A second round of amendments has been made to the Credit Contracts and Consumer Finance Regulations 2004 (the CCCF Regulations) and to the Responsible Lending Code (the Code), as the Government continues to address the unintended consequences of a law designed to protect the most vulnerable consumers.
The changes, which came into force on 4 May 2023, relate to the rules for conducting affordability assessments. In our view, if they will not deliver the intended outcomes, the Credit Contracts and Consumer Finance Act 2003 (CCCFA) liability and penalties regime should be reconsidered.
Broader changes to CCCFA may be needed
The Ministry of Business, Innovation and Employment (MBIE) found in its investigative report Early implementation and impacts of 1 December 2021 credit law changes, released in June 2022, that lenders had taken a “naturally conservative approach” because of the “CCCFA’s strong liability regime”.
It observed that the regulations, while prescriptive overall, typically provided “multiple pathways for lenders to comply” and included “many provisions that involve judgements about what is ‘reasonable’ in the circumstances”, and use other terms (such as ‘likely’ and ‘take account’ of) that require lenders to use “judgement in the design of processes to ensure compliance is achieved.”
Accordingly, if these latest amendments do not achieve an appropriate balance between responsible lending obligations and overly restrictive lending practices, there may be a need to reconsider the CCCFA liability settings. This could include:
- Lifting the restrictions on indemnities for pecuniary penalties for senior managers and directors; and
- Providing detailed guidance and information in relation to the due diligence duty, including how penalties will be applied. This guidance should have equivalent status to the Code, so that compliance with it is treated as evidence of compliance by lenders, senior managers and directors.
The CCCFA reforms were enacted by the Credit Contracts Legislation Amendment Act 2019, with changes subsequently made through the CCCF Regulations. Amendments to the Code have provided non-binding guidance on the affordability regime.
Key features, which came into force on 1 December 2021, included:
- Prescriptive requirements for affordability and suitability assessments, with such assessments also being required for top-ups and credit limit increases; and
- Obligations on directors and senior managers to exercise due diligence to ensure lenders comply with their CCCFA duties and obligations, including taking reasonable steps to ensure the lender has appropriate procedures for complying with the CCCFA and remedying any deficiencies discovered.
Breaches of the due diligence duty could incur:
- Pecuniary penalties of up to $200,000 per act or omission for an individual; and/or
- Liability for any court ordered statutory damages, compensation or exemplary damages payable by the lender.
Directors or senior managers cannot be indemnified or insured in respect of pecuniary penalties.
Unintended consequences of reforms
Concerns from lenders, consumers and other stakeholders led MBIE to investigate whether the reforms had unintended impacts on the availability of credit. MBIE found that this was the case and that:
- More borrowers, across all lending types, who should pass the affordability tests, were being subject to outright declines or reduced credit limits; and
- Borrowers were being subjected to unnecessary or disproportionate inquires which were perceived by them as unjustifiably intrusive.
MBIE identified various changes to address the concerns raised.
July 2022 changes
The Government made some initial changes which took effect on 7 July 2022 and were never expected to provide a full solution. They included:
- No longer treating savings as an expense; and
- Broadening the guidance on when it is obvious that the loan is affordable.
May 2023 changes
Excluding discretionary expenses that the borrower is willing to forgo
The “listed outgoings” definition (Regulation 4AE) now excludes discretionary expenses, instead providing for “essential living expenses” and “any non-discretionary regular or frequently recurring outgoings that are material to the estimate of the relevant expenses”.
Chapter 5 of the Code provides guidance on how lenders are to determine whether expenses are “essential” or “non-discretionary”.
New exception to full affordability assessment
Regulation 4AH provides a new exception from the full affordability assessment requirements for refinancing or consolidation of a borrower’s existing credit contract/s with another lender, provided that:
- The borrower’s total credit limit under the replacement contract will not increase, unless any increase is only to the extent reasonably necessary to postpone or reduce existing payments to reduce the borrower’s present or reasonably expected financial difficulties, and
- Either (a) the annual interest rates on the replacement contracts are lower than the interest rates on all of the repaid contracts, or (b) the total monthly repayments will be equal to or lower than those under the repaid contracts.
Reducing the risk of double counting expenses
The requirements for calculated relevant expenses in Regulation 4AL no longer apply to revolving ‘Buy Now Pay Later’ (BNPL) contracts. This change is designed to reduce the risk of double counting both the BNPL repayments and the underlying expense. We see this as a sensible outcome.
Chapter 5 of the Code provides guidance on the factors lenders should consider when estimating BNPL expenses as part of an affordability assessment.
The potential double counting in respect of credit cards that are paid off each month remains unresolved, although it was included among the proposals for consultation.
Our thanks to Alexander Schumacher for his help in preparing this article.