How COVID-19 re-shaped the focus of the financial services industry
Heading into the start of 2020, the financial services industry was anticipating reforms to consumer credit laws and regulation of financial institutions' conduct, and the start of a new financial advice regime.
We had some early media references to a new coronavirus affecting China, but nobody could have anticipated what was to come. By the end of March, our borders were closed and we'd entered a four-week nationwide lockdown that put many of the anticipated reforms on hold, and brought with it unique challenges requiring some hasty changes to legislation and practices, together with new regulation.
With the year drawing to a close, we take a look at some of the key measures taken to cushion the blow of COVID-19 from a financial services law perspective and, where data is available, how well they have been utilised.
Reserve Bank measures
The Reserve Bank has used both its monetary and regulatory tools to soften the impact of COVID-19 on New Zealand's economy, noting that “banks need to continue to support their customers and maintain their appetite to lend". To this end, it has:
lowered the official cash rate,
bought up bonds to keep long-term interest rates low,
introduced a funding for lending programme, allowing banks to borrow at the official cash rate,
delayed the start date of increases to bank capital requirements,
removed loan-to-value restrictions (these are likely to be re-instated in March 2021),
deferred various regulatory initiatives, and
released new metrics to help monitor changes in bank lending, capturing new weekly credit events, including metrics for mortgage deferrals and business loan restructures.
While more resilient than anticipated, initial reports from the Reserve Bank indicated that economic activity had contracted sharply in the June quarter, and remained below pre-COVID-19 levels. However, with few restrictions on activity in the September quarter, the economy grew by a record 14% which surpassed pre-COVID levels and exceeded forecasts from the Reserve Bank and Treasury.
Mortgage repayment deferral scheme
Following consultation with the government and the Reserve Bank, in March retail banks offered temporary loan deferrals and reduced loan repayments to customers financially impacted by COVID-19. The Credit Contracts and Consumer Finance Regulations 2004 were amended to support the scheme, and the initial six-month relief was extended in August until 31 March 2021.
At the end of August the New Zealand Bankers' Association reported that banks had:
deferred all loan repayments for 62,274 consumers to the value of $21.2 billion,
reduced loan repayments to interest-only, or reduced principal and interest payments for 95,038 consumers to the value of $29.4 billion,
provided $25.7 billion in new lending to 178,320 new consumers,
deferred all loan repayments for 3,404 businesses to the value of $1.2 billion,
reduced loan repayments to interest-only, or reduced principal and/or interest repayments for 15,135 businesses to the value of $18.3 billion,
restructured loans for 4,098 businesses to the value of $8.6 billion, and
provided $17.6 billion in new lending to 29,390 businesses (outside of the business finance guarantee scheme).
The New Zealand Bankers' Association recently reported that more than two thirds of consumer loans that had principal and interest repayments deferred are now “back to normal", and nearly 40% of consumer loans that had reduced repayments are “back on track". As at 31 October:
69% of consumer loans (including home loans) that had deferred all repayments were back to full repayments,
37% of consumer loans that had reduced repayments were back to full repayments,
69% of business loans that had deferred all repayments were back to full repayments, and
50% of business loans that had reduced payments were back to full repayments.
Directors' safe harbour and business debt hibernation
The government introduced two key measures aimed at helping companies to trade through the impacts of COVID-19.
Business debt hibernation was introduced to assist companies, trusts, and other businesses affected by COVID-19 to manage their debts, by allowing them to place existing debts into hibernation for up to seven months. And a “safe harbour" was introduced to give directors comfort to continue to trade without falling foul of the reckless trading provisions of the Companies Act. The Companies Act was amended to allow for the two temporary measures.
The business debt hibernation scheme was due to expire on 24 December 2020, but has been extended until 31 October 2021. The safe harbour provisions expired on 30 September 2020.
According to media reports, as at 23 November 2020, only 43 businesses had applied to enter the business debt hibernation scheme and of these, the creditors of only 15 had agreed to the additional six-month moratorium.
Business finance guarantee scheme
The government launched a scheme supporting the provision of loans to businesses by taking up to 80% of the loan's default risk. Under the scheme, lenders assess eligibility applying modified lending criteria and processes that allow them to take into account the economic conditions caused by COVID-19. Criteria to simplify and expand the scheme were announced in August, and the closing date to take it up has been extended from 30 September until 31 December 2020.
According to Treasury, as at 8 December 2020 there were 1,566 borrowers utilising the business finance guarantee scheme, with a total exposure of $828 million. This is up substantially from 15 September 2020 figures of 827 borrowers with a value of $172 million.
Small business cashflow loan scheme
The small business cashflow loan scheme was introduced by the government in May to support organisations and small-to-medium businesses adversely affected by COVID-19 with one-off five-year term loans. The scheme was due to expire at the end of this year, but the government recently agreed to extend it until 31 December 2023.
The Department of Inland Revenue, which administers the scheme, reported that as at 10 September 2020 it had helped 94,300 businesses under the scheme.
As we enter 2021, we will continue to keep across these key measures and provide further insight into the impact of COVID-19 on the financial services industry. If you have any questions about the matter raised in this article please get in touch with the contacts listed or your usual Bell Gully adviser.
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.