Many Australians may be surprised to learn that Australia's tradition of strong financial privacy laws is one of the key reasons Australian consumers pay more for credit, such as bank loans and credit cards, than consumers in the UK.
While Australia's privacy laws are currently being reviewed, it is unlikely the latest proposals put forward by those in charge of the country's privacy system will help give Australians access to cheaper credit.
The reason that Australian consumers have to pay more for their credit than their northern hemisphere cousins is that the Australian privacy system prevents lenders sharing with each other the type of information that would improve their ability to spot the people who are likely to fail to make their repayments.
Most lenders use a credit scoring system to decide who to lend money to. Credit scoring is a mathematical formula, which uses a consumer's credit history and lifestyle to predict how likely a potential customer is to repay their debt.
Because lenders in Australia cannot share consumers' credit payment performance information with the credit reference agencies, as they can in the UK and US, it is much harder for Australian lenders to weed out the people who are most likely to fail to make their repayments. As a result Australian lenders tend to charge higher interest rates to cover the cost of lending money to people who fail to repay.
In the UK and US the cost of credit is relatively cheap because lenders are able to access the credit payment performance information of potential customers. Lenders are able to keep bad debt levels to a minimum and are able to avoid having to pass on the extra cost of bad debt to their customers.
The type of information that Australian lenders are currently permitted to share with the credit reference agencies for credit checking purposes includes records of when customers are 60 days late with their payments, and information to help verify consumers' identities.
Most lenders have called for Australian law to be changed to allow them to share a wider range of credit information, including how good consumers are at meeting their monthly payments. Lenders say they would be better able to identify those consumers struggling to meet their debts, which would allow them to reduce the price they charge for credit.
Privacy campaigners fear that a loosening of Australian financial privacy rules may lead to an increase in the amount of credit available to consumers. They are also concerned this could lead to a hike in the numbers of people facing financial meltdown.
The Australian Law Reform Commission, which is responsible for putting forward suggested changes to Australian privacy laws, is currently against increasing the range of permitted credit information made available to lenders to the levels permitted in the UK and US.
For Australian consumers the price for maintaining strong financial privacy is likely to be felt most keenly in their wallets.
