On the 23rd and 24th of November, COFACE Families Europe was invited to speak at a conference dedicated to insolvency and the credit market in Madrid. At a time where 11,4% of European citizens have excessive indebtedness and have difficulties paying certain basic services, it is essential to reflect how best to prevent overindebtedness and resolve overindebtedness when it arises.
The conference was built around the publication of a book dedicated to preventing overindebtedness, to which COFACE Families Europe has contributed. A wide variety of issues surrounding the problem of overindebtedness were touched upon during the event: insolvency and how it can help overindebted consumers and businesses to have a “fresh start”, the new challenges emerging from Fintechs and Big Data and the data protection dimensions of sensitive data such as financial data in light of the GDPR.
COFACE Families Europe was represented by Martin Schmalzried on the panel dedicated to credit bureaus and their economic impact. Several key questions were discussed during the panel:
1/The use of positive credit data in preventing overindebtedness
COFACE Families Europe supports the idea of using positive credit data in preventing overindebtedness but underlines several conditions for it to work as intended. The use of any type of data creates effects on the behaviours of both financial service providers and on consumers. The use of positive credit data allows banks to maximize the sale of credit to borrowers who managed to successfully repay previous loans. It also encourages consumers to take out credit even if they don’t need it in order to “build” their positive data “curriculum” and get low interest rates when they need a more substantial loan like a mortgage credit. This is why it is important to agree on the weight positive credit data has in the creditworthiness process.
First, it is important to underline that the most important aspects of positive credit data is not necessarily the list of past repayments of credit, but rather the ongoing financial commitments of a consumer (other credits the consumer may have at the time of asking for a new credit) in order to have a clear picture of his/her financial situation.
Second, the creditworthiness process must put more weight in assessing the financial/budgetary management of the consumer in the past several months. Does the consumer have a steady income stream? What are his/her cash outflows/inflows? Is the consumer able to save up money? Does he/she have a “financial buffer” or some savings in order to weather certain accidents of life?
Putting more emphasis on a consumers’ financial management skills creates a positive incentive that encourages consumers to save and manage their money responsibly. This is the type of behaviour that should be rewarded and encouraged, as opposed to simply looking for whether a consumer has successfully repaid past credits or not.
2/Competition in the financial sector and credit data sharing
On the issue of consolidation of the financial sector, credit data sharing only has a marginal effect. It is clear that big incumbent banks which sit on a large amount of data about the financial situation of their customers and refuse to share that data with a credit bureau have a competitive advantage over new market entrants. But credit data sharing is not the main factor in poor competition. Market consolidation has to be addressed with many other measures such as anti-trust, separating investment banking from retail banking, and proactively encourage or support the emergence of certain financial service providers which have different business models or target different customer profiles. Examples include credit unions or cooperative banking, ethical banking and micro credit providers.
3/Public credit registers vs. Private credit registers
COFACE Families Europe has always been a strong proponent of public credit registers based on the Belgian model for a variety of reasons:
– Increased transparency in the way the credit register functions and the data included in the register
– Certain key aspects of the credit register are determined by law (following a democratic debate by legislators): the data included in the register, the missions and aims of the credit register, which, in the Belgian case for instance, have a clear mandate to prevent overindebtedness…
– Free access to consumers: consumers can consult the information that is included about them free of charge, online or on site.
– A clear procedure to correct mistakes: if consumers find a mistake, there is a formal procedure to correct the mistakes either via the financial service provider who encoded the wrong data, or via the MInistry of Economic Affairs.
– Quality and consistency of the data: all financial service providers are required by law to feed data into the register which means that the data is trustworthy, consistent and exhaustive (to the extent required by law).
– The cost of running such a central database is much lower than for each bank to maintain their own separate databases.
4/Harmonization of credit data across the EU
COFACE Families Europe is in favour of a standardization of credit data necessary for carrying out creditworthiness checks in order to prevent overindebtedness and social exclusion, while still maintaining a high standard in privacy and data protection.
Restricting the data used for creditworthiness checks to negative data, positive data (especially the ongoing financial commitments of consumers) and especially examining the financial management skills and capability of consumers would allow for a much fairer access to credit. Indeed, consumers should be either deemed creditworthy (with a clear proof that they have the financial ability to repay their loan) or not (in which case they should not have access to credit), and on that basis, offered an advantageous interest rate regardless of other data (race, religion, sex, localisation, or big data analytics such as social networking data etc).