The result is that borrowers will no longer be subject to highly prescriptive affordability assessments, which in practice resulted in detailed and invasive questions about their living expenses. The proposals, which were announced by the Commerce and Consumer Affairs Minister Andrew Bayly on Sunday, give lenders greater discretion as to how they determine whether a loan is affordable.
At the same time, the proposed reforms are not a carte blanche for lenders. Lenders will still be subject to general requirements to make “reasonable inquiries” into the affordability and suitability of loans, and will have to determine for themselves how to discharge that more flexible obligation.
In this article, we summarise the key takeaways from the Minister’s announcement and relevant implications for New Zealand lenders.
Summary of changes
According to the announcement (here), the following changes will be implemented:
- Repeal of affordability regulations
- The most significant change is the repeal of the current affordability regulations, to occur “within the coming months.”
- Currently, the affordability regulations are onerous and require a detailed assessment of a credit applicant’s net income after deducting various categories of expenses, as well as various mandatory cross-checks to ensure the accuracy of the estimated figures used. For example, in some cases lenders are required to check that declared expense figures are accurate by reference to reliable benchmarks, or by checking the figures against the borrower’s bank statements. Those prescriptive requirements, introduced in 2021 to protect borrowers from unaffordable debt, ultimately resulted in longer processing times and more invasive analysis.
- Importantly, the repeal of the regulations will not remove responsible lending obligations altogether. More general obligations will still apply under the CCCFA, but they are more broadly expressed and require simply that lenders must make “reasonable inquiries” into the suitability and affordability of the loan.
- Lenders will need to consider carefully how they meet those continuing obligations following the repeal of the regulations. That is not straightforward given the relatively limited case law on the scope of the responsible lending principles under the CCCFA. While there are general guidelines in the Responsible Lending Code (which will be updated to reflect the repeal of the regulations) the guidance is open-ended and does not offer any form of safe harbour. Therefore, the adaptation of current lending procedures to respond to the repeal of the regulations will require careful thought.
- Increased limits for complaints
- The reforms also include modifications to the existing dispute resolution framework for consumer complaints. The current framework requires every consumer lender to be a member of an approved dispute resolution scheme. In the absence of an agreed resolution of a consumer complaint the scheme can make a binding decision.
- Currently there are four approved dispute resolution schemes with slightly different rules, including in relation to the maximum value of complaints that can be addressed through the scheme. For most of the schemes, the cap is NZ$350,000, although in one case (FDRS) the cap is NZ$200,000. The scheme rules will now be standardised, and the maximum compensatory amount will be increased to NZ$500,000. The increased cap will effectively mean that consumers have a simpler process for obtaining binding outcomes in relation to higher value disputes.
- Other measures
The changes will also include a range of other measures including:
- New exemptions for councils (to permit the provision of certain low-risk financial products to help households improve their energy efficiency by installing heat pumps and insulation).
- The removal of “duplicative reporting requirements” for certain entities whose primary business is non-financial goods and services, such as car dealers. Though no details are provided, this is likely intended to refer to the requirement to file annual returns (which took effect this year, and which will continue to apply for other creditors).
- The removal of various outdated Covid-19 exemptions.
Finally, regulatory oversight of the CCCFA will transfer from the Commerce Commission to the Financial Markets Authority, which was announced by the Government earlier this year.
Implications and next steps
The announcement will be welcomed by many lenders and borrowers as offering partial relief from the restrictive regulatory framework that currently applies to consumer credit. Positively, the Minister has indicated that the announcement marks “only the first phase of financial reforms” and that public consultation on a range of other matters will proceed in the coming weeks, including in relation to other “known pain points.”
In advance, lenders should:
- Consider carefully how they will adapt their current lending processes to address the more relaxed lending rules. As noted above, the revised regime will still require lenders to make reasonable inquiries into affordability and suitability, so it will be important to ensure that any adaptations to lending procedures remain compliant with the residual obligations under the CCCFA.
- Pay close attention to further announcements in relation to broader CCCFA reforms. Even with the significant wind-back of the regulations, the CCCFA remains a burdensome regime (with extensive obligations in relation to disclosure, fees, due diligence for directors and senior managers, and many other obligations). The upcoming consultation offers an opportunity for a broader reset of the regulatory settings, and lenders should consider carefully what issues they will prioritise in submissions.
If you have any questions about the proposed reforms, or would like advice on the adaption of existing lending processes, please get in touch with the contacts listed, or your usual Bell Gully adviser.