In our mid-March consumer credit update, we outlined the latest legislative changes from the consumer credit law reform programme, and marked out some key dates in the implementation timeline. That was released just before the COVID-19 lockdown hit us, and the world as we knew it changed – including the timetable for implementing some of the new rules and regulations in the consumer finance space.
The impact of COVID-19 on consumer financing has been significant – both on the financial wellbeing of many New Zealanders and on the ability of creditors (to comply) and regulators (to finalise and implement) these changes while the nation weathers the lockdown and its economic consequences. In this update, we look at how the regulators and legislation have responded to that impact, and plot the new timeline to full implementation of the reform package.
Where are we at?
As a reminder, the Credit Contracts Legislation Amendment Act 2019 (Amendment Act) became law on 19 December 2019. A staggered timetable for implementing amendments to the Credit Contracts and Consumer Finance Act 2003 (CCCFA) was put in place. That original timetable has now been disrupted – the order of what gets implemented when has changed, more pressing aspects have been brought forward, and the end date for full implementation of the reforms has been extended.
The changes which have already been implemented since December 2019 include the following:
- Civil pecuniary penalties have been increased 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)
- Courts are now 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 have more options on how they can make electronic disclosure
- The enforcement of guarantees is prohibited in some situations if a lender has failed to make reasonable inquiries before a guarantee is given
On 1 May 2020, the original timetable for implementing certain changes relating to high-cost consumer credit contracts was fast-tracked by a month. The following rules now apply:
- Fees and interest under a high-cost consumer credit contract are limited to 100% of the first advance
- Lenders cannot charge compound interest
- Default fees cannot exceed NZ$30; it’s presumed a default fee in excess of this amount is unreasonable unless the lender can prove otherwise
- New anti-avoidance rules have been introduced
On 1 June 2020
In line with the original timetable, on 1 June 2020:
- Mobile traders who supply consumer goods on credit to a natural person will become subject to the CCCFA as creditors
- Most of the rest of the rules around high-cost consumer credit contracts will come into effect, including a maximum daily charge of interest and fees of 0.8% per day and restrictions on entering into such loans when the borrower already has or has recently had other high-cost loans
The Commerce Commission has released updated guidance on high-cost loans, which also includes the changes coming into effect on 1 June. The guidelines can be read here.
The opening date for applications for the new fit and proper person certifications required as part of the reform package has now been delayed from 1 September 2020 to no earlier than 1 March 2021.
It’s now proposed the remaining changes under the Amendment Act will come into force no earlier than 1 October 2021, with a backstop date of 1 April 2023. This is a change from the previously scheduled date of 1 April 2021, and was introduced by the COVID-19 Response (Taxation and Other Regulatory Urgent Measures) Act 2020. Refer to our previous update here.
Draft Credit Contracts and Consumer Finance Amendment Regulations 2020
The Amendment Act provides for the creation of regulations to support the new requirements set out under that Act.
MBIE had completed its consultation on the draft regulations earlier this year, with its official response previously expected in April. At the time of writing, no indication had been given as to when the official response might now be expected. However, commencement of the new regulations has now been delayed from 1 April 2021 to no earlier than 1 October 2021, which aligns with the revised implementation dates of the remaining Amendment Act provisions.
MBIE has now advised that further consultation is on hold for the time being. MBIE officials will continue to work on the revised draft regulations, and further consultations with industry will take place at a more appropriate time in the future. At the time of writing, no specific update has been given by the Commerce Commission or MBIE on the release of a proposed updated Responsible Lending Code. However, in the COVID-19 Response (Further Management Measures) Legislation Bill introduced to Parliament on 5 May, section 9H of the CCCFA is proposed to be amended to allow for a shorter notice period than the usual 28 day notice period before the provisions of a revised Code come into force, if a Gazette notice is published on or before 14 August 2020. This indicates that the government are seeking greater flexibility to bring in a revised Code at short notice to the extent needed as part of the COVID-19 economic recovery. We would still expect the timetable for other changes to the Code not related to COVID-19 to be linked to that of the draft regulations.
Early indications are the draft regulations will be amended to provide more detail on what lenders need to cover when conducting affordability and suitability assessments in order to meet their responsible lending obligations. Greater clarity in this area will be welcome, but the bulk of the obligations and requirements proposed by the exposure draft are expected to remain unchanged, including the content of annual returns.
In the meantime
The Credit Contracts and Consumer Finance (Exemptions for COVID-19) Amendment Regulations 2020 came into effect on 1 April 2020, with the aim of facilitating the mortgage repayment deferral scheme and helping consumers with borrowings from registered banks.
The exemptions apply to registered banks and to a borrower experiencing, or who reasonably expects to experience, financial difficulties due to the economic or health effects of COVID-19. The exemptions facilitate variations or replacements of existing contracts entered into on or before 31 October 2020 to reduce those difficulties.
The exemptions apply to:
- Lender responsibility principles relating to the need to make enquiries and be satisfied as to a borrower’s ability to repay without suffering substantial hardship
- Certain disclosure requirements (provided compliant disclosure is made as soon as reasonably practicable)
- Certain obligations of lenders in relation to hardship applications (provided that a lender must decide whether to agree to the change and respond to the borrower as soon as reasonably practicable after receiving an application to change a contract due to unforeseen hardship)
The Commerce Commission published guidance for lenders on 19 April (which was then updated on 1 May to flesh out the guidance on responding to borrowers under financial stress (paragraphs 35 to 47 of the updated guidance)). A copy of the guidance can be found here.
To date, we have seen the government and RBNZ take bold steps to shore up the economy to promote a COVID-19 recovery - from quantitative easing and liquidity tools, to direct financial assistance and public/private support mechanisms. On 1 May, the RBNZ removed mortgage loan to value ratio restrictions for 12 months. The RBNZ’s assessment was that removing these restrictions will support financial stability by “removing one potential obstacle to the flow of credit in the economy, helping to soften the downturn”.
We have also seen banks supporting, and being urged to support, their customers by providing payment holidays, fee waivers, interest rate reductions and temporary working capital facilities.
During these fast changing times, lenders of consumer loans will need to walk a tightrope to ensure consumers don’t come out of the current crisis worse-off due to short term, and short-lived, relief measures.