Consequences of 2019 changes outlined
Minister of Commerce and Consumer Affairs Andrew Bayly is proceeding with plans to reform the Credit Contracts and Consumer Finance Act (CCCFA).
Bayly (pictured above left) also intends to perform a targeted reform of the Conduct of Institutions Amendment Act 2022 (CoFI) which would see applicants take responsibility for determining what is an appropriate fair conduct programme for their business.
Speaking at a Financial Services Council Outlook 2024 event on Wednesday, Bayly said that reforming the CCCFA was a “particular priority”. He outlined a two-staged approach to consumer credit legislation.
“Firstly, I will remove the prescriptive affordability requirements for lower-risk lending. I expect to do this soon, as a matter of priority,” the minister said. “Second, I will undertake a more substantive review of the CCCFA. This will include reviewing its penalty and disclosure regime, and its relationship with CoFi.”
Bayly is also proposing to bring back a sense of coherence to the financial services sector, which would see responsibility for the CCCFA be transferred to the Financial Markets Authority, and the Reserve Bank serve as the prudential regulator.
Under the CCCFA, lenders who enter into credit contracts with consumers are required to lend responsibly, including checking that lending is suitable and affordable.
Initially cited by mortgage advisers and borrowers as being overly prescriptive, the CCCFA legislation has undergone several rounds of amendments, including the removal of discretionary expenses from affordability testing.
National/ACT Coalition Agreement documents released in November stated that the CCCFA would be rewritten to “protect vulnerable consumers without unnecessarily limiting access to credit”.
CCCFA changes have increased processing times, Bayly says Bayly said on Wednesday that changes made from 2019 onwards had led to processing times for lending applications “increasing significantly” across all loan types.
“I have also heard that banks estimated 6 to 7% of applicants – who would otherwise have qualified for a mortgage – had to be turned down,” he said.
The detailed regulations and strong liability regime have led to overly risk-averse lending decisions, unnecessary compliance cost and reduced access to credit for consumers, Bayly said.
High-cost lenders should be subject to regulation
As with CoFi, Bayly said that the intent was not to undermine good conduct requirements, especially for high-cost lenders, who could “prey on our most vulnerable Kiwis”.
The CCCFA changes had led to a significant decline in traditional and short-term lending, forcing vulnerable borrowers to turn to “alternative unregulated high-cost sources”.
It is the aim to subject high-cost lenders to “adequate regulation surrounding lending practices,” Bayly said.
Targeted CoFI reform proposed
Bayly said that CoFI imposed substantial compliance costs on financial institutions to documenting the fair conduct programmes.
A targeted reform of CoFI will include reinforcing the principle that the responsibility for determining what is an appropriate fair conduct programme for their specific business lies with the applicant. Secondly, it would require the FMA to issue clear guidance for smaller institutions to meet minimum requirements of conduct.
Bayly said that the changes were not about reducing requirements for appropriate conduct but would ensure that financial institutions have clear guidance from the FMA and “take responsibility to meet their obligations more effectively”.
He encouraged financial institutions to continue to prepare fair conduct programmes for the introduction of the CoFI regime by March 31, 2025.
Industry bodies respond to reforms
Financial Advice New Zealand interim CEO Tony Dench (pictured above right) said that the adviser membership organisation welcomed the minister’s announcement to simplify CoFi regulations, while keeping a fair conduct programme to protect consumers.
“The review of the CCCFA will open opportunities for lenders to streamline the lending process and allows financial advisers to assist more Kiwis into comes,” Dench said.
Dench acknowledged that the sector had experienced numerous changes to regulations. One conduct licence system overseen by the FMA would provide a clear process that will enable Financial Advice New Zealand members to focus on clients’ outcomes and business growth, he said.
“We are pleased with the considered and consultative approach of the government, and discussions with Hon. Andrew Bayly and the Ministry has been open to understanding the implications for financial advisers,” Dench said.
Financial Services Federation executive director Lyn McMorran (pictured above centre) said that the non-bank sector remained committed to getting a better outcome and businesses and consumers and how the regime could be improved.
The Financial Services Federation “fully supported” the initial changes to the Act that put a definition into the law of high-cost lending and the parameters applied to high-cost loans (maximum interest and fees) that could be applied, she said.
McMorran said that the changes had limited the amount of high-cost lending taking place in New Zealand.
“The FSF will be working with the Minister and his officials to develop a CCCFA regime that will provide the necessary protections to those consumers who need them, but which does not treat every borrower as being vulnerable or incapable of managing their own finances,” she said.
In relation to CoFI, McMorran said that the Financial Services Federation agreed with the Minister that all financial services providers have fair conduct programmes in place. This would include the areas of customer engagement, new policies and products being fit for purpose and meeting regulatory requirements, transparency of fee structures and an adequate complaints process.
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