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Consumer credit update - legislative overhaul of responsible lending

May 06, 2019


Partners Anne Callinan, Andrew Harkness

Competition law (inc cartels)

It is a priority of the current Government to provide greater protection to vulnerable consumers and legislative reforms are in the pipeline to strengthen the existing responsible lending rules, particularly in relation to high-cost-short-term loans.[1]

While the amendments proposed in the recent Credit Contracts Legislation Amendment Bill 2019 (Bill) undoubtedly go some way to addressing these concerns, they broadly impact all consumer lending in New Zealand. The Bill raises a number of as yet unanswered questions about how the changes will be implemented in practice and how burdensome the related compliance costs will be for lenders.

One of the new requirements of the Bill is a duty on creditors to substantiate that their credit fees are reasonable. While this requirement should assist the Commerce Commission (and borrowers) enforce the reasonable fee provisions of the CCCFA, the Bill fails to address the underlying issue of how creditors are to calculate a ‘reasonable fee’ or whether the reasonable fee regime remains fit for purpose.

MBIE Review 2018 and the Credit Contracts Legislation Amendment Bill

Following the Ministry of Business Innovation and Employment’s review of New Zealand’s credit laws in 2018, Government has decided to make a number of significant changes to the Credit Contracts and Consumer Finance Act 2003 (CCCFA). In summary, these are:

  1. A limit on the accumulation of interest and fees on high-cost loans capped at 100% of the amount borrowed. This will only apply to loans with an annualised interest rate of 50% or more.

  2. Prescriptive requirements for affordability and suitability tests, which are part of the existing responsible lending requirements.

  3. A repeal of the presumption that allowed lenders to rely on information provided by borrowers when assessing whether a loan is affordable and/or suitable for a borrower.

  4. New rules about disclosure and advertising, particularly in relation to use of different languages.

  5. Stronger enforcement provisions where lending is not responsible, including increased financial penalties, statutory damages, and banning orders.

  6. All directors and top executives of lenders offering consumer credit contracts (as well as mobile traders) will be required to meet a ‘fit and proper person’ test before the creditor can be registered on the Financial Service Providers Register.

  7. New duties on directors and top executives to ensure that lenders comply with their obligations. The penalties for breach of those duties cannot be indemnified or insured against.

  8. Greater transparency and access to redress during debt collection, including a requirement that key loan information will need to be shared with debtors at the start of debt collection activity.

  9. The ability of the Court to reduce liability under s99(1A) for minor disclosure breaches.

  10. New regulatory-making powers to deem certain contracts to be ‘consumer credit contracts’ and certain persons to be ‘creditors’.

  11. Lenders will now be required to substantiate that their fees are reasonable if the Commerce Commission asks them to do so.

These changes will apply to all consumer credit lending in New Zealand, with the exception of the 100% recovery cap, which will only apply to ‘high cost’ loans with an annualised interest rate over 50%.

The focus of the reforms has been on protecting vulnerable borrowers from predatory and irresponsible lenders. There seems to be wide political agreement that further regulation and oversight is required to safeguard consumer interests, balanced against the need to keep affordable credit available through legitimate channels.

The proposed amendments were recorded in the Credit Contracts Legislation Amendment Bill, which passed its first reading on 30 April 2019 with cross-party support. The Bill can be read here.

A number of key aspects have already been flagged for review by the Finance and Expenditure Select Committee, including how a number of the aspects will apply in practice and whether interest rate caps should also be included. This was Labour and Green Party policy while in Opposition and has been called for by various community groups (read here).

The tension between ‘in policy’ and ‘in practice’

A reoccurring difficulty in New Zealand’s credit laws has been (and remains) translating the objectives of the legislation into practically achievable actions that can be undertaken by the industry without undue compliance costs. A good example of this is the current CCCFA requirement for creditors to charge no more than a ‘reasonable’ credit fee.

