Hot on the heels of the Credit Contracts Legislation Amendment Act (the Amendment Act) being passed into law on 19 December 2019, the consumer credit law reform programme has not lost any of its momentum in 2020.
There are still some significant pieces of work needed to complete the reform package – first in line is finalising the draft Credit Contracts and Consumer Finance Amendment Regulations 2020 (the Regulations), the draft of which is currently back with MBIE.
In this update, we provide a recap on the recent changes introduced by the Amendment Act, key dates in the implementation timeline, and what to look out for next.
Amendment Act - what is the current state of play?
The Amendment Act has a staggered timetable for implementation, but on 20 December 2019 the first set of provisions came into force. The main changes to the Credit Contracts and Consumer Finance Act (as amended by the Amendment Act) (the CCCFA) resulting from these provisions mean:
- civil pecuniary penalties increased to a maximum of NZD$200,000 for individuals and NZD$600,000 for corporates for certain breaches (including non-compliance with the lender responsibility principles)
- statutory damages are now available for a wider group of breaches (including non-compliance of the responsible lending principles)
- a court is able to make orders for a credit contract to be amended to allow for the affordable repayment of unpaid debt if the lender responsibility principles have not been complied with
- the Commerce Commission is now able to accept written undertakings from creditors (similar to equivalent powers under the Commerce Act 1986)
- creditors now have more options on how they are able to make electronic disclosure
Timeline - next key dates
The remaining provisions of the Amendment Act will come into force on 1 June 2020 and on 1 April 2021. Below is a recap of the main changes coming into effect on those dates. We also touch on the fit and proper person certification process which opens on 1 September 2020:
1 June 2020
New requirements for high cost consumer credit contracts (HCCC)
A consumer credit contract will be a HCCC if:
• the annual interest rate is 50% or more
• the weighted average annual interest rate on the unpaid balance is or is likely to be 50% or more on any day during the life of the contract
• the total interest charged (including default interest) is or is likely to be 50% or more on an unpaid balance in the event of default in payment or the credit limit being exceeded
• The 50% cap will be subject to statutory review every three years, and that review must also consider whether to extend the total interest and fees cap to credit contracts with interest rates between 30% and 50%.
• Daily charges (comprising interest and fees, but excluding default fees) will be capped at 0.8% per day.
• Compound interest will not be permitted.
• Default fees cannot exceed $30 (or other amount prescribed in regulations). If a lender charges default fees in excess of this amount it will be presumed to be unreasonable unless the lender can rebut the presumption by proving that, on the balance of probabilities, the fees are reasonable. For example, this would include evidence that it was reasonable for the lender to take the action that incurred the cost to which the fees relate (for example, referring the default to a collection agency).
• Mobile traders will be treated as creditors under consumer credit contracts, closing the loophole previously relied on by “truck shop” lenders.
Duties on directors and senior managers
- New statutory duty for directors and senior managers (for example, a CEO or CFO) of a lender to exercise due diligence to ensure compliance with the CCCFA. This means that they must take reasonable steps to ensure the lender:
• requires employees and agents to follow compliance procedures or puts in place automated compliance procedures
• has methods in place to systematically identify deficiencies in its compliance procedures
• promptly remedies any deficiencies discovered
• Directors and senior managers found to be in breach of their duty are potentially liable for civil pecuniary penalties of up to NZD$200,000 per act or omission. They cannot be insured or indemnified against this potential liability.
1 September 2020
Applications open for certification of directors and senior managers as fit and proper persons
• From April 2021, unless exempt, all directors and senior managers of lenders that provide consumer credit or act as mobile traders must be certified ‘fit and proper’.
• On 20 February 2020 the Commerce Commission released the proposed ‘fit and proper’ criteria in its consultation report, which can be read here. Submissions close on 18 March 2020.
• In making the assessment, the Commission proposes to take a two-pronged approach by focusing on the applicant’s (i) probity, reputation and financial integrity, and (ii) competency and capability.
1 April 2021
The remainder of the Amendment Act comes into force
• Some of the most significant changes under the Amendment Act will require creditors to:
• keep records of affordability and suitability assessments to demonstrate how they have satisfied this lender responsibility
• provide information about disputes resolution schemes and financial mentoring services
• provide disclosure to borrowers in the same language to that used in advertising
• achieve and hold all certifications (currently, FSPR registered creditors have until their next annual confirmation to obtain the certifications)
• provide annual returns to the Commerce Commission to support monitoring and enforcement
What can we expect next?
Draft Regulations to be finalised
All eyes will be on MBIE’s response to its consultation on the draft Regulations in early April 2020, after submissions closed in early February. In particular, more clarity is needed for creditors around conducting affordability and suitability assessments, determining relevant expenses, and how to reconcile conflicting information. It is unavoidable that this enhanced lender responsibility, which also requires the lender to keep records of inquiries made, will result in increased compliance costs for lenders. It is also likely to make the loan approval process more complex for borrowers.
It remains to be seen if the draft Regulations will enable lenders to begin to put in place necessary processes and systems to meet the other new requirements under the Amendment Act, which also cover advertising standards, variation disclosure, disclosure of financial mentoring services and provision of annual returns.
Responsible Lending Code
MBIE has announced it will also develop updates to the Responsible Lending Code so that it supports the implementation of the Amendment Act and the Regulations. An updated Code should align with the Regulations and will be useful in providing much needed guidance for lenders to meet and discharge their responsible lending obligations.
No indication has been given yet as to when a proposed updated Code will be in circulation. The last 1 April 2021 implementation date requires some lead time to allow lenders to update their systems and to train staff so they are in alignment with the new obligations. This means that the Code should be finalised by the end of September 2020. Given the extent of the changes, and in particular the new record keeping requirements, we would be surprised if a draft of the proposed Code is not circulated ahead of then to enable stakeholders to provide their feedback on the practicalities involved. Hopefully there will be an update on this soon – watch this space!