Final tranche of consumer credit reforms now live

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In brief

From 1 December 2021:

  • The remaining bulk of the amendments under the Credit Contracts Legislation Amendment Act 2019 (CCLAA) will come into force and amend the Credit Contracts and Consumer Finance Act 2003 (CCCFA).
  • The related duo of CCLAA regulations, the Credit Contracts and Consumer Finance (Lender Inquiries into Suitability and Affordability) Amendment Regulations 2020, and the Credit Contracts and Consumer Finance Amendment Regulations 2020, will also come into force and amend the Credit Contracts and Consumer Finance Regulations 2004 (Regulations).
  • The updated Responsible Lending Code (other than Chapter 12 relating to hardship), which includes guidance on the enhanced lender responsibility principles as amended by the CCLAA, comes into effect.

Recent developments

Before the current COVID-19 Delta outbreak, the final round of CCLAA amendments and its related regulations were due to take effect on 1 October 2021. Due to continuing nationwide restrictions, in early September a further two-month delay was confirmed, which pushed out the final implementation date (except for the new certification regime), to 1 December 2021.

Since September, the following consumer credit legal developments have been introduced:

1 October 2021 - Mandatory certification
  • The new certification regime under CCLAA is applicable to all consumer credit providers and mobile traders, unless exempt (mainly entities licensed or authorised by the FMA or Reserve Bank).
  • Lenders and mobile traders must be certified by the Commerce Commission and registered on the Financial Services Providers Register (FSPR) if it provides lending services.
  • If a lender or mobile trader is already FSPR registered 30 September 2021, it has until the date of its next FSPR confirmation to become certified.
13 October 2021 - Updated Addendum to the Responsible Lending Code
  • The Updated Addendum to the Responsible Lending Code: COVID-19 (Addendum) was re-issued in response to the COVID-19 Delta outbreak.
  • The Addendum offers further guidance on how to navigate obligations under the lender responsibilities when dealing with borrowers impacted by COVID-19. Several strategies are outlined, including loan repayment deferrals and replacement of the existing loan agreements.
  • The Addendum expires on 1 February 2022, when the revised Responsible Lending Code Chapter 12, concerning hardship, comes into force.

Where we have landed – key areas of reform

The CCLAA provisions coming into force on 1 December broadly cover the following areas:

Enhanced lender responsibilities - suitability and affordability
  • The new amended Regulations prescribe specific suitability and affordability inquiries that must be made by lenders before agreeing to lend or before making any ‘material changes’ to the loan agreement, such as a credit limit increase.
  • Direct inquiries must be made into a borrower’s needs and objectives to ensure the credit proposed meets its purpose. Specific inquiries to fully assess a borrower’s income and expenses must be made to enable a lender to be satisfied that the repayments are not likely to cause the borrower substantial hardship.
  • Lenders must retain records of the above inquiries and their outcome for seven years. The records must demonstrate how the lender has complied with its responsible lending obligations. If requested, copies of the records must be provided to the borrower or Commerce Commission.
Disclosure
  • Lenders are now required to make additional disclosures before a debt recovery process is started.
  • Lenders must disclose information to the borrower about its dispute resolution process and the free of charge financial mentoring services available to the borrower.
  • The amended Regulations prescribe the minimum variation disclosure requirements which apply to unilateral and mutually agreed variations.
  • If a lender advertises in a language in the previous 6 months which is different to the language used in the proposed loan agreement, it must provide the borrower with information relating to the loan agreement in the same language used in the advertisement.
Due diligence duty for directors and senior managers
  • Directors and senior managers of consumer credit providers must exercise due diligence to ensure that the creditor complies with its CCCFA obligations.
  • Under the duty, directors and senior managers must objectively demonstrate they have ensured robust systems and procedures are in place to meet its compliance obligations. This also extends to ensuring processes to identify deficiencies exist and are operational.
  • Directors and senior managers will be personally liable for breach of their due diligence duty, with the courts being able to order pecuniary penalties up to $200,000. Significantly, insuring or indemnifying against these penalties is prohibited.
Advertising and fees
  • The Regulations contain new minimum advertising standards if an interest rate, interest charge, payment amount, or if no interest is referenced. In each case, certain prescribed details relating to the total cost or fees relevant to the credit product must be prominently displayed in the advertisement.
  • Certain advertising practices are prohibited. An advertisement must not say no inquiries will be made into, or take account of, a borrower’s circumstances to approve a loan.
  • If an advertisement refers to the speed of a loan approval in minutes or hours, it must also include a prominent reference that it is subject to responsible lending inquiries and criteria.
  • Lenders must review its credit and default fees if it knows (or ought to reasonably know) of a change in circumstances which may materially affect the reasonableness of a fee.
  • Lenders must keep records for seven years which demonstrate how their credit and default fees have been calculated and what they are considered reasonable. These records may be requested by a dispute resolution scheme or the Commerce Commission.

Our take

The CCLAA reforms go beyond their initial main purpose to ensure better protection for vulnerable consumers against unscrupulous or predatory lenders. In practice, these are wide ranging reforms which already have had, and will continue to have, deep implications for all lenders in the consumer credit market.

For prospective lenders looking to enter this market, it is difficult to see how the new enhanced suitability and affordability assessment requirements, record keeping obligations, mandatory certification and personal due diligence duties for directors and senior managers would not be considered material barriers to entry in a cost-benefit analysis. It is doubtful that due and proper compliance under the CCCFA can be realistically achieved without sizeable investment and resources to ensure robust operational compliance systems and processes are in place.

Only time will reveal the extent to which the CCLAA reforms will impact borrowers, but we will be watching the below issues with interest:

  • The increased administrative burden due to the enhanced suitability and affordability assessment requirements, and the time and cost implications of this in the provision of loans. Time delays will frustrate both lenders and borrowers and is no conducive to efficient transaction execution. Increased administrative costs borne by lenders may ultimately have to be passed on to consumers.
  • The extent of evidence gathered by lenders to demonstrate how they have satisfied themselves as to the enhanced affordability and suitability requirements. The evidence and records kept should show a robust assessment of affordability and suitability has been conducted, and the right internal processes have been put in place to ensure this. In the event of investigation, much will hinge on a lender proving it has got its systems right, with a good outcome no defence to a poor process.
  • Given the enhanced penalties for CCCFA breaches, lenders may naturally take a more cautious approach in their suitability and affordability assessments. Credit could become increasingly difficult to access for consumers, and particularly for consumers where more complex or non-vanilla circumstances apply.
  • The Regulations provide that a suitability and affordability assessment may not be required if is objectively considered “obvious in the circumstances” that the borrower can meet the repayments without suffering financial hardship. This is intended to be a high test. The limited scope of this exception may restrict lenders from supporting good customer outcomes. For example, a long-standing customer of a lender may find it unnecessarily cumbersome to be subjected to a full income and expense on requesting any increase (regardless of how material) to an existing credit limit.

While the heart of the consumer credit reforms focus on the protection of the consumer, the real test will be whether the additional legislative protections and obligations for lenders are proportionate and at the right settings. It remains to be seen if a workable balance can exist between these and servicing consumer demand for credit, enabling healthy competition amongst credit providers (including entry of new providers), and ensuring that credit remains reasonably accessible for the benefit of all consumers and the wider economy.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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