Financial Services Quarterly
Proposed tougher consumer credit laws target loan sharks
The Government plans to overhaul consumer credit laws to protect consumers from unscrupulous credit companies.
According to Finance Minister Bill English, "credit providers remain largely unregulated and have no conduct requirements, leading some to exploit vulnerable people, resulting in severe financial hardship and spiralling debt."
Cabinet has approved a package of changes including:
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Strengthening the Credit Contracts and Consumer Finance Act (CCCFA) by adding new responsible lending requirements that:
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the borrower must be reasonably expected to repay the loan without substantial hardship; and
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the lender must be honest and transparent in dealing with the borrower.
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Creating a Code of Responsible Lending that sets out the types of practices accepted as meeting the principles of responsible lending.
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Giving the Financial Markets Authority the power to issue formal warnings and to cancel financial service provider registrations.
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Providing that borrowers are not liable for the costs of interest or fees if their lender is not registered as a Financial Service Provider.
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Amending the CCCFA to stipulate that advertising must not be misleading, deceptive, or confusing, and must comply with the code.
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Protecting important goods, such as tools of trade, necessary household items, and motor vehicles with a value of up to $5000, from being used as security against a loan (unless the loan is to purchase such an item).
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Extending the 'cooling-off period', where a consumer has the right to cancel a credit contract, from three to five working days.
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Improving disclosure requirements, including that disclosure of key information must occur before the contract is made (presently this can happen up to five days after).
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Increasing consumer protection around oppressive credit contract provisions and hardship applications.
The Government intends to release draft legislation for consultation on the proposed changes before it introduces final legislation to Parliament.
The introduction of a requirement for lenders to ensure borrowers must be reasonably able to repay loans without substantial hardship will be a significant change in New Zealand law. While comparable requirements exist in Australia and the United Kingdom, New Zealand laws do not currently require this. This approach also conflicts with the recent decision of the Supreme Court in the Bartle case1, where the court found in favour of the lender, relying on the fact that the borrowers were independently advised, and noting that lenders should not have to "investigate the affairs of the borrower to determine whether there is anything that renders the transaction liable to re-opening". This decision was consistent with the general principle of New Zealand's lending laws that lenders do not assume responsibility for the actions of borrowers. Introduction of the proposed changes would have the opposite effect, so we'll be following progress of the legislation, and will keep you up to date in future issues of Financial Services Quarterly. |
1 GE Custodians Limited v Bartle [2010] NZSC 146
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This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
