10/08/2023·3 mins to read
Consumer credit - Changes ahead
After a decade of ever-tighter regulation of consumer credit, we may see a loosening of the reins.
The Government this week announced:
- less strict regulation for “buy now, pay later” (BNPL) credit contracts than the market had requested;
- new exemptions from the Credit Contracts and Consumer Finance Act 2003 (CCCFA); and
- an intended review of the CCCFA, to assess more targeted settings that tailor the regulatory burden to the lending’s risk profile.
We comment on the immediate reforms, namely the new BNPL regime and exemptions. We will be commenting on the foreshadowed CCCFA review separately.
BNPL credit contracts do not fall within the CCCFA’s definition of “consumer credit contracts”, and so are not currently regulated by the CCCFA.
In October 2022, Cabinet agreed to apply the CCCFA to BNPL, subject to certain exemptions and conditions. For example, Cabinet decided that BNPL loans would be exempt from the usual affordability assessments if the total loan was less than a certain amount.
Cabinet has now decided on some alterations to its original BNPL decisions. Under the new decisions:
- BNPL credit contracts will be regulated as “consumer credit contracts” under the CCCFA.
- BNPL providers will be exempt from affordability assessments, regardless of how large the loan amount is. Instead, they must complete comprehensive credit reporting when customers sign up or increase their credit limit.
- BNPL providers will be exempt from undertaking suitability assessments.
- BNPL providers will be exempt from the requirement to disclose to the borrower their statutory right to cancel the contract within five days.
The decision to exempt all BNPL loans from affordability assessments, regardless of the loan amount, will come as a surprise to many. It was widely anticipated in the market that the decision would turn on what the amount of the exemption cap should be (if, indeed, the exemption was to be retained at all - consumer budgeting services having submitted that affordability assessments should be required for all BNPL loans, no matter how small). The basis for Cabinet’s decision is that a monetary cap was seen as difficult to administer, and would subject some BNPL loans to affordability assessments disproportionate to their relatively low risk. Cabinet considered that affordability assessments would be too onerous, given BNPL providers only offer short‑term, low‑value, interest‑free loans. Credit reporting requirements would sufficiently reduce the risk that borrowers already in problem debt might obtain further BNPL loans, and would allow BNPL borrowers to benefit from the CCCFA’s other protections without introducing disproportionate compliance costs.
That said, the Cabinet paper records that the Minister views replacing affordability assessments with credit checks as a first step. If there is continued evidence of financial hardship caused by BNPL, affordability assessments could be required at a later date.
The decision to dispense with affordability assessments for all BNPL loans runs counter to the CCCFA’s mantra of protecting consumers, and the rationale for that decision – such as not imposing disproportionate compliance costs – seems equally applicable to other cases for which no exemptions exist. It will be welcomed by BNPL lenders, but baffle other lenders.
The exemption from suitability assessments reflects these products’ low risk of being unsuitable.
The exemption from the cancellation period disclosure reflects that BNPL lenders have more generous cancellation terms than the CCCFA requires; it would confuse borrowers to be informed about the CCCFA’s five-day cancellation period if, under the BNPL terms, they can in fact cancel at any time.
The Government plans to finalise the Regulations for the BNPL sector soon (well before the election), to come into force in 2024.
In addition to the exemption for BNPL credit from the affordability and suitability assessment requirements, the Government has announced three further exemption developments.
First, the Government proposes to develop a permanent exemption to ensure consumers affected by extreme weather events have timely access to credit. This will make temporary ad hoc exemptions, such as from affordability and suitability assessments, unnecessary. Further consultation will be necessary to inform the detailed policy design.
Secondly, there will be a complete exemption from the CCCFA for local and regional councils’ voluntary target rates schemes. These schemes finance healthy home or sustainability improvements, usually for lower-income households.
Finally, a technical change will be made to the exemption for annual returns, to avoid duplication in certain cases. The relevant cases relate to where a loan made by an entity whose principal business is the provision of non-financial goods and services (“original dealer”) is assigned to a finance provider. Under the change, an original dealer would be exempted from the CCCFA’s annual reporting requirements if, as part of its annual report, the finance provider provides a breakdown of loans by original dealer.
Regulations will be made to put these exemptions in place.
We can help
Please contact one of our experts if you would like to discuss how the CCCFA may affect your business or your input in any upcoming consultations.