The Government introduced a Bill into Parliament on 4 April amending the Credit Contracts and Consumer Finance Act.
The Bill responds to issues identified by MBIE following its review of the consumer credit sector in 2018, and introduces significant changes that will take effect on
1 March 2020. The detail regarding how the changes will be implemented will depend on new regulations, which have yet to be released.
The explanatory note to the Bill explains that the changes are intended to reduce "problem debt." However, the effect of the changes is likely to be widely felt, and we expect that lenders across all sectors of the consumer credit industry will be interested in making submissions on the Bill.
The key changes are as follows:
1. Responsible Lending
The responsible lending regime will become more onerous for lenders. In particular:
The Bill will impose greater responsibility on lenders for ensuring that products are "suitable" and "affordable". New regulations will specify the inquiries that must be made but the current rule that a lender may rely on information provided by borrowers (unless unreasonable to do so) will be repealed. This will require lenders to undertake more extensive verification of information than is currently the case.
Lenders will be subject to a new requirement to keep records of the reasonable inquiries they make of borrowers, and to provide such records to the Commerce Commission on request. New regulations will specify the inquiries that must be made, and the way in which borrowers' responses must be taken into account.
Advertising will need to comply with advertising standards to be set in regulations.
2. "Fit and proper person" test / due diligence
Directors and top executives of lenders will be required to meet a "fit and proper person" test in order for the lender to be certified under the CCCFA (which will be necessary to register on the Financial Service Providers Register). The elements of the test will be set out in separate regulations.
Directors and top executives of lenders will also have new duties to ensure that lenders comply with the CCCFA, including a requirement to exercise due diligence to ensure compliance with the CCCFA. That includes ensuring that compliance procedures are followed, implementing processes for identifying compliance deficiencies, and promptly remedying any deficiencies discovered.
4. Interest/fee caps for high-cost loans
Interest and fees over the life of a loan will be limited to 100% of the principal, for loans with an annualised interest rate of 50% or more. So, for example, for an advance to a borrower of $1,000, the maximum amount that can be charged, including repayment of principal and all interest, fees, and default fees, is $2,000.
The consequences of non-compliance will become more onerous. Statutory damages will be available for a wider range of breaches, and the court will be able to make orders to allow for the "affordable repayment" of outstanding debt for breach of the lender responsibility principles.
In addition, new civil pecuniary penalties of up to $600,000 will apply for certain breaches (including for breaches of the lender responsibility principles).
The Commission will also be able to accept written undertakings (mirroring equivalent powers under the Commerce Act 1986).
6. Relief for disclosure breaches
7. Other Changes
More positively for lenders, the Bill introduces a means for lenders to seek relief from the onerous effects of 99(1A) of the CCCFA (which provides that debtors are not liable for costs of borrowing in relation to any period during which disclosure was non-compliant, even if minor).
In deciding whether to grant relief, the court must have regard to a range of factors, including the reasons for the breach and whether the creditor had an appropriate compliance programme, as well as the extent to which the creditor has offered to compensate any person who has suffered loss or damage by that breach.
Where a creditor makes its disclosures in one language but advertises in other languages, that creditor must ensure that disclosure of key information is made in the advertised language if they suspect (or ought to suspect) that the debtor has a better understanding of the advertised language.
Debt collectors will be required to make disclosure of key information to debtors before commencing debt collection.
Regulations will be made to declare certain types of credit arrangements to be "consumer credit contracts". Even contracts carefully designed to avoid the existing statutory definition of that term could now face extensive regulation under the CCCFA.
Layby sale agreements can constitute consumer credit contracts even if no interest charges or credit fees are payable. This repeals the previous exemption.
We will continue to track the progress of the Bill. If you would like further details, or assistance in making submissions, please get in touch with the authors or your usual
Bell Gully advisor.
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.