The impact of the recent amendments to the Credit Contracts and Consumer Finance Act 2003 (CCCFA) has been one of the stories of the summer. News articles detailing barriers that borrowers have run into since the introduction of new affordability and suitability regulations have been rife. Together with calls for urgent action within the consumer credit industry and complaints to the Banking Ombudsman, the headlines have not been happy holiday reading for the Government.

The Government has now responded by announcing, just two months after the changes came into force, an investigation into the CCCFA changes and their impacts (the Investigation).

In this Financial Law Insight, we unpack the factors prompting such a strong response to the CCCFA amendments, consider the terms of the Investigation, and set out some of the key issues that will need resolving to help find a practical solution for all stakeholders.

How did we get here?

On 1 December 2021, the final tranche of the amendments to the consumer credit regulatory regime came into force. This took the form of amendments to the CCCFA, the Credit Contracts and Consumer Finance Regulations 2004 (Regulations), and the introduction of a revised Responsible Lending Code (Code).

The programme of consumer credit reforms can be traced back to June 2018, when MBIE released its initial Discussion Paper and consultation. In April 2019, draft legislation amending the CCCFA — the Credit Contracts Legislation Bill — was introduced. This became law in the form of the Credit Contracts Legislation Amendment Act 2019 (CCLAA) in December 2019. With CCLAA in place, proposed amendments to the Regulations (most significantly for present purposes, in relation to suitability and affordability assessments) were subsequently released for consultation over 2020–2021, and were finalised in 2021.

Why were these reforms put in place? Concerns over unscrupulous lending in some quarters, coupled with an increasing focus on the need to protect vulnerable customers, were at the heart of the reforms. However, rather than targeting lenders operating on the fringe and particular customer vulnerabilities, the CCLAA reform package was all-encompassing, meaning no form of consumer lending escaped its protectionist net.

New prescriptive suitability and affordability regulations

Although some media have dubbed the CCCFA changes the new ‘KFC, Uber, pregnancy loan rules’, the main issues with the loan approval process stem from the more prosaically titled Credit Contracts and Consumer Finance (Lender Inquiries into Suitability and Affordability) Amendment Regulations 2020 (SARs), which are now incorporated into the current Regulations.

SARs’ objective is to prescribe in detail the minimum requirements which apply when a lender undertakes suitability and affordability assessments in order for the lender to meet responsible lending obligations. SARs include provision for:

• Specific inquiries which must be made into a borrower’s needs and objectives to ensure the credit proposed meets their purpose.
• Generally, how the results of the inquiries must be used to carry out a full income and expense assessment if a borrower intends to rely on income to make repayments on their loan. If the borrower is to rely on means other than income to make repayments, the lender must make reasonable inquiries into those means. In both cases, lenders must be satisfied on reasonable grounds that it is likely the borrower can make repayments without suffering substantial hardship.

It is primarily the implementation of the new requirements under SARs that is responsible for the anecdotal evidence emerging that customers now face undue difficulties in obtaining a loan. The fact that this outcome is also not a desired outcome for lenders, given they are in the business of providing credit, has largely escaped media and official comment.

Our experience? Although the CCCFA reforms have come at a time when lenders have also been navigating a wave of other significant regulatory changes (e.g. financial advice reforms, CoFi), all the lenders we have been working with have directed considerable resources, care and effort to implement, test and operationalise their internal processes to ensure compliance with SARs, as well as the wider CCCFA amendments.

Our take is that the concerns raised over the difficulties now encountered in securing a loan are by and large testament to the seriousness with which lenders have taken the reforms.

Personal liability for directors and senior managers

The implementation of SARs also stands in the shadow of the new due diligence duty that a lender’s directors and senior managers now need to exercise to ensure lenders comply with their CCCFA obligations.

The potential consequences of non-compliance are weighty. Directors and senior managers may be personally liable, with pecuniary penalties of up to NZ$200,000 and/or court ordered damages or compensation. Additionally, in a strong signal as to as to how important the regulators see the duty, the relatively rare step was taken to invoke a blanket prohibition on directors and senior managers being able to be protected by indemnities (whether by third party insurance or by any other means) in respect of any pecuniary penalty that may be imposed. This is in contrast to the position under the FMCA, where insurance for director and senior manager liability is lawful.

