Credit Contract Law Reform given the green light by Parliament

Thursday 29 May 2014

Authors: Murray King and Laura Littlewood

​​The Credit Contracts and Consumer Finance Amendment Act 2014 underwent its final reading this week and is expected to receive royal assent on 4 June 2014. The Amendment Act introduces significant changes to the Credit Contracts and Consumer Finance Act 2003 (the CCCFA).

When do the amendments come into force?

The commencement date for these amendments has not yet been announced but all provisions (as well as the new Responsible Lending Code) must come into force over the next 12 months. We will keep you updated as information on transitional periods is announced.

We have set out a summary of the key amendments, and relevant issues for lenders, in the table below.

Do these amendments overlap with recent changes to the Fair Trading Act (FTA)?

The recent changes to the FTA, introduced under the Fair Trading Amendment Act 2013 (see our previous Update) will be implemented separately.

Accordingly, under the FTA, lenders, insurers and suppliers of goods on credit must ensure that:

  • by 17 June this year extended warranty agreements and direct sales agreements have been updated to reflect the new disclosure and cancellation obligations in the FTA; and

  • by 17 March next year consumer credit contracts (and any other standard form consumer contracts) do not include any “unfair contract terms”.

Where to from here?

If your business involves the entry into consumer credit contracts, you will have to update your practices and processes to comply with the changes to the CCCFA. To assist you with this process, Bell Gully has established a dedicated CCCFA Team. Our team will be co-ordinating a programme over the next 12 months to ensure you are ready when the changes come into force. This will include the distribution of a compliance checklist to help you determine what you need to change, seminars and ongoing alerts on the implementation of the key amendments to the CCCFA, information on transition periods, consultation documents and guidelines and a detailed analysis of the Responsible Lending Code (probably the key change to the CCCFA).

If you would like to enrol for the Bell Gully CCCFA Compliance Programme (at no charge), please click here.​

CCCFA Amendment Act 2014

Key AmendmentsRelevant issues for Lenders
Secu​​rity over consumer goods Creditors are now prohibited from taking security over certain essential consumer goods. Such goods include bedding, medical equipment, identification documents and cooking equipment.

Importantly, this does not apply to PMSIs taken in the relevant goods.
Creditors should review their consumer credit contracts to ensure they are not taking security over the specified essential consumer goods (other than as a PMSI). This will relate to contracts which grant a general security interest over the debtor’s assets.

Creditors should also consider updating existing PPSR financing statements (and changing collateral descriptions going forward), to ensure general descriptions do not inadvertently cover the specified consumer goods.

Initial disclosure and cancellation statements

Initial disclosure in relation to consumer credit contracts, credit related insurance, repayment waivers and extended warranties must now be made to the debtor before the contract is entered into (rather than within the 15 day period currently prescribed by the CCCFA).

The period within which a debtor has a right to cancel a consumer credit contract has been extended from 3 to 5 working days. Further, the CCCFA’s prescribed cancellation statement has been revoked.
All creditors should review their disclosure procedures to ensure the required ‘initial disclosures’ are made at the point of sale. Sending documentation, after the credit contract is entered into, will no longer be sufficient.

Creditors will need to review current cancellation statements and amend initial disclosure documentation to reflect the 5 day cancellation period.
Standing disclosure A new concept of ‘standing disclosure’ has been introduced. This requires creditors to display their standard credit contract terms (including repayment waiver and extended warranty terms) and costs prominently on their website and in their business premises.This applies to all credit contracts, not just consumer credit contracts.
Credit card minimum repayment warning Credit card providers must provide a prescribed warning to debtors about minimum repayments.Credit card providers should update terms and continuing disclosure statements to incorporate the new prescribed warning to debtors about minimum repayments.
Commission on credit-related insurance Commission on credit-related insurance is now prohibited where: (a) the creditor requires the debtor to obtain insurance from a particular insurer (or has in place an arrangement to that effect); or (b) the insurance is financed under the credit contract and the creditor has breached the lender responsibilities in relation to that credit contract.Creditors (and insurers that offer credit related insurance) should review commission arrangements in light of the new restrictions.
Changes to fees and chargesAmendments have been introduced which affect the requirements of the CCCFA relating to fees and charges, such as the definition of ‘credit fees’ and the calculation for full prepayment of a consumer credit contract.All creditors should review fees and charges to ensure these are still compliant under the new fee regime.
Lender responsibility principles New ‘lender responsibility principles’ will now apply to creditors.

A first draft of the Responsible Lending Code is expected to be published during June.
Creditors will have to review their practices to ensure they comply with the new lender responsibility principles. These principles are extended to apply to mortgage and security documentation and also to guarantees and the treatment of guarantors.

Similar codes are in place offshore. Lenders should start thinking about how the new responsibility principles will affect current practice. We will update you on the requirements of the Responsible Lending Code as this develops.
Credit contract documentationAll credit contracts must be in ‘plain language’ and expressed in a clear, concise and intelligible manner. All creditors should review credit contracts to ensure they comply with the new plain-English requirements.
Prohibition on “drag-net” clausesCreditors can  no longer use  “drag-net” clauses in their consumer credit contracts to allow the addition of other consumer goods as security after the agreement has been signed.This change takes effect immediately. Creditors may no longer rely on these clauses and must remove them from future contract terms.


Disclaimer

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.

For more information
  • Murray King

    Partner Auckland
  • Laura Littlewood

    Senior Associate Auckland
Related areas of expertise
  • Banking and finance