Lending rule changes a precursor to deregulating CCCFA?

The government has announced reforms to financial services that promise to strengthen consumer protections and allow lending by “cutting red tape”. These changes are part of a suite of upcoming updates to the Credit Contracts and Consumer Finance Act 2003 (CCCFA) following widespread criticism to the responsible lending regulations. Reforms to the CCCFA will be introduced in two parts as outlined below.

 

Repeal of affordability regulations

The most significant change for Phase 1 is repealing the affordability regulations “within the coming months”. The affordability regulations enacted in 2021 by the previous government focussed on preventing unaffordable and predatory lending. In practice, the onerous requirements to assess borrowers' finances and spending habits are reported to have resulted in restricting applicants’ credit. While announcing the repeal, the Commerce and Consumer Affairs Minister, criticised the overly prescriptive current regulations as creating an excessive barrier for lending. In the Minister’s view, repealing the regulations will allow consumers to obtain smaller loans with greater ease and access credit from regulated credit providers instead of borrowing from high-interest lenders.

The repeal of affordability regulations does not affect the existing principles-based lending obligations under the CCCFA. This means that lenders must still make “reasonable inquiries” to determine the suitability and affordability of loans and whether borrowers will be able to repay loans without experiencing substantial hardship. The Responsible Lending Code (Code) will also be updated to reflect the repeal of the affordability regulations.

The move away from a restrictive regulatory framework through repealing the affordability regulations has largely been received positively from the industry. For example, the New Zealand Bank Association supported the changes as providing lenders with the necessary discretion to help borrowers.

Whether repealing the regulations will achieve the desired flexibility while protecting consumers from unaffordable loans is yet to be seen. Lenders will need to revisit their lending practices and procedures to ensure compliance in light of the repealed regulations and the amended Code (once in place). Lenders will continue to have a duty to make reasonable enquiries of its borrowers to ensure that the credit product is suitable for the borrower’s needs and that borrowers can make the payments without suffering substantial hardship. However, given the changes aim to increase ease of access to credit, the more prescriptive requirements and administrative burden should be somewhat alleviated for Lenders.

 

Other phase 1 changes

• Exemptions for local authorities: From 25 April, local authorities will be exempt from the CCCFA for voluntary targeted schemes such as providing loans to install heat pumps or insulations.
• Removal of duplicate reporting requirements: Entities whose primary business is the provision of non-financial goods and services will also be fully exempt from duplicate reporting requirements under the CCCFA. Further detail has not been provided yet on what ‘duplicate reporting requirements’ are.
• Dispute resolution: the rules for the four approved dispute resolutions schemes (Financial Services Complaint Limited, Financial Dispute Resolution Services, Banking Ombudsman and the Insurance and Financial Services Ombudsman) currently all vary slightly including with differing maximums value of complaints. It is expected that regulations will be introduced on 18 July that standardise the rules between the four dispute resolution schemes with an increased maximum compensatory amount of NZD500,000.

 

Expected phase 2 changes

From previous government announcements on how the government intends to reduce barriers for financial services, we understand that Phase 2 will address the following:

• Regulatory oversight of the CCCFA, which is currently performed by the Commerce Commission, will be transferred to the Financial Markets Authority (FMA).
• Streamlining the Conduct of Financial Institutes regime.
• Reviewing the CCCFA’s high-cost credit provisions, liability settings and disclosure obligations.
• Reviewing the conduct licensing framework overseen by the FMA with a view to having one prudential license by the Reserve Bank of New Zealand.

 

Next steps

The government has confirmed that public consultation on these reforms will commence in the next few weeks. If you have any questions about the proposed reforms or matters relating to the CCCFA, we will be happy to be help.