Open banking and consumer protection - the Government weighs in

Friday 29 June 2018

Authors: Sophie East, Fran Burley, Richard Massey and Sean Coupe

​​​​The past week has seen Commerce and Consumer Affairs Minister, Kris Faafoi, signal future tightening of consumer credit laws and comment on the role for Government in achieving Open Banking.  

Reform of consumer credit laws

In 2015 we saw an overhaul of New Zealand's consumer credit laws with changes to both the Fair Trading Act 1986 and the Credit Contracts and Consumer Finance Act 2003 (the CCCFA).  Such changes included the introduction of new Lender Responsibility Principles, new disclosure requirements, restrictions around fees and charges, and the prohibition of unfair contract terms. 

In a Discussion Paper released this week by the Ministry of Business, Innovation and​ Employment (MBIE), which seeks feedback on proposed changes to the CCCFA, MBIE found that the 2015 amendments had improved consumer protection, but identified areas that still require improvement.   The Discussion Paper notes that the 2015 amendments have resulted in a greater awareness by lenders of their responsibilities and improvements in disclosure and advertising.  However, MBIE also reports considerable uncertainty among lenders about how to comply with the Lender Responsibility Principles, and notes that this may be contributing to high levels of non-compliance with the CCCFA. 

MBIE also found that unreasonable fees, predatory lending behaviour, and the high cost of some consumer credit remain problems for the sector.  The Discussion Paper notes that these issues have had a particular impact on vulnerable consumers, such as those with low literacy and numeracy skills and those in poverty.  The focus of the Discussion Paper is on addressing these issues and providing greater protection for vulnerable borrowers. Some of the key proposals included in the Discussion Paper are:

  • Limiting the accumulation of interest and fees;

  • capping interest rates;

  • increasing the powers of the Commerce Commission to deregister lenders and ban directors from involvement in the credit industry;

  • creating stricter requirements around who can become a lender;

  • expanding penalties for breaches of lenders' responsibilities, including penalties for directors personally;

  • introducing more prescriptive requirements for affordability assessments and advertising;

  • requiring lenders to substantiate the reasonableness of their fees or imposing specific caps on fees;

  • restricting the fees charged by third parties (such as brokers); and

  • creating greater obligations at the debt collection phase, such as requiring debt collectors to offer affordable repayment plans to borrowers.​​

Whilst many of these proposals would create greater obligations for creditors and increase compliance costs, the effects are likely to be greatest for lenders who provide short term credit at high interest rates, and lenders marketing to more vulnerable consumers.  Regardless of what changes end up being implemented, the intention of the Government is clear:

"…the 2015 amendments to the Act did not go far enough and it is time now to finish the job and protect the most vulnerable consumers." [Minister Kris Faafoi]

Submissions on the Discussion Paper are due by 1 August 2018.

In addition, the review by the Financial Markets Authority and Reserve Bank into the conduct and culture of New Zealand financial services entities (in the wake of the Australian Royal Commission's review) has the potential to result in some legislative reform. Reporting on these findings is expected to occur in October/November of this year.

Open Banking

The Government is also focussed on Open Banking.  Put simply, Open Banking will allow a customer to direct his or her bank to share information held by that bank with trusted third parties.  Essentially, the ownership of customer data is put back into the hands of the customer.  For our detailed explanation on Open Banking, click here.

While the Government has previously voiced a commitment to Open Banking, the strength of that commitment has been unclear.  However, speaking at the recent Payments NZ conference, Mr Faafoi commented:

"Speed is of the essence and the status quo isn't an option. I do not want to see New Zealand left behind in respect of the outcomes that Open Banking could deliver in terms of economic development and benefits for consumers."

The Minister also indicated that there may be more of a role for Government to play in achieving Open Banking.  This is in contrast to the Government's previous stance that self-regulation, rather than Government intervention, was the best approach to achieving Open Banking in New Zealand.

Whichever approach the Government ends up taking, what is clear is that the protection of a consumer's rights in respect of their personal data is paramount and Open Banking is here to stay.

Please contact our team if you would like any advice or assistance in relation to the matters addressed in this client update. ​


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
  • Sophie East

    Partner Auckland
  • Laura Littlewood

    Partner Auckland
  • Fran Burley

    Senior Associate Auckland
  • Richard Massey

    Senior Associate Auckland
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