Yesterday, the Commerce and Consumer Affairs Minister Andrew Bayly announced further details on the upcoming reform of the Credit Contracts and Consumer Finance Act 2003 (CCCFA).
The Minister has announced that as part of the first phase of changes the affordability regulations enacted in 2021 will be entirely repealed. The first phase will also involve certain other changes outlined below.
Affordability regulations
In announcing the repeal of the affordability regulations the Minister again voiced his concern that the prescriptive requirements have unduly increased the administrative burden and time taken to process loans, restricting access to credit. In his view the regulations have also made it very difficult for consumers to obtain smaller loans.
The Minister considers that repealing the regulations will mean consumers will have better access to credit from regulated credit providers (like banks and other financial institutions) rather than having to relying on high-interest lenders. He also indicated that there would be no changes to the underlying ‘principles-based’ obligations on lenders to act responsibly and ensure that the lending would not cause hardship.
Reaction to the proposed changes
The Minister had previously communicated that reform of the affordability regulations would be a priority. However, until yesterday, it was not clear what this reform would look like and most were expecting the affordability regulations would stay in place other than for a defined group of “low risk” lenders or categories of credit.
The New Zealand Banking Association has issued a media release in support of the changes to ‘fix the one-size fits all approach that treated all types of lending and borrowers the same’. Other industry groups have also supported the changes.
Initial feedback from financial mentoring service providers has been critical of the changes on the basis that repeal of the regulations could result in more borrowers being exposed to higher levels of debt and loan sharks.
In our view the concerns of the mentoring services are not an inevitable consequence of the change. As the Minister noted, lenders will still have a duty to make reasonable enquiries so as to be satisfied that the borrower will make the payments without suffering substantial hardship. In addition, the changes will also be coupled with amendments to the Responsible Lending Code (Code) – a formal guidance tool that operates in conjunction with statutory and regulatory obligations. The Code as it existed before the regulations were introduced encouraged a proportionate approach to affordability enquiries which, if properly applied (and enforced), would continue to encourage responsible lending and guard against predatory lending practice. Accordingly, the shape of the new provisions of the Code will be an important element in this reform – both to ensure the desired flexibility is achieved and bad behaviour on the fringes is curbed.
Other changes as part of the first phase
- Dispute resolution schemes: the rules of the four approved financial dispute resolution schemes (Banking Ombudsman, the Insurance and Financial Services Ombudsman, Financial Services Complaints Limited, and the Financial Dispute Resolution Service) will be aligned. The maximum amount of compensation the schemes can award will be increased to $500,000. The regulations providing for these changes are expected by 18 July.
- Exemptions for local authorities: From 25 April, local authorities will be exempted from the CCCFA for voluntary targeted rates schemes e.g., loans to install heat pumps or insulation. Entities whose primary business is non-financial goods and services (such as specific car dealers) will also be exempted from duplicate reporting requirements under the CCCFA.
Next steps and second phase
The Government also confirmed public consultation will open in the coming weeks in relation to the second phase of changes. We understand from previous communications that the second phase will include the following matters:
- Streamlining the CCCFA, Financial Markets (Conduct of institutions) Amendment Act 2022 and Financial Service Providers (Registration and Dispute Resolution) Act 2008.
- Review of the liability settings, disclosure obligations and high-cost credit provisions in the CCCFA.
- Improving the effectiveness of the financial dispute resolution system.
- Amendments to facilitate the transition of responsibilities of the CCCFA from the Commerce Commission to the Financial Markets Authority.
- Clarifying the requirements of the Conduct of Financial Institutions (CoFI) regime.
- Review of the conduct licensing framework in the Financial Markets Conduct Act 2013.
If you have any questions on the reform or require any help with matters relating to the CCCFA, get in touch with one of our experts, we will be happy to help.
This article was co-authored by Nisha Novell, Law Clerk, in the Banking and Financial Services team.
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