The fees provisions of the CCCFA (ss 41-45) prohibit creditors from charging unreasonable fees. In the Sportzone decisions,[2] the Courts interpreted those provisions to mean that creditors can only charge cost-based fees. The policy driving this interpretation was that creditors would only recover costs through their fees and therefore compete and make profit on interest rates. In turn, this should allow consumers to easily compare fees and drive down interest rates, resulting in a better outcome for consumers.

While this policy has some logic, it has been difficult and costly to implement and enforce in practice. The regulator responsible for policing the fees provisions, the Commerce Commission, noted in its submission on the CCCFA review that:[3]

The fees provisions are unnecessarily complicated, difficult for borrowers and for the Commission to enforce, create compliance costs for lenders and potentially obscure the costs of credit.

With the focus of the review very much being on responsible lending and high-cost loans, less attention has been given to this different, but equally fundamental, question of whether the existing fees regime is fit for purpose.[4]

The MBIE review found that a number of lenders do not carry out a cost-based analysis, continue to charge excessive fees, are charging an increasing number of fees for a range of activities and are not being incentivised to increase efficiency and lower fees. While MBIE identified three potential options for addressing this issue, all three involved reasonably minor revisions to the existing regime rather than any options for a complete overhaul.[5]

To assist the Commission, the Bill proposes to add a new requirement that creditors keep records, for at least seven years from the date on which the fee is set, detailing how the creditor calculated its fees in accordance with the fees provisions. Those records must then be made available to the Commission at its request. Failure to provide these records to the Commission within 20 working days results in liability for pecuniary penalties of up to $200,000 for individuals and $600,000 for other entities.

While this requirement to proactively substantiate fees will assist the Commission with its enforcement proceedings, there remains uncertainties about how to calculate a ‘reasonable’ fee. This is especially the case for FinTech and other online creditors who increasingly utilise technology to facilitate their lending and bear little resemblance to the traditional ‘bricks and mortar’ model. These entities have different costs and loan establishment processes making the existing guidance difficult to apply. The proposed amendments do not tackle this underlying issue with the CCCFA.

Given the upcoming implementation of a recovery cap for high-cost lending (and also a potential interest rate cap), it may be an appropriate time to revisit whether the existing fees provisions are fit for purpose and meeting their objectives or whether a better alternative is available. For example, in Australia and the United Kingdom, certain fees are capped at a set amount or at a particular percentage relative to the size of the loan and there is no requirement to show fees are reasonable or cost-based. This has the advantage of certainty for borrowers, lenders and the Commission, but would need to be balanced against the lack of flexibility with fee caps.

While the Government’s current preferred option is to require creditors to substantiate fees, this may be a matter that is discussed further before the Finance and Expenditure Select Committee.

Next steps

Following the first reading of the Bill on 30 April, it has now been sent to the Finance and Expenditure Select Committee for review and 2019 amendment. The Bill is expected to come into force around March 2020.

The public are able to make submissions on any aspect of the Bill to this Select Committee before 14 June 2019. Make your submissions here. Our specialists are happy to assist with any questions regarding the proposed amendments and what this will mean for your business.


[1] In addition to the Credit Contracts Legislation Amendment Bill 2019, the Government is also implementing a number of other consumer credit reforms including measures to regulate banks’ and insurers’ conduct in their dealings with consumers and the ad-hoc amendments contained in the Regulatory Systems (Economic Development) Amendment (No 2) Bill, which is currently before the Economic Development, Science and Innovation Committee.

[2] Sportzone Motorcycles Ltd (in liq) v Commerce Commission [2016] 1 NZLR 1024, [[2016] NZSC 53; Sportzone Motorcycles (in liq) v Commerce Commission [2015] 3 NZLR 191, [2015] NZCA 78; Commerce Commission v Sportzone Motorcycles Ltd (in liq) [2014] NZHC 2486; Commerce Commission v Sportzone Motorcycles Ltd (in liq) [2014] 3 NZLR 355, [2013] NZHC 2531.

[3] Commerce Commission submission on Consumer Credit Regulation Review Published: 1 Aug 2018 at [166].