The Credit Contracts Legislation Amendment Act 2019 (Act) became law on 19 December 2019. The Act amends the Credit Contracts and Consumer Finance Act 2003 (CCCFA) and introduces some significant changes which will affect all lenders providing consumer credit in New Zealand.
In addition providers of "high-cost" consumer credit contracts will be subject to new rules and "mobile traders" will be brought within the scope of the CCCFA.
The Act extends and strengthens the existing lender responsibility provisions in the CCCFA.
Affordability and suitability tests
Lenders are already obligated under the CCCFA to make "reasonable inquiries" as to a borrower's or guarantor's requirements and objectives and whether the borrower or guarantor will be able to make payments under the agreement without suffering "substantial hardship". From 1 April 2021, these inquiries must be carried-out in accordance with requirements set by regulation.
These regulations (currently in draft form) will codify and expand on the existing guidance set out in the Responsible Lending Code and will draw on the current requirements in the United Kingdom and Australia. There will also be additional requirements when assessing the suitability of repayment waivers, extended warranties and insurance.
For existing consumer credit contracts, these suitability and affordability checks will need to be undertaken when there is a "material change" to the contract (for example, if the credit limit is increased or unforeseen further advances are made).
Lenders will be required to keep records to substantiate how the lender satisfied itself as to the loan's suitability and affordability and make this information available to the Commerce Commission, borrower, guarantor or the lender's approved dispute resolution scheme on request.
From 1 April 2021, advertising must comply with new advertising standards set by regulation. These will likely include, for example, requirements to include details of payments, interest rates, credit fees and charges in advertisements.
Lenders will also be required to take reasonable steps to provide borrowers and guarantors with information to assist the borrower or guarantor to make an informed decision and must do so in any language in which the lender has advertised.
Evidence of how fees are calculated
The CCCFA prohibits unreasonable credit or default fees in consumer credit contracts. From 1 April 2021 lenders will be required to keep records to substantiate how each credit fee and default fee is calculated and to demonstrate that it was not unreasonable at the time it was calculated or reviewed. These records must be made available to the Commerce Commission on request. Lenders will be required to proactively review the reasonableness of fees and (if appropriate) take action to reduce an unreasonable fee.
Directors / Senior managers
The Act introduces new personal obligations on every director and senior manager of a creditor under a consumer credit contract. A "senior manager" is a person who is not a director but occupies a position that allows that person to exercise significant influence over the management or administration of the creditor.
- Exercise due diligence
Directors and senior managers must exercise due diligence to ensure that the creditor complies with the CCCFA. This includes: implementing (and requiring staff to comply with) procedures to ensure compliance with the CCCFA; ensuring that appropriate systems are in place to identify deficiencies with these procedures; and taking prompt action to remedy any deficiencies discovered.
To meet these obligations, directors and senior managers are required to exercise the care, diligence and skill that a reasonable director or senior manager would exercise in the same circumstances taking into account the nature of the business (e.g. its size and the nature of the credit provided) and the position of the director or senior manager.
These duties will come into effect on 1 June 2020.
- Certification / Fit & proper person requirements
The Act introduces a certification regime under which all creditors under a consumer credit contract and all "mobile traders" will be required to be certified by the Commerce Commission. As part of this process, the Commission must be satisfied that all the applicant's current and prospective directors and senior managers are fit and proper persons to hold their respective positions.
Lenders already licensed under the Financial Service Providers (Registration and Dispute Resolution) Act will be exempt from this requirement (this would include, for example, Registered Banks and Non-Bank Deposit Takers).
This certification regime will come into effect on 1 April 2021. Applications will be open from 1 September 2020.
- Annual Returns - All lenders will be required to provide an annual return to the Commerce Commission which will contain certain statistical information in relation to the lender's business (including its loan book).
- Disclosure - New rules require lenders to provide information about the lender's dispute resolution scheme whenever they receive a hardship application or receive a complaint from a debtor. Lenders must also provide information on financial mentoring services when a debtor defaults in payment or exceeds the credit limit under any consumer credit contract, when a lender receives a hardship application or declines an application for a high-cost loan. In addition, certain new information will be required to be disclosed by lenders at the commencement of debt collection. These changes come into effect on 1 April 2021.
High-cost consumer credit contracts
The Act introduces new restrictions and lender obligations in relation to "high-cost" consumer credit contracts – these are contracts which provide for an annual interest rate (or weighted average annual interest rate on any day during the term) of 50% or more. This includes loans where the total rate of interest charges (including default interest charges) applicable to any part of the loan is (or is likely to be) 50% or more.
Example, if a lender's normal interest rate is 40% per annum and a default interest rate of 20% is payable on any part of the unpaid balance in default – the total rate of interest charges for the purposes of the Act will be 60% and the contract will be a high cost consumer credit contract.
The following new rules will apply to high-cost loans from 1 June 2020:
- Maximum cost of borrowing - The total amount of interest and fees (includes credit fees, default fees, interest charges, charges for an optional service and any other fees or charges passed on by the lender) on a high-cost loan cannot be higher than the first advance under that loan (or, in the case of related consumer credit contracts, the first advance under the earliest high-cost loan).
- Rate cap - The Act imposes a daily cap of 0.8% on charges, calculated in accordance with regulations as a proportion of the amount of credit provided. This limit includes interest, credit fees, charges for an optional service and other fees or charges passed on by the lender but does not include default fees.
- Limit on default fees - Default fees cannot exceed $30 (or any other amount set by regulation) unless the lender can prove that the default fee is reasonable.
- Prohibition on compound interest and "non-circumvention" - Creditors are prohibited from charging compound interest on high-cost loans and entering into any scheme designed to avoid the high cost lending restrictions.
- Prohibition on "lender hopping" - To prevent people from repeatedly refinancing high-cost loans, lenders are prohibited from entering into a high-cost loan with a debtor who has or has had a high-cost loan with another lender within the past 15 days or has entered into two or more high-cost loans within the past 90 days.
- Additional advertising standards - In addition to complying with the advertising standards referred to above, advertisements for high cost consumer credit contracts must contain a prominent risk warning and information about financial mentoring services set by regulation.
New pecuniary penalties of up to $600,000 (and $200,000 for an individual) have been introduced for breaches of certain breaches of the CCCFA, including breaches of the lender responsibility principles, breach of directors' and senior managers' duties, failure to comply with record-keeping requirements, unreasonable credit or default fees, breaches of the high-cost lending requirements and failure to be certified. These came into effect on 20 December 2019.
Directors and senior managers may now also be liable for statutory damages and compensation. Importantly, directors and senior managers are prevented from being indemnified or insured in relation to pecuniary penalties under the Act or for any costs incurred in defending any civil proceeding where a penalty is imposed.
The Ministry of Business, Innovation and Employment (MBIE) has issued draft regulations and a commencement order for consultation – these can be accessed here. MBIE is seeking written submissions on these by 5pm on Wednesday, 5 February 2020.
The key commencement dates are shown in the table below:
20 December 2019
1 June 2020
1 September 2020
1 April 2021
These changes will be significant for all lenders of consumer credit who will need to review and update their documentation and procedures. They will also be of particular interest to those lenders who provide "high-cost" lending. We recommend that these lenders take prompt action to ensure that they can meet the new obligations and requirements by 1 June 2020.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.