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Consumer credit update - interest rate and fees cap introduced

September 05, 2019

Contacts

Partners Anne Callinan, Andrew Harkness

Summary - What you need to know

  • The Government has just announced further proposed changes to New Zealand’s consumer credit laws via the Credit Contracts Legislation Amendment Bill.

  • The most significant of these is an interest and fees cap, which will restrict lenders to charging 0.8% interest and fees per day for a loan (or a 292% annualised cap).

  • This cap marks a significant policy shift in New Zealand’s consumer credit law. Parliament had previously refused to impose interest rate caps despite considering the issue on a number of occasions.

Background

On 3 September 2019, the Minister of Commerce and Consumer Affairs announced the Government’s intention to introduce further consumer protections into the Credit Contracts Legislation Amendment Bill. The additional changes were introduced following public feedback received on the Bill by the Finance and Expenditure Select Committee.

The newest changes follow the original set of amendments introduced in April 2019, which you can read about here.

Key details

The Government has announced that it will introduce an interest rate and fees cap that will prevent lenders from charging more than 0.8% interest and fees per day for a loan. This means the annualised interest rate and fees will be restricted to 292%.

The Government had considered introducing an interest rate and fees cap in the original round of amendments, but had decided not to on the basis that:[1

Limiting interest rates would likely result in the closure of many high-cost lenders, and a significant tightening of lending criteria by those who remain. Lenders would likely offer customers longer-term credit in larger amounts, or seek to charge higher fees, in order to recoup the costs of lending. Borrowers with poor credit histories would have fewer options to deal with genuine short-term financial difficulties, and some would end up paying more in interest and fees overall.

The existing recovery cap that was already proposed in the Bill (which limits the interest and fees charged on a high-cost loan to 100% of the amount borrowed) will remain and work in conjunction with the new interest and fees cap.

The introduction of an interest rate cap marks a significant policy shift in New Zealand’s consumer credit law. Since the introduction of the Credit Contracts and Consumer Finance Act in 2003, Parliament has refused to restrict the interest rates lenders can charge in favour of regulating fees by requiring them to be “reasonable” or cost based.

The proposed shift to an interest rate and fees cap aligns New Zealand with other OECD countries. In particular, the 0.8% cap combined with a recovery cap of 100% is identical to the regime in the United Kingdom. However, in other jurisdictions where an interest rate cap has been implemented, there is generally no additional requirement for fees to be cost based.

The new amendments will also require mobile traders and truck shops to comply with responsible lending and disclosure obligations (including an assessment of whether credit is affordable and suitable for each customer, before providing anyone with goods that are not paid for upfront).

You can read more about the changes to the consumer credit laws on MBIE’s website and an updated Cabinet paper and Regulatory Impact Statement will be put on there shortly.

Next steps

The Bill is currently before the Finance and Expenditure Select Committee for review. Public submissions on the Bill closed on 14 June 2019, meaning the public will not have a direct opportunity to make submissions on the latest changes to the Bill.

The Finance and Expenditure Select Committee is expected to report to Parliament on 30 October 2019. The Government is then aiming for the Bill to be passed into law at the end of this year and will come into effect, in stages, from March 2020.

Contributors sam.comber@simpsongrierson.com, laurette.barnard@simpsongrierson.com