Privacy Commissioner Marie Shroff has signed off on the changes which mean lenders will have much greater information on people's credit history, including on whether they pay their bills on time rather than the current system which usually only provides information on defaults.
Assistant Commissioner Blair Stewart says it was "a big step for the commission to permit it" and for the commission to be convinced of the economic benefits to consumers.
"We've made sure it's a closed loop. Sure, you are sharing more sensitive financial information but it's only going to be unlocked when you seek credit," he says.
The information can't be accessed for any other purpose.
"Most people see the legitimacy of being open about how far you're extended financially" when seeking credit, Stewart says.
The new system could benefit those with no credit history, such as young people, recent immigrants or those who for whatever reason have had little contact with the mainstream banking system, he says.
"Those people may well have a good payment history with say, a telephone company or utility. Quite poor people can demonstrate they're actually good risks and they pay their bills on time and they shouldn't be pushed off onto loan sharks."
On the other hand, banks will gain a lot more information on people with previously undisclosed credit. In Hong Kong when similar rules were introduced several years ago, a number of banks discovered they had customers holding multiple credit cards and who were using one card to pay off another, Stewart says.
It's possible the new rules could promote competition. For example, existing banks tend to have a lot of information about long term customers which a new entrant has no access to currently. The new rules should mean a more level playing field for future new entrants, he says.
The new rules also give banks the ability to adopt a more refined version of risk-based pricing. "If you really are a good risk, you could end up paying less," Stewart says. That was the experience when similar rules were introduced in Singarpore but it may not happen here because of the small size of the New Zealand market.
"The system enables those things. That doesn't mean it will happen. We would hope there will be evidence of that when we come to review the code in three-and-a-half year's time."
