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Select Committee amends Credit Contracts Bill

November 12, 2019

Contacts

Partners Anne Callinan, Josh Cairns, Stuart Evans, Andrew Harkness, Ben Upton
Senior Associates Laurette Barnard, Zelda Gower, Sarah Lee

Financial services regulation

The Select Committee has recommended that the Credit Contracts Legislation Amendment Bill (Bill) be passed, with certain notable amendments.

The Bill was introduced in April 2019 to strengthen the protections for vulnerable consumers under the Credit Contracts and Consumer Finance Act 2003 (CCCFA).

Summary - what you need to know

The Select Committee report on the Bill was issued on 11 November 2019. This FYI highlights some of the key amendments the Select Committee has recommended, including:

  • Changes relating to high-cost consumer credit.
  • Further consumer-related changes.
  • Non-consumer credit and other changes.

Changes relating to high-cost consumer credit

Definition

Payday loans and similar forms of high-cost financing have accounted for the problem debts incurred by many vulnerable borrowers. To mitigate the harm, the Bill (as introduced) provided for various restrictions on “high-cost consumer credit contracts” (HCCCs). It defined an HCCC as a consumer credit contract that provides for an annual interest rate of 50% or more, or where the weighted average annual interest rate applied to the unpaid balance is (or is likely to be) 50% or more on any day during the life of the contract.

The Select Committee has retained the threshold interest rate of 50% for now (contrary to several submitters’ view that this should be reduced to 30%), but has recommended that this threshold be reviewed after three years. However, the Select Committee has amended the definition of HCCC to also include contracts where the total interest charged (including default interest) is or is likely to be 50% or more on an unpaid balance in the event of default or the credit limit being exceeded.

Interest and fee restrictions

Payday loans and similar forms of high-cost financing have accounted for the problem debts incurred by many vulnerable borrowers. To mitigate the harm, the Bill as introduced provided for a maximum rate cap, whereby the total interest and fees charged on an HCCC could not exceed the amount of the principal advanced, ie a 100% total cost-of-borrowing cap. The Government subsequently announced that the Bill would be amended during its passage through Parliament to additionally include a daily rate cap of 0.8% on HCCCs. 

The Select Committee has now made the following changes:

  • The Select Committee has inserted the 0.8% daily cap into the Bill. Regulations will prescribe how the 0.8% must be calculated.
  • The total cap will no longer apply to the sum of the interest charges, credit fees, and default fees alone. Instead, it will apply to the sum of the interest charges, credit fees, charges for optional services, all fees or charges passed on by the creditor, and default fees.
  • The 0.8% daily cap will apply to the sum of the interest charges, credit fees, charges for optional services, and all fees or charges passed on by the creditor. Default fees will be excluded from this calculation.    

In addition to the above rate caps, the Select Committee has added a prohibition on compound interest for HCCCs.

The Select Committee has also added a restriction on default fees. A creditor will not be able to charge more than a prescribed amount (currently proposed to be $30) for default fees (singly or in combination) unless a creditor can prove that its higher fee is reasonable. 

Restrictions on refinancing and “lender hopping”

To prevent vulnerable borrowers from repeatedly refinancing an HCCC with another HCCC, the Bill (as introduced) prohibited creditors from charging borrowing costs on any related HCCCs that are higher than the principal amount of the first HCCC advance.

The Select Committee was concerned that some borrowers could use workarounds to avoid that restriction. This could include seeking additional loans from new creditors to repay earlier loans, or repaying a loan and then immediately taking out another loan. To avoid this, the Select Committee has:

  • Extended the definition of “related consumer credit contract” to include HCCCs entered into with the same lender or an associated lender within 15 days of a previous HCCC being paid off.
  • Added a prohibition on providing an HCCC to a borrower who has held an HCCC with a different creditor within the past 15 days.
  • Added a prohibition on providing an HCCC to a borrower who has entered into two or more HCCCs within the past 90 days.

Further consumer-related changes

Further consumer-related changes by the Select Committee include:

  • Requiring creditors to conduct affordability and suitability assessments not only when first providing credit (as currently), but also when making “material changes” to an existing consumer credit contract – eg when raising the credit limit is raised or making a further advance.
  • Requiring creditors who advertise in a language other than English to provide information in that language that will assist borrowers to make an informed decision.
  • Requiring creditors to reset their fees when they know, or reasonably ought to know, that a change in their business or costs will likely affect the reasonableness of a fee.
  • Requiring a creditor to refund the insurance premiums if it has breached its responsible lending duty of making reasonable inquiries before an insurance contract is entered into.
  • Requiring a creditor to release a consumer from the guarantee if the creditor has breached its responsible lending duty of making reasonable inquiries before a guarantee is given.
  • New obligations for creditors who receive hardship applications, have debtors who fall into arrears, or decline applications for HCCCs to ensure that borrowers are fully aware of all avenues available should they run into financial hardship – in particular, needing to inform these consumers that they can approach a dispute resolution scheme or the court if they have a complaint or concern, and needing to provide information about financial mentoring services.

Non-consumer credit and other changes

Other notable changes by the Select Committee include:

  • Removing the requirement under the Bill (as introduced) for controlling owners of businesses that provide credit contracts to be certified as “fit and proper persons”.
  • A Regulation-making power that will enable the due diligence duty being created by the Bill (under which every director and senior manager of a creditor under a consumer credit contract must exercise due diligence to ensure that the creditor complies with the CCCFA) to be varied in the context of securitisation, covered bond, or similar arrangements, so that the contract manager’s directors and senior managers – and not the trustee’s directors and senior managers - will be subject to this duty.
  • Requiring creditors to lodge annual returns with the Commerce Commission;
  • New provisions dealing with the Government’s powers to call in arrangements as ”consumer credit contracts”, and to exclude arrangements from being “credit contracts”, under the CCCFA.
  • Prohibiting and voiding insurance and indemnification against CCCFA pecuniary penalties or the costs of defending civil proceedings for such pecuniary penalties, except in cases where liability is not established.

Next steps

Parliament will shortly (at the Bill’s second reading) vote on accepting the Select Committee’s set of recommended changes (not on the changes individually, and without debate or amendment). Once agreed to by Parliament, the set of changes will become part of the Bill as passed at its upcoming second reading. 

However, further changes could still be introduced by way of Supplementary Order Papers (SOPs, which are introduced by Members of Parliament during the third reading of the Bill, and which are voted on individually). Given that the Select Committee report was a majority recommendation (with the National Party members issuing a minority view, due to their concern that the daily rate cap was policy made “on the hoof”), matters such as the rate cap could well the subject of further SOPs.

If you would like to discuss how to comply with the CCCFA, or how to navigate the upcoming changes, please get in touch with one of our contacts.