Further to our Financial Law Insight last month, the Government has released its proposed amendments in response to its formal investigation into the recent amendments to the Credit Contracts and Consumer Finance Act 2003 (CCCFA) (the Investigation).

After engaging informally and seeking feedback from banks, other lenders, and consumers, the Government has proposed what it sees as practical changes to the responsible lending rules to reduce the unintended consequences caused by the recent amendments to the CCCFA and the Credit Contracts and Consumer Finance Regulations 2004 (Regulations).

The proposed amendments

The proposals include amendments to the Responsible Lending Code (Code) and the Regulations to:

• Remove regular ‘savings’ and ‘investments’ as examples of outgoings that lenders need to inquire into when assessing the borrower’s future expenses.
• Clarify when borrowers provide a detailed breakdown of their future living expenses, there is no need to also inquire into their current living expenses from recent bank transactions.
• Clarify where lenders choose to estimate future expenses from recent bank transaction records, they are permitted to obtain information about how the borrower’s current expenses are likely to change once the contract is entered into.
• Clarify the requirement to obtain information in ‘sufficient detail’ only relates to information provided by borrowers directly rather than relating to information from bank transaction records.
• Provide further guidance on when a lender needs to allow for a ‘reasonable surplus’ and how lenders should set surplus requirements.
• Provide alternative guidance and examples for when it is ‘obvious’ that a loan is affordable, so that a full income and expense assessment is not required.

It is expected the proposed Regulations and changes to the Code will be released for public consultation later this month with the changes to come into effect by early June 2022.

This first phase of amendments is to make some progress while the Investigation is still ongoing. A Cabinet paper released by MBIE suggests that the following further actions will be progressed as part of the continuing Investigation, including:

• Continued engagement with key stakeholders and analysis to determine what additional changes to the Regulations and the CCCFA may be required.
• Conducting an international comparison to assist in determining how New Zealand’s policy aligns with the global context.
• Undertaking further work on understanding the impact of the CCCFA on local government led housing initiatives.
• Separate work on small business lending.

The time frame for any subsequent changes to the CCCFA, the Regulations or the Code from the second part of the Investigation is unclear.

Cautious optimism or temporary band-aid?

The announcement has been greeted by some in the industry as a step in the right direction. In particular, guidance on how to apply the affordability exception and no longer requiring savings to be caught as an expense should be useful to lenders. But we have reservations. We believe the majority of the proposed changes to date are superficial and do not go far enough to address the underlying issues that have caused the unintended consequences we have seen in the past few months. As New Zealand Bankers Association Chief Executive Roger Beaumont has commented, some of the issues identified are the main pain points for consumers, but “it’s not clear the changes will move the dial enough to make a difference”.

The media headlines over the past few months have undoubtedly created political urgency around the initial proposed amendments. While the speed with which the Government has acted is encouraging, if the initial amendments are too hastily rolled out there is a real danger they will not help in actually addressing the underlying issues and could result in further unintended consequences and additional costs.

It will be a more optimal long-term outcome for all if the Government takes proper care and consideration in crafting changes, including fully taking in to account feedback from key stakeholders.  This may require more homework and kōrero on the part of Minister David Clark, MBIE and the other members of the Council of Financial Regulators before rolling out amendments. However, this would be preferable to tinkering around the edges of the Regulations and the Code to achieve an immediate band-aid fix.

It should also be recognised that the Government’s two stage approach to amendments will come at a cost. It is very likely that once the Investigation is fully complete, lenders in particular will have had to understand two rounds of changes to the rule book which, taken together, may not actually resolve the underlying issues and concerns they have raised. This lack of certainty while the initial amendments are digested will come at a cost – not only for lenders as they devote yet more time and resource to updating systems for CCCFA compliance, but also for borrowers, as lenders work out how to navigate the impact on their affordability and suitability assessment processes.

We await the proposed amended draft Regulations and the Code with bated breath.

See links below for further information:

• Minister Clark’s recent announcement can be found here.
• Cabinet paper on the Investigation’s initial findings and proposals can be found here.
• General information on the Investigation can be found here.

Start a conversation

If you would like a briefing on any aspect of the Investigation or the CCCFA reforms, or have any questions in relation to this Alert, please contact Liz Lim on +64 9 909 6341, David Ireland on +64 4 498 0840, or Catriona Grover on +64 4 498 0816, or email the team at bankingandfinancialmarkets.nz@dentons.com.