Time for Australia to have credit repair regulation

Australia's move to a comprehensive credit reporting regime makes it a priority for policymakers to address the lack of consumer protection in the credit repair market, according to a new study.

Ian Ramsay, Paul Ali and Lucinda O'Brien from the Melbourne Law School have published a review of the credit repair industry, its impact on consumers and regulatory approaches to dealing with it overseas.

They argue that Australia should have specific regulation covering the industry and the best approach would be a hybrid that borrows from the rules-based approach in the United States and the licensing regime in the United Kingdom.

They say the matter has become more urgent because more and more Australians are seeking help from credit repair companies. Last year's change to credit reporting rules, allowing for a wider range of information to be included in credit files, creates the potential for more errors and adverse listings on consumers' credit files, which may lead to even greater demand for the services of CRCs.

The study said data quality was a problem in credit reports and it was possible that under the new credit reporting regime more incorrect information would appear on credit reports.

CRCs offer to improve their clients' access to credit by removing adverse information from their credit reports, as well as represent them in negotiations with lenders and in dispute resolution. They also offer budgeting and debt management services, and work with insolvent debtors entering into debt agreements.

Consumer advocates have long been concerned that CRCs only serve to entrench financial hardship by charging high fees for services that can, in many cases, be obtained at no cost.

They also accuse CRCs of preying on people's ignorance by claiming to be able to remove legitimate listings from their credit files.

In the US, CRCs are governed by the Credit Repair Organisations Act, which was enacted in 1996. The study said the problem with the rules-based US system was that it encouraged changes to CRC business models and contract terms to get around the regulations.

In the US, 30 per cent of disputes with creditors and credit bureaus are thought to be instigated by credit repair companies.

In the UK, CRCs have been subject to a licensing regime since 2008.

In Australia little is known about the industry and there are few legal protections for consumers.

CRCs are subject to the Australian Consumer Law (which prohibits misleading and deceptive conduct) and state fair trading laws, but there is no industry-specific regulation.

In 2012, the Credit Repair Industry Association of Australia published a code of conduct, which was "little more than a restatement of legal obligations." The CRIAA website was shut down in mid-2014.

Consumer credit is a utility for many people and a good credit history may be a prerequisite for access to basic services such as a telephone or electricity account, as well as credit. Most people do not monitor their credit reports regularly.

The study said the most effective option for regulating CRCs in Australia would be a rules-based regime combined with a licensing system. Such a system would be consistent with the approach adopted in other parts of the National Consumer Credit Protection Act and the National Credit Code.

"This is a hybrid model, drawing on the strength of the rules-based US approach and the UK licensing regime," the study said.

"A set of overarching rules would give regulators, consumer groups and consumers a clear framework for dealing with CRCs. These rules would include extensive disclosure requirements, a prohibition on upfront fees and mandatory cooling-off period after contracts are signed, and would be combined with rights to sue.

"In conjunction with these rules, a mandatory licensing and reporting regime would eliminate the worst operators and give government information about activities in the sector. It would require CRCs to join EDR schemes."