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No positive credit reporting in France?

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Iain Ramsay

http://www.kent.ac.uk/law/people/academic/Ramsay,_Iain.html

 

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France differs from the UK in its approach to credit bureaux. The Bank of France administers  ‘negative’ credit reporting systems which contain information on whether individuals have made applications to the Over-Indebtedness commissions or  are  in substantial arrears on repayment. They do not include ‘positive’ information on loans taken out  and payment record, a characteristic of UK credit reference systems.  Private credit bureaux do not operate in the  French consumer credit market and in 2007 the Conseil d’État upheld a refusal by the French privacy regulator (CNIL) to permit Experian to establish a central database.

The French system was introduced in 1989 as part of the loi Neiertz to address 0ver-indebtedness.  However,  the continued rise in over-indebtedness in France since then has resulted in pressure to introduce positive credit reporting on the assumption that this will enhance  credit decision-making and prevent  subsequent over-indebtedness.

The introduction of positive credit reporting in  France is controversial. First, a strong conception of privacy–understood as the ability to shield one’s financial affairs from market and commercial intrusion–is argued to be influential in France. This is best developed by James Whitman in his study of Western cultures of privacy. Undoubtedly this is a factor but political interest groups have also been influential in the debate. Although one might expect financial institutions to be in favour of having more information available on potential debtors, French banks through their lobbying group have opposed the creation of  a positive reporting system. Why?  The answer is probably a fear of greater foreign competition and new entrants to the consumer credit market. The ability of a financial institution to access a neutral third-party information source on debtors would reduce the advantage of existing incumbents who already have built up sophisticated scoring systems on their clients. Consumer groups are also divided in their support. Some groups are opposed, although those involved with over-indebted individuals (such as Crésus) support the introduction of a positive system. The opposition here is partly a concern that because the primary cause of over-indebtedness relates to events which occur after the credit has been granted then more information will not necessarily reduce the risk to an extent that the economic and social costs of introducing a system outweigh the benefits.

It seemed  as if a positive credit reporting system operated by the Bank of France  would be introduced when an expert body appointed as a consequence of the 2010 Loi Lagarde implementing the EU 2008 Credit Directive, recommended this option. It was included within the recent loi Hamon which introduced a variety of consumer protections. However, the relevant sections were referred to the Constitutional Council (Conseil Constitutionel) which on March 13 2014 struck down the sections as a disproportionate intrusion on the constitutional right of privacy which was not outweighed by benefits related to credit decision-making.

This French decision is interesting internationally in terms of the role of credit bureaux and the balance of positive and negative information.  International agencies such as the World Bank promote strongly the introduction of credit bureaux with wide information sharing. They argue that it promotes better screening and risk assessment, reduces bad debts, increases competition by reducing the advantages of local incumbents, makes it easier for consumers to switch, and widens availability of credit. But although these institutions may be useful in kick-starting a credit system, there are concerns that in mature credit economies comprehensive credit information on individuals becomes part of a lender strategy to maximise profits rather than minimise risk, with the expansion of the market to include higher risks and targeting of individuals who are highly profitable because they will yield high late payment and other fees. This is the so-called ‘sweat box’ model of credit card lending.

These concerns combined with privacy issues and accuracy of information have prevented the EU from developing an EU wide credit reference system or set of norms. The EU established an expert group on credit histories in 2009.  It could not agree on whether positive reporting should be a norm concluding that the ‘economic literature offers contradictory (and often not definitive) views and that the European experience shows that both approaches can work effectively’. Thus although the EU may require  lenders to consult credit databases in mortgage lending and to have cross-border access to databases where necessary, no agreement on the form of the credit database exists.

Two further points. The existence of extensive credit reporting in the US and the UK did little to prevent the sub-prime lending crisis, or in the UK the large run-up in credit card debt prior to the Great Recession. The credit reference industry and multinational credit firms have an interest in expanding the role of credit bureaux, so that they become central sources of information for purposes such as checking tenants or employees.  The example of France where they are unable to operate in the consumer credit market represents a challenge to their growth and to influential thinking about credit bureaux, suggesting that the overall economic and social value of these systems needs further analysis and debate.

 

 

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