This update provides a summary of the key developments and the implications for the financial services sector.
Background
In April 2024, the Government announced a two-phase reform strategy aimed at streamlining financial services regulation and clarifying the scope of various consumer protections. The first phase of these reforms, which took effect in July, saw several important changes to regulations under the Credit Contracts and Consumer Finance Act 2003 (CCCFA) and rules for dispute resolution schemes, including:
- Changes to prescriptive affordability assessments: The Government repealed detailed and rigid affordability assessment requirements under the CCCFA, allowing lenders more flexibility in assessing affordability, while still requiring reasonable inquiries to reduce the risk of hardship. Related updates were made to the Responsible Lending Code to guide lenders on how to maintain responsible lending practices following the revocation of affordability regulations.
- Harmonisation of Dispute Resolution Schemes: The rules governing the four approved financial dispute resolution schemes were aligned, improving consistency and accessibility for consumers. This included raising the maximum compensation limit to NZ$500,000 (previously capped at NZ$350,000 for most schemes).
The recent announcement clarifies the scope of the second phase of reforms, which will amend other aspects of the CCCFA and various requirements under the Financial Markets Conduct Act 2013 (FMCA). We summarise some of the key aspects of the reforms below.
CCCFA: Personal Liability removed for Directors and Senior Managers
One of the major changes is the removal of the “due diligence” duty under the CCCFA, and with it personal liability for directors and senior managers of lenders. This shift aims to strike a balance between maintaining accountability for lenders and reducing the compliance burden on individual directors and senior managers. In the Minister’s assessment, the severe effects of personal liability “can negatively impact access to credit and increase compliance costs that are passed on to consumers.”
This change will come as welcome relief for lenders, and should support greater flexibility in decision-making at the management level, allowing senior staff to focus on operations without the risk of personal repercussions for technical breaches. The reform is expressly intended to support a less conservative lending environment, which may in turn improve access to credit for consumers within the remaining obligations under the responsible lending framework.
CCCFA: Consequences of disclosure breaches:
The reforms introduce a more flexible, risk-based approach to imposing penalties on lenders who fail to meet certain disclosure obligations. A disclosure breach must have caused “genuine financial harm” to borrowers in order to potentially affect a lender’s ability to recover interest and fees.
Regulatory oversight: transfer of CCCFA to FMA and new powers
Another key reform is the transfer of responsibility for consumer lending regulation from the Commerce Commission to the Financial Markets Authority (FMA), which the Minister has now confirmed. In a speech earlier this week, the Chief Executive of the FMA Samantha Barrass noted that the Commerce Commission and the FMA are already working closely on the transfer of credit functions, with several joint activities underway. As part of that transition, consumer credit contracts will now be subject to the fair dealing provisions under the FMCA, breach of which can carry material enforcement consequences (including penalties of up to NZ$5 million).
Lenders will also transition to a licensing model under the FMCA (rather than the current certification regime under the CCCFA) aligning with other financial entities already licensed by the FMA. Positively, the Minister has confirmed that “To make it easy for consumer creditors to transition to the new licencing framework, I propose to deem all existing consumer credit lenders who are either certified or exempt from certification (on the basis that they are licensed by the FMA or RBNZ) to be licensed, at no cost.” Relatedly, the Minister has confirmed that licensing requirements under the FMCA will be consolidated, so that all licensed entities are only required to hold one licence (rather than parallel licenses for different categories of market service).
The FMA will also be granted material new powers, including the authority to conduct onsite inspections, and new requirements to approve change of control applications when licensed firms change ownership. The right to conduct on-site inspections is an eye-catching extension of the FMA’s powers but the Minister has confirmed his expectation that it would only rarely be used on a “without notice” basis (and in all cases it must be exercised at a reasonable time of day and in a reasonable manner, and never in private dwellings).
FMCA: Changes to CoFI
The Financial Markets (Conduct of Institutions) Amendment Act 2022 (CoFI) amends the FMCA from 31 March 2025 next year to introduce a new conduct regime for financial institutions, including requirements to be licensed and to implement a “fair conduct programme” based on the “fair conduct principle” to treat customers fairly.
As part of the announced reforms, the Government proposes to clarify and adjust the minimum requirements for fair conduct programmes:
- Fee Disclosure and Review: Programmes will now need to include how fees and charges are applied, disclosed, and reviewed.
- Complaint Handling: Programmes will also need to cover how consumer complaints are recorded and resolved.
In addition, the following minimum requirements have been removed:
- Removal of duplicative obligations: The requirement for programmes to include processes for “meeting all legal obligations” will be removed to avoid duplication and 're-documenting' existing procedures.
- Training and supervision flexibility: Adjustments will be made to clarify that training and monitoring of employees should focus on supporting compliance with conduct obligations, without overly prescriptive rules.
- Simplified programme review: The requirement for systematic reviews to identify deficiencies will be removed, on the basis that CoFI already mandates that programmes must be effective.
The Minister has also confirmed that the fair conduct principle (section 446C) will remain open-ended to ensure flexibility while maintaining clarity, despite initial consideration as to whether to codify the principle exhaustively. The open-ended approach aligns with the principles-based approach of the CoFI regime.
Key implications for the financial services sector
The announcement marks a significant change to the regulatory landscape for financial markets participants and raises a number of material implications. In particular:
- Reduced Compliance Burden: With the removal of prescriptive affordability requirements (already implemented) and the removal of personal liability from directors and senior managers, lenders should experience reduced administrative burdens and greater flexibility in discharging their CCCFA obligations.
- Scrutiny from the FMA: While the reforms are generally favourable and reduce some compliance costs, they will also increase the FMA’s ability to monitor market conduct more proactively, especially during ownership transitions. Businesses should ensure they are prepared for more active oversight, including potential onsite inspections.
- Licensing transition: Consumer lenders will need to transition to the new FMA licensing regime. Businesses should be ready to meet the procedural requirements involved and the ongoing obligations applicable to licensed entities. As noted above, given the Minister’s confirmation that all existing consumer credit lenders who are certified will be treated as licensed, the initial transition should not create a material burden for lenders who are currently certified.
Looking ahead
This week’s announcement is part of a larger overhaul of New Zealand’s financial services sector, which will continue to evolve over the coming months as the Government reviews other areas (such as high-cost credit provisions, and the details of aspects of the disclosure requirements). In terms of next steps, the Minister has confirmed that the Government intends to introduce a bill in December 2024 addressing the proposed reforms. In the meantime, lenders and other financial service providers should consider the implications of the recent announcements for their businesses and plan ahead to ensure they maximise the opportunities created by the simplifications to the regime.
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.