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The package of consumer credit reforms announced this month will provide some relief from the heavy-handed regulation that has been stifling the market but will not provide a complete solution.
We summarise the key changes and identify some of the issues that remain. We hope that these will be picked up in the next round of policy decisions and technical amendments now under consideration by Commerce and Consumer Affairs Minister Andrew Bayly.
Simpler licensing process
The ‘fit and proper’ certification regime in the Credit Contracts and Consumer Finance Act (CCCFA) will be scrapped. Instead, consumer credit will become a ‘licensed market service’ under the Financial Markets Conduct Act 2013 (FMCA), with providers required to get a market services licence unless exceptions apply.
Existing consumer credit lenders will be treated as licensed, avoiding a transitional regime, and lenders currently exempt from certification for certain reasons (e.g., certain securitisation arrangements and non-financial service businesses) will maintain that exemption.
Officials expect that the new licence will cost between $700 and $1,000 (excluding GST), and it is likely that the costs of compliance, including monitoring and reporting obligations, will also be higher than under the present system although we will need more information before making a judgement about that.
Removal of personal liability for directors and senior managers
The due diligence duty and resulting personal liability for directors and senior managers of all consumer credit providers in section 59B of the CCCFA will be removed.
Personal liability will remain where an individual is knowingly involved in a contravention of the duties in the FMCA, and of certain provisions in the CCCFA. The prohibition against insurance and indemnification for pecuniary penalties for such breaches of the CCCFA will also remain.
No liability for harmless disclosure breaches, but no retrospectivity yet…
Borrowers will be non-liable for the costs of borrowing during a period of non-compliant disclosure only where it can be shown – either by the borrower or by the Financial Markets Authority (FMA) - that harm was created by the disclosure non-compliance.
But liability for historic disclosure breaches from when section 99(1A) of the CCCFA came into force in 2015 until the Courts were granted discretion to reduce the section’s effect in 2019 has not been dealt with, although the Government is aware that this is a major issue for lenders.
The Ministry of Business, Innovation and Employment (MBIE) notes that retrospective legislation can generally only be justified where it entirely benefits affected people without adverse impacts on others and that it raises natural justice and constitutional issues. They highlighted that retrospective intervention raises natural justice and constitutional questions. We encourage lenders to consider how these questions could be addressed in any further submissions on retrospectivity.
But the door may not be entirely closed as the cabinet paper states that, while no retrospectivity is proposed at this time, “further analysis is required”.
FMA as consumer credit regulator
Effective FMA intervention was a key factor in agreeing to limit section 99(1A) to breaches causing harm. The FMA will be given tools to assist a “pro-active, responsive, proportionate, and effective oversight” of lenders.
- On-site inspection powers: These will be able to be exercised “without notice” (similar to the Reserve Bank’s powers for licensed deposit takers) and are intended to be used in limited circumstances where giving notice would defeat the purpose of the visit or urgency is required to prevent potential consumer harm. Safeguards are planned to ensure the power is exercised reasonably and to exclude private dwellings and marae from inspections.
- Change of control consent requirements: FMA approval will be required for any change in control of FMCA-licensed firms. The proposed design of this requirement will be key. We expect it to adversely impact M&A in the consumer lending space, whatever shape it takes.
A lot will depend on how the FMA uses these powers. Significant weight is placed on the FMA’s “risk-based and proportionate” response, but we’ll be keen to see what guardrails are put in place against abuse or over-reach.
The transfer of functions from the Commerce Commission is fiscally neutral, so we’ll be watching to see what the FMA’s priorities are, compared to those of the Commerce Commission.
Other decisions
- The fair dealing provisions in Part 2 of the FMCA will apply to consumer credit, replacing the Fair Trading Act 1986.
- The current definition of a high-cost credit contract, set at an interest rate of 50% or more, will remain unchanged.
- Buy Now Pay Later lenders will be exempt from complying with CCCFA provisions relating to unreasonable fees, without conditions. You can read more about that here. This is more favourable to BNPL lenders than initially proposed by the Minister of Commerce and Consumer Affairs.
- The open-ended fair conduct principle in CoFI will remain, with changes aimed at reducing duplication and increasing flexibility.
More to come
We hope the Minister’s next round of changes, expected to come to Cabinet in the coming months, will include rationalisation of the initial disclosure requirements and improvements for electronic disclosure.
Debt collection practices will be addressed in the Fair Trading Act review, expected to commence next year. MBIE is also investigating changes to the dispute resolution scheme regime.
The bill is expected to be introduced in December. Given the holidays, it is advisable to start considering submissions based on the approved policies now.
