KEY POINTS:
There has been concerted lobbying from the finance industry, in New Zealand and overseas, to allow credit providers greater access to potential customers' "total financial footprint" - including details about their income, mortgages and credit card balances.
It is claimed that fuller information will allow greater accuracy in decisions over granting credit, fewer defaulters, and fewer people falling prey to loan sharks as a result.
For privacy advocates, on the other hand, this represents a Big Brother form of surveillance and possibly the thin edge of the wedge. If credit profiles are allowed, why not employment and health profiles among other candidates?
The move is a small part of the global trend towards mapping every aspect of an individual's buying habits and financial preferences. Technology (derived from hunting for terrorists) exists for "predictive behaviour mapping", whereby it is possible to predict accurately an individual's conduct by modelling their previous behavioural patterns. In the United States, this has already led to some consumers being denied store cards and the like because they are deemed unworthy customers on the basis of information collected about them.
In New Zealand, strict privacy rules dictate what information is collected about individuals and what it can be used for. The Privacy Act applies to the government and companies alike.
In the case of credit reporting agencies and finance companies, a credit reporting privacy code applies certain safeguards to what information can be collected and with whom it can be shared. At present negative credit reporting is permissible: for example, whether the individual has defaulted, as well as basic information about the types of credit they have. Crucially, individuals have a right, free of charge, to find out exactly what information about them is held by reporting agencies. Clearly, financial institutions would like to be able to obtain positive credit information as well, such as about individuals who have an exemplary repayment record and perhaps high incomes also. After all, this is where the best customers are. By rewarding those with a clean record, so the argument goes, everyone benefits because the cost of credit is reduced and people will no longer be able to lie about their circumstances in order to obtain credit.
Although seemingly benign, the downside of this argument is that it will lead inexorably to two classes of citizens: those deemed worthy credit risks and those deemed not to be so. This will, in time, lead to a form of credit apartheid.
The inequality will only widen as the cost of credit diminishes for the haves while the have-nots are forced to pay an ever-increasing risk premium. Instead of being eliminated, loan sharks will be encouraged by the expanding pool of those desperate for access to credit.
It is trite to say that information is power. The reality is that allowing the greater profiling of individuals will further transfer power from consumers to industry. Instead of allowing risk to be better managed, it will simply be transferred.
At present financial institutions carry the risk of default by customers. This risk is, of course, passed on to all customers alike. There is a democratic quality to this process. The indebtedness of disadvantaged socio-economic groups is the concern of all. Allowing institutions to customise risk may seem fairer from the point of view of those deemed to be good credit risks but will disenfranchise a sizeable portion of the population.
There are other ways of dealing with loan defaulters. Better education and fostering a less consumerist culture may be part of the solution. Allowing Big Brother databases to monitor everyone is not the solution.
* Gehan Gunasekara researches privacy and information law issues at the Auckland University business school.
