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CREDIT REPORTING AND DATA PROTECTION IN EU LAW

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Vincenzo Zeno-Zencovich

Professor of Comparative Law – University of Roma Tre Rector of the Rome University of International Studies (UNINT)

CREDIT REPORTING

AND DATA PROTECTION

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  In   &mes   of   financial   instability   growing   importance  of  credit  repor&ng  

•  Credit  repor&ng  as  part  of  monitoring  system   of  the  common  financial  market  

•  Credit   repor&ng   as   obliga&on   of   both   public   ins&tu&ons  and  private  enterprises  

•  Evalua&on  of  creditworthiness  is  fundamental   in  gran&ng  credit  and  in  evalua&ng  risk  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  In   2013   numerous   EU   legisla&on   which   involves,  directly  or  indirectly,  credit  repor&ng   Ø Direc&ve   2013/36   of   26   June   2013   on   access   to   the   ac&vity   of   credit   ins&tu&ons   and   the   pruden&al  supervision  of  credit  ins&tu&ons  

Ø Regula&on     575/2013   of   26   June   2013   on   pruden&al  requirements  for  credit  ins&tu&ons   and  investment  firms    

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

Ø Regula&on  462/13  of  21  May  2013  on  credit   ra&ng  agencies  

•  Direc&ve  2013/36:  

Ø Ar&cle  77,  para.  2:  “  Competent  authori.es  shall,   taking  into  account  the  nature,  scale  and  complexity   of   ins.tu.ons'   ac.vi.es,   monitor   that   they   do   not   solely   or   mechanis.cally   rely   on   external   credit   ra.ngs  for  assessing  the  creditworthiness  of  an  en.ty   or  financial  instrument”  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  Regula&on  575/13:  

Ø In   order   to   obtain   covered   bonds   “Both   the  

credit   ins.tu.on   and   the   protec.on   provider   shall   carry   out   a   creditworthiness   assessment   of  the  borrower”  (ar&cle  129)  

Ø In  order  to  obtain  credit  protec&on    necessary   t o   d e t e c t   e x c e s s i v e   r e l i a n c e   o n   creditworthiness  (ar&cle  217)  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

Ø Credit   ins&tu&ons   must   “not   undertake  

business   with   a   counterparty   without   assessing  its  creditworthiness”  (ar&cle  286)  

Ø Ins&tu&ons   applying   credit   risk   mi&ga&on   techniques   must   disclose   “the   main   types   of  

guarantor   and   credit   deriva.ve   counterparty   and  their  creditworthiness”(ar&cle  453)  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  Regula&on  462/13:  

Ø Ins&tu&ons   should   avoid   entering   into   contracts   using     credit   ra&ng   «as   only  

p a r a m e t e r     t o   a s s e s s   creditworthiness»   (preamble   n.   9)   (i.e.   they  

must  use  further  informa&on)  

Ø «More   diversity   in   the   assessment   of  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

Ø In  order  «to  make  an  informed  assessment  of  

the   creditworthiness   of   finance   instruments»  

investors   must   be   provided   with   further   informa&on  (preamble  n.  30)  

Ø Use  of  «credit  scores»  

Ø European   Data   Protec&on   Supervisor   (EDPS)   expressly   asked   that   Regula&on   462   should   have   a   safeguard   clause   of   data   protec&on,   but  the  request  was  rejected.    

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

Ø Paramount   are   «the   enhancement   of  

consumer  and  investor  protec.on»  (ar&cle  1)  

•  Clear   conflict   between   need   for   stable,   reliable,     transparent   and   compe&&ve   financial     markets   and   increase   of   data   protec&on  measures  

•  Typical  example  of  conflict:  Dra^  direc&ve  on   credit   agreements   rela&ng   to   residen&al   property  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  In  dra^  direc&ve    extended  provisions  on:  

Ø Obliga&on   to   assess   the   creditworthiness   of   the  consumer  (ar&cle  14)  

Ø Disclosure   obliga&on   on   the   part   of   the   consumer  (ar&cle  15)  

Ø Right  to  access  databases  on  creditworthiness   of   consumers   and   for   monitoring   consumers   compliance  (ar&cle  16)  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  In   the   Opinion   of   the   ECB     “private   credit  

bureaux   or   credit   reference   agencies   and   public   credit   registers”   should   be   allowed   “against  the  background  of  their  purposes  and   business   models,   to   collect   addi.onal   informa.on   on   these   credits   where   appropriate”.  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  In  the  Opinion  of  the  EDPS,  instead:  

Ø the   whole   ac&vity   should   be   subject   to   data   protec&on  laws  

Ø sources   from   which   informa&on   on   debtor’s   creditworthiness   can   be   obtained   should   be   restricted  

Ø access   to   database   should   be   allowed   only   prior  to  specific  communica&on  to  the  debtor  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  Different   approach     between   financial   market   regulators   and   data   protec&on   authori&es   is   very   clear  in  other  EU  documents.  

