The proposed consumer credit reforms offer a valuable opportunity to improve a regulatory framework that has received significant criticism from both borrowers and lenders over recent years. Ahead of the deadline for submissions, this article sets out some considerations for industry participants to keep in mind when assessing the consultation and deciding whether to make a submission.
- Due diligence: Currently the CCCFA imposes duties on directors and senior managers of lenders to exercise “due diligence” to ensure that the lender complies with its obligations under the CCCFA. Breach of that duty can result in personal liability, including pecuniary penalties which cannot be indemnified or insured against. The consultation considers various options, including a proposal to either:
- repeal the due diligence duty altogether, or
- remove the restrictions on indemnities and insurance. This would mean that the liability for breach would be met by the lender rather than the director or senior manager personally.
We expect that creditors will be keen to submit on this proposal given that either development is likely to be welcomed by their directors and senior managers.
- Certification vs Market Services License: Currently consumer creditors must be certified by the Commerce Commission in order to provide consumer credit (subject to certain exceptions, including for registered banks). For some lenders, this certification requirement is in addition to existing licensing requirements to the extent those participants provide certain “market services” (such as providing financial advice). The consultation proposes various options for simplification, including creating a single licensing regime under the Financial Markets Conduct Act 2013 (FMCA), that would extend the existing framework to include a new class of “market service” applicable to consumer credit. This would be coupled with removing the current certification requirements. That proposal will require careful consideration by lenders. For some, it may offer a simplification in that a single license could cover a number of activities and licensing applications are a one-off process, as opposed to the current five-year certification process. On the other hand, for other lenders who are currently certified. having navigated this process in 2021, this will introduce a new licensing requirement to understand and navigate, including any conditions to that licence and the supervision and enforcement powers of the Financial Markets Authority.
- Disclosure: The consultation notes the challenges created by the onerous and prescriptive disclosure obligations under the CCCFA. One option proposed is a “more targeted” approach, limited to “information that is more likely to be relevant to the consumer in view of their circumstances at the time of the disclosure.” The paper recognises that this flexible approach could reduce the disclosure of unnecessary information and associated costs without affecting borrowers’ ability to make informed decisions. As an alternative, the paper proposes simplifying the information to be disclosed in various specific contexts, focussing on debt collection disclosure and variation disclosure. For many lenders, ensuring compliant disclosure can be a detailed and onerous exercise, and it is not clear that borrowers are better informed as a result. We expect that the opportunity for simplification will be broadly welcomed.
- Penalties: Section 99(1A) of the CCCFA states that “Neither the debtor nor any other person is liable for the costs of borrowing in relation to any period during which the creditor has failed to comply with section 17 [initial disclosure] or 22 [disclosure of agreed variations].” This provision has been controversial and one of the proposals includes repealing it altogether. We expect that lenders will be interested in submitting on this, and query the need for section 99(1A) given the other penalty options in the CCCFA, including statutory damages.
- “High cost” credit: The CCCFA imposes additional obligations for certain “high cost” consumer credit contracts, defined to capture credit contracts with interest rates of over 50%. The restrictions include limits on costs of borrowing, which must not exceed the loan advance, and are subject to a cap of 0.8% per day, and limits on frequency of borrowing (e.g. lenders must not offer high cost credit to a borrower who has entered into two or more high-cost contracts in the past 90 days). One option under consideration is reducing the threshold for “high cost” credit down to 30%. This would mean that a wider class of lenders would be subject to the additional restrictions on high-cost credit. This is likely to be particularly relevant for finance companies offering unsecured personal loans which, being higher risk products, may involve interest rates above the proposed threshold. We expect those lenders will be keen to submit on the proposals and to highlight the likely consequences and compliance costs.
- Responsible Lending Code: As noted above, MBIE is also consulting on changes to the Responsible Lending Code (RLC), which are intended to reflect the government’s intention to repeal the current affordability regulations (discussed in our separate article here). It will be important for lenders to consider the RLC changes and how they will adapt their current lending processes to address the more permissive lending recommendations. Some of the new details in the draft RLC amendments require careful thought. For example, paragraph 5.1 of the draft RLC explains what is meant by substantial hardship, and is relatively detailed. It requires lenders to consider whether the borrower can meet “necessities”, defined to include various specific categories of expenses, without having to “further borrow from another source” or sell assets “other than in accordance with the borrower’s intentions at the time of approval.” In other words, substantial hardship would be considered likely if the borrower is only able to service the loan by increasing their indebtedness, or selling assets that they hadn’t originally envisaged selling. That guidance merits careful reflection, and may set the bar relatively high in terms of what loans are considered affordable.
Next Steps
Submissions close on 19 June 2024 (and 10 June 2024 for the RLC amendments).
If you have any questions on the matters raised in this article, or would like assistance with your own submission please get in touch with the contacts listed or your usual Bell Gully adviser.