The changes will be broadly welcomed by lenders, with a shift toward a more pragmatic and proportionate regulatory framework. However, the package of reforms also introduces new risks to consider, particularly in relation to the expanded regulatory enforcement powers under the new oversight of the Financial Markets Authority (FMA).
CCCFA: key changes and implications
The Credit Contracts and Consumer Finance Amendment Bill (Bill) introduces a number of significant changes to the CCCFA, which should materially simplify compliance for consumer credit providers and should partially reduce the risk of breach. We summarise some of the key changes below.
Consequences of disclosure breaches – a more balanced approach
Section 99(1A) of the CCCFA, which was introduced in 2015, provides that borrowers are “not liable for the costs of borrowing in relation to any period during which the creditor has failed to comply” with certain disclosure obligations. To avoid the potential for disproportionate consequences to arise from minor or technical disclosure breaches, the Bill repeals that section, which will no longer apply for new consumer credit contracts.
The repeal does not apply to existing agreements. However, relief provisions introduced in 2019 (which allowed the courts to reduce the effect of section 99(1A) where “just and equitable” based on various factors) remain available and, importantly, will now apply retrospectively for disclosure breaches occurring prior to 2019. The Bill notes that this retrospective change will apply to existing proceedings that have not been finally disposed of by a court of first instance before the change commences.
This is a valuable clarification and provides helpful certainty to lenders and consumers.
FMA oversight and licensing
As had been signalled in September last year (see our article here), the Bill proposes a significant shift in regulatory oversight, transferring responsibility for enforcing the CCCFA from the Commerce Commission to the FMA. This move aims to align consumer credit regulation with broader financial markets regulation under the Financial Markets Conduct Act 2013 (FMCA), streamlining oversight and ensuring a more consistent approach across financial services.
For many lenders, this will have little immediate impact given that lenders who are already certified under the CCCFA (or currently exempt) will be deemed to be licensed under the FMCA. However, lenders will need to adapt to the FMA’s regulatory expectations and enforcement priorities, which may differ from the Commerce Commission. Licensing also brings enhanced regulatory scrutiny including reporting obligations under the FMCA for various mattes, including breaches of certain obligations or material changes of circumstances. Lenders (particularly where they don’t currently hold another category of market services licence) should ensure they are familiar with these new obligations as licensed entities.
Declarations
The Bill introduces expanded regulatory powers including a right for the FMA to seek court declarations of CCCFA breaches. This is an important shift from the current enforcement model, as a court declaration could serve as the basis for claims and reputational damage. The drafting in the Bill states that the purpose of such declarations is to enable applicants to seek orders for certain civil remedies (primarily compensatory claims). Lenders will no doubt wish to ensure that the effect of declarations is clearly limited and does not support private claims for wider orders (e.g. statutory damages).
Other changes
The Bill introduces several other positive changes for lenders, streamlining compliance and reducing administrative burdens. Key benefits include:
- repealing the due diligence duty for directors and senior managers (and with it, personal liability for breach of that duty);
- repealing the annual reporting requirement, which will reduce ongoing compliance costs for lenders in preparing annual reports;
- wider exemptions for loans to borrowers who are trustees (previously this exemption only applied to family trusts, but the Bill will extend this to any category of trust); and
- lenders will no longer be required to provide continuing disclosure if the borrower’s unpaid balance is accessible on the lender’s website. This should offer a more flexible approach to meeting disclosure obligations.
The proposed CCCFA reforms represent a valuable reset, addressing many of the more material burdens for consumer lenders that have accumulated in recent years (in particular under the 2019 amendments). While the overall direction of reform is positive, lenders should now focus on engaging in the consultation process when submissions are called in due course. The Bill presents an opportunity to ensure clarity in the final drafting (particularly around enforcement and declarations). In addition, given the FMA’s increased role, lenders should consider how their compliance programs align with regulatory expectations under a licensing regime, and ensure they are familiar with the additional obligations that apply to licensed entities under the FMCA.
COFI – simplification of minimum requirements
In parallel with the above reforms, the Financial Markets Conduct Amendment Bill (FMC Bill) proposes changes to the new conduct of financial institutions (COFI) regime in subpart 6A of part 6 of the FMCA, which took effect on 31 March. In summary:
- The FMC Bill will change some of the minimum requirements for a “fair conduct programme” (FCP) that financial institutions must maintain under the FMCA. Positively, it will simplify the requirements relating to training, supervising, and monitoring employees by reducing the level of prescription, and remove requirements relating to existing legal obligations and regular reviews of the effectiveness of FCPs. However, there are new requirements including extending requirements to communicate with consumers about the price of services or products. There will also be new requirement to resolve consumers’ complaints in a timely and effective manner. Financial institutions should consider carefully how they will update their FCPs to address these new aspects.
- The FMC Bill also introduces a single licensing obligation to replace the current multilayered licensing framework under the FMCA. This change will consolidate multiple existing licences into one, simplifying the regime and improving clarity and certainty for financial institutions.
- Importantly, the FMC Bill also introduces new powers for the FMA, including a change-in-control approval process. Licence holders will need to obtain FMA approval before significant changes in control, such as when a person acquires 25 per cent of voting rights or the ability to appoint 50 per cent of directors, or during significant business transactions like asset sales or amalgamations.
- One potentially alarming aspect of the FMC Bill (signalled in last year’s announcement) is the introduction of on-site inspection powers for the FMA. Even though the FMC Bill states that the power may only be exercised “at a reasonable time and in a reasonable manner” unannounced inspections could be disruptive and alarming to employees. Regulated entities may wish to submit on these changes to ensure there is clarity as to the guardrails that will apply to this new power.
FSP reforms
Finally, the Financial Service Providers (Registration and Dispute Resolution) Amendment Bill (FSP Bill) seeks to address perceived gaps in the applicable dispute resolution frameworks for financial service providers. In particular, it will introduce improved oversight of approved dispute resolution scheme performance, by requiring the responsible Minister to decide how the schemes must undertake their independent reviews. In addition, to ensure effective and impartial governance of the schemes’ boards, a new regulation-making power will be available to prescribe the skills, experience, and independence requirements of dispute resolution scheme board members.
Next steps
Collectively, these reforms signal a significant move toward a more streamlined and efficient regulatory landscape for lenders and financial institutions. While these changes are largely beneficial, they also introduce new challenges that will require careful consideration by regulated entities (in particular regarding regulatory oversight and enforcement risks). As this triple bill of reforms progresses through the legislative process, it will be crucial for businesses to stay engaged in the consultation process and proactively prepare for the upcoming shifts. Early adaptation and understanding of the new requirements, particularly for lenders unfamiliar with FMCA licensing, will help mitigate potential risks and ensure smoother compliance once the changes are fully implemented.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully adviser.