By Michael Hartman on Wednesday 28 January 2015
After reading AltFi’s 9th of January article, “Down Under – An overview of the activity” about those in and entering the P2P market, I thought readers might be interested in additional detail on a few of the regulatory related challenges they face (both obvious and some perhaps not so obvious).
The mix of P2P lenders in and coming to Australia is wide, varied, and strongly rumoured to still be increasing. Such an influx of innovation is exciting and presents many opportunities. That said, each entrant will face a number of challenges in their efforts to become established in Australia….not the least of which are those that relate to the raft of regulation.
Thus far there are at least 4 key dimensions that differentiate the P2P market participants:
Each of these profile aspects also carries with it differences in terms of the regulations that apply and whilst such aspects are regulated in each P2P lender’s home country – in many cases Australia’s approach to these issues is likely to be different…and to varying degrees.
Several key considerations – aspects of responsible lending legislation are perhaps ‘older’ here than in the new entrant’s home countries, whilst changes to credit reporting are far more recent and industry is yet to fully engage in the exchange of the newly allowed data.
Following is a basic segmentation of those P2P market participants listed in the previous article and brief summary of some of what they may be facing in regulation.
Many of the regulatory related issues involved will be clear, for example the vast number of administrative activities involved in meeting many of the obligations; however other potentially important requirements may not be so clear…such as; will the new practices of those lending to consumers be deemed acceptable under the NCCP ‘risk based approach’ relative to responsible lending, or the many technical details relating to the new credit reporting provisions under the Privacy Act, related regulations and the Credit Reporting Code of Conduct.
Beyond an awareness of the various regulations (and for those coming from offshore understanding how to adapt practices to the differences in regulation from what they have known), it may be equally if not more important to have an understanding of certain industry dynamics related to the regulation…in particular those that impact the data available for credit risk assessment.
As an example of what may be sitting below the surface, here are a few issues relative to Privacy and Credit Reporting:
Using ‘innovative’ data:
Even if new data is highly predictive of risk, this does not always enable it to be used. The Privacy Act is very specific about businesses that gather data for the purpose of disclosing it to others for the assessing credit worthiness ….defining such businesses as “credit reporting businesses” thus bringing them under the Privacy Act’s Part IIIA provisions…which include substantial limitations on the sort of data that such businesses can gather. Are the new P2P entrants fully aware of these restrictions on their data suppliers?
Some vendors in the market are offering to gather data for credit providers via very clever use of internet banking…but there appear to be very different models used to do the gathering. Some involve ‘impersonation’ of the individual (others don’t).
How reliant are the new P2P entrants’ assessment processes on such data? If the practices used to gather ‘innovative data’ don’t fit within both the spirit and the letter of the current privacy legislation, is there a risk that new legislation may rule out such practices, or at least curtail them? As a point of reference, it took industry 8 years to come up with the rules regarding a ‘5 grace period’ prior to reporting a payment as late. It took less than “8 days” to see that increased to 14 days (and there was no evidence that the 5 days was an issue as not a single byte of data relating to the 5 day rule had yet been exchanged!...government can certainly work quickly when they choose to).
Australia has in all likelihood one of the world’s most complex sets of requirements relating to ‘default listing’…multiple notifications, multiple specific time intervals, lagging of reporting re: the amount in default and other complex requirements relative to what can (and can’t) be included in the listing amount…i.e. what can and can’t be listed as the amount may often not be the amount that is actually overdue and outstanding on the day of the listing.
What might be the implications of all this complexity considering there is no obligation to list defaults at all? Are credit providers listing in a manner similar to the practices of the past 5 years? (An important aspect for credit scoring that any changes are understood and catered for). If not (and in some instances certain items they can’t be reported any longer…such as defaults < $150), how different are credit provider’s listing practices now? Have in fact some significant players materially reduced their listing or stopped listing altogether? If they have, will they restart listing defaults again, and if so when? And in the interim how will the ‘missing defaults’ be compensated for in credit assessments? With the new rules now coming up on a year old, their impact could be across ~20% (1 of the 5 years of history that can be retained for credit reporting) meaning there is real potentially for this to be material.
Comprehensive Credit Reporting – when will the data start to flow?
In the media some journalists seemed to be surprised that the supply of such data was not immediate from 12 March 2014, but that was never going to be the case. In the prior AltFi article there were several mentions of the need for this data and the issues and challenges stemming from the lack of such data. How quickly will such data actually be exchanged on a wide scale? Given that supply of such data is subject to each credit provider’s commercial decision, will a substantial portion of the industry wait until the ‘rules of exchange’ are finalised (including ACCC authorisation – thought likely to take at least 6-12 months to obtain once a request is made )? Publically, most industry participants say they support the new data coming on board…but are there commercial implications that see some privately seeking to delay the change and maintaining the current ‘negative only’ system for as long as possible?
The implication of what ‘may’ be happening with default listing and the market dynamics that ‘may’ be at play with regard to the new data have the potential to complicate credit assessments considerably…not just for the new P2P players…but to varying degrees for all providers of credit…and not just in the short term but perhaps for a number of years.
Will the new entrants ‘shake things up’ with the innovative approaches that they bring? How well will they cope with the regulation itself as well as some of the less obvious market dynamics linked to compliance? How will the incumbents act and react through all of this? And what might the legislators and regulators do?
So much happening…what a great time to be involved!