•  Commission  Retail  Banking  Sector  Inquiry    (2007)  

Ø Credit   registers   are   an   important   element   of   retail   banking   market   infrastructure.   To   ensure   strong   compe..on  among  credit  providers  in  retail  banking   markets   it   is   vital   that   credit   registers   enable   open   and  non-­‐discriminatory  access  to  credit  data”  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  Credit  data  sharing  tends  to  have  posi&ve  economic  effects:     Ø  Credit   data   reduces   the   informa&on   asymmetry   between   a  

bank  and  its  poten&al  customer  (lower  default  rates)    

Ø  Credit   informa&on   sharing   acts   as   a   borrower   discipline   device:  borrowers  know  that  if  they  default,  this  fact  becomes   public   knowledge   and   their   reputa&on   with   other   lenders   is   affected    

Ø  Credit  repor&ng  helps  reduce  problems  of  adverse  selec&on,   generally   ensuring   greater   credit   availability   on   becer   condi&on  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  Banks   and   other   providers   of   credit   require   access   to   good   quality   credit   informa&on   in   order  to  price  accurately  for  borrowers,  and  a   greater   availability   of   credit   data   tends   to   improve  banking  market  performance  

•  Need  for  common  rules  throughout  the  EU  

•  Similar   sugges&ons   come   from   the   2009   EU   Report  of  the  Expert  Group  on  Credit  Histories  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

Ø Access   to   credit   registers   should   be   possible   throughout  the  lifecycle  of  the  credit  and  also   a^er  

Ø Common   mechanisms   for   consumers   to     access  credit  reports  

Ø Necessary   to   strike   a   balance   between   transparency   of   credit   markets   and   data   protec&on  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  Model   suggested   in   2007   by   Retail   Banking   Sector    Inquiry    and  2009  EGCH  is  consistent   with  interna&onal  models  and  standards  

•  US  Fair  Credit  Repor&ng  Act  

Ø Credit   repor&ng   agencies   have   the   right   to   create  individual  credit  records  

Ø Consumers   have   the   right   to   access   their   record  and  to  ask  correc&ons  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  Australian  Credit  Repor&ng  Code  of  Conduct   Ø Informa&on  on  why  informa&on  is  collected   Ø Data  must  be  accurate,  up  to  date,  complete  

and  not  misleading  

Ø Right  of  access  and  correc&on  of  credit   records  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

•  In  Canada  regula&on  on  a  provincial  basis   Ø Model  is  that  of  credit  scores  which  each  

consumer  has  the  right  to  access  and    ask   correc&ons  

Ø Great  effort  in  informing  consumers  by     Financial  Consumer  Agency  

Ø See  «Understanding  Your  Credit  Report  and  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

In  2011  World  Bank  has  issued  «General  Principles  for   Credit   Repor&ng»   sehng   several   public   policy   objec&ves:  

Ø Credit   repor&ng   systems   should   effec&vely   support   the  sound  and  fair  extension  of  credit  in  an  economy  as   the   founda&on   for   robust   and   compe&&ve   credit   markets.   Credit   repor&ng   systems   should   be   safe   and   efficient,   and   fully   suppor&ve   of   data   subjects   and   consumer  rights.  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

Ø  Credit   repor&ng   systems   should   have   accurate,   &mely   and   sufficient  data  –  including  posi&ve  -­‐  collected  on  a  systema&c   basis     from   all   relevant   and   available   sources,   and   should   retain  this  informa&on    for  a  sufficient  amount  of  &me.  

Ø  Credit   repor&ng   systems   should   have   rigorous   standards   of   security  and  reliability,  and  be  efficient.  

Ø  The   governance   arrangements   of   credit   repor&ng   service   providers   and   data   providers   should   ensure   accountability,   transparency   and   effec&veness   in   managing   the   risks   associated   with   the   business   and   fair   access   to   the   informa&on  by  users.  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

Ø The  overall  legal  and  regulatory  framework  for   credit   repor&ng   should   be   clear,   predictable,   non-­‐discriminatory,   propor&onate   and   suppor&ve   of   data   subject   and   consumer   rights  

Ø Cross-­‐border   credit   data   transfer   should   be   facilitated  where  appropriate  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

SOME  CONCLUSIONS  

Ø Credit   collec&on   firms   in   the   EU   should   side   the   acemps   of   the   Commission   and   other   financial   governance   ins&tu&ons   (ECB)   to   put   into  place  a  comprehensive  regula&on  of  credit   repor&ng  

Ø Processing  of  data  in  the  field  of  credit  cannot   be   considered   a   ‘personal’   macer   which   concerns  only  the  borrower  

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CREDIT  REPORTING  AND  DATA  PROTECTION   IN  EU  LAW  

Ø Credit  records  are  relevant  not  only  for  credit   ins&tu&ons  but  also  for  public  financial  market   regulators:  personal  data  have  public  impact   Ø Many   sugges&ons   can   come   from   non-­‐EU  

models  (US,  Australia,  Canada)  

Ø Objec&ve:   special   regula&on   –   and   not   General   Data   Protec&on   Regula&on   –   for   credit  repor&ng  

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