improvement.” The fact that not all credit institutions provide data to the existing credit reference agencies is identified as a weakness and “needs to change”.

There is much work to be done to develop a credit infrastructure that might ensure the disaster that has befallen the country could or should not reoccur – for example, the provision of a unique personal identifier, such as an identity number for individuals, would give a clearer view of a person’s total borrowings across institutions.

But there also needs to be a diverse and competitive credit reference industry. Back in 2010 the Central Bank dismissed the assertion that a market of Ireland’s size and concentration could not support more than one credit agency:  “International comparison does not suggest that Ireland could only sustain one credit information provider. Rather, there are examples of similar size jurisdictions where several credit information providers operate.”

As we have said before in these pages, we at BusinessPro/Stubbs Credit Bureau are completely behind the multi-bureaux approach, which is the case in most developed countries. The assumption that all credit bureaux produce identical results for a given individual or company is erroneous – we know this from long experience.

Most of the differences and discrepancies in credit ratings Ireland can be explained by the small number of lenders that share data with only one credit bureau. We know also  the information shared is not comprehensive excluding as it does a lot of detrimental data such default, registered and commercial  court judgments, bankruptcies, director disqualifications and  restrictions etc.

We have conclusive evidence that individuals who show a high risk credit score with the Stubbs Credit  Bureau, for example, can have a relatively benign one with another credit bureau.  Indeed, in one of the most high profile cases of recent years, Stubbs featured on RTE's Prime Time where we pointed out the damning credit scores against rogue solicitors Lynn & Byrne going  back as far as 1996 and yet they still managed to embezzle hundreds of  millions from Irish banks.

Everybody can support the formation of the CCR but the consultation document makes very little mention of how the Irish Central Bank will outsource the functions of the CCR. We believe there should be a degree of separation between the credit grantors and the operators of the CCR (even if the Irish Credit Bureau wins the tender – assuming there is one – to operate the CCR, the overall operator will be the Central Bank of Ireland.

It should also be remembered that the credit granting banks that own the ICB are committed to sell their stake and there will be several potential suitors lined up to buy it should they win the tender. This is something the Department anticipates: “The purpose of the CBI owning the database and its contents is to ensure that there remains public control over a database which will hold a very large volume of private data relating to individuals and entities, for reasons of public confidence, and to best ensure continuity of service in the event that a new tender is selected to become the CCR operator.”

We would also have concerns around the comment in the document “For clarity, the CCR operator shall not be authorised to supply data to any other Credit Reference Agency operating in the State”. We believe this is a mistake. If the stated intention is to ensure “that the application of service fees by the CCR operator does not disproportionally burden, in particular, smaller credit information users” this is best achieved by creating a competitive market in Credit Information that will drive efficiencies, help to keep costs down and drive innovation.

In addition, the consultation document refers only to registered judgments, which account for less than 20 per cent of all default money judgments: the department should seek to ensure universal coverage of judgments if the stated aims of collecting statistical data on over indebtedness are to be achieved. Failure to address the matter of unregistered judgments would leave out of the statistics billions of Euros of over indebtedness and render any statistical assessment void.

The document states that “The Minister for Finance, on request by the CBI and following consultation with the Data Protection Commissioner and any relevant Minister, may make regulations to provide for additional fields of identity information, related to a personal credit information subject’s identity, subject to the Minister being satisfied that such additional information is necessary for the effective operation of the CCR.”

We agree and would maintain the most effective way of correctly identifying data subjects would be for a permitted change of use for the Electoral Register, which would allow the data to be used for Credit Reference and fraud prevention purposes. The Electoral Register could form an important part of the validation process for matching data and determining the accuracy of current and historical addresses.