The extent to which concerns over potential personal liability of directors and senior managers have influenced lenders’ internal processes is unclear. But the possibility of individuals needing to pay potentially significant fines out of their own pockets for entity level breaches does not help, and serves as a clear regulatory signal to encourage conservatism by lenders.

Warning signs

The fact that it is now harder to get a loan than before December 2021 should hardly come as a surprise. The FSF and NZBA warned as much to consumers shortly before the changes went live, with the general message being to expect and be prepared for a lending process that would be more detailed, complicated and time consuming.

These warnings followed a common theme in the submissions to the SARs consultation process from major lenders — namely, concern that their prescriptive nature was impractical and would unintentionally result in less credit being available to borrowers.

In the wider CCLAA consultation process, the due diligence duty and potential penalties were also a focus in many submissions, with the NZBA stating in its 2019 submission that they ‘consider that the proposed civil pecuniary penalties (with insurance and indemnities prohibited) and statutory damages are disproportionate and may drive excessively conservative lending practices to the detriment of consumers.’

The chilling effect foreshadowed in those submissions now appears to be taking hold. It is a predictable consequence given the enhanced regulatory CCCFA framework (including the prescriptive SARs requirements), that lenders would enhance their existing requirements.

We don’t see this as meaning a lender was not performing appropriate affordability and suitability checks prior to 1 December 2021 (as has been alluded to in the media). Rather, we think it is a natural and justifiable response to the reforms that lenders would make adjustments to tighten their processes to ensure and signal that compliance is as tight as it should be. Any other outcome would have risked lenders being accused of not listening to the regulatory signals.

What matters now, though, is where to from here? First, we need to understand whether the SARs requirements have gone too far and, if so, why. Is it due to an overly cautious application by lenders, the SARs themselves, the risk of personal liability, or a combination of these factors? The Investigation is an opportunity not only to address these questions, but also to provide a pathway to some practical solutions.

What we can expect from the Investigation?

As announced on 14 January by the Minister of Commerce and Consumer Affairs, David Clark, the Investigation will be conducted by the Council of Financial Regulators (CoFR), which comprises the Reserve Bank, Treasury, FMA, MBIE and Commerce Commission.

Further details and terms of reference for the Investigation were released on 31 January as follows:

• MBIE will lead in the Investigation with assistance from the other CoFR agencies, and engagement being sought from other stakeholders.
• The aim of the Investigation is relatively general — any impacts of the recent CCCFA changes may be considered and assessed to determine what further actions, if any, are needed.
• The scope of the Investigation will look at the intended and unintended impacts, beyond those expected by the initial implementation, of the parts of CCLAA and SARs that came into force primarily in relation to mortgage, but also other lending, by banks and non-bank lenders in the current consumer credit market.
• Four lines of inquiry have been identified for the investigation:
  • examine the changes being seen;
  • investigate causes;
  • evaluate CCCFA impact; and
  • identify possible actions.

• An urgent turnaround is proposed, with initial advice anticipated for mid-February and further advice to follow in April.

What we would like to see

An investigation into new legislation less than two months from it coming into effect is far from desirable. However, we are hopeful that the relatively broad scope of the Investigation means that MBIE and the other CoFR agencies can cut through the recent political and media noise. This means approaching the Investigation objectively, with an open mind and without any pre-determined outcome.

It is essential the Investigation translates into practical steps, either in the form of tweaks to the SARs or further supplementary guidance to the Code. However, despite the short timeframe for the Investigation, it is important that any resulting redrafting process is not rushed. Consultation with key stakeholders before finalising any changes is now crucial to ensure the changes will address current concerns and be workable in practice. The last thing we need is a knee-jerk political reaction leading to more unintended consequences.

Specifically, we would like to see:

• Further regulatory guidance around what constitutes a ‘reasonable buffer’ and a ‘reasonable surplus’. The Code says that what is reasonable will ‘depend on the circumstances’ — in the absence of clear parameters, most lenders will quite reasonably continue to take a conservative approach.
• Allowance for a degree of discretion or flexibility to be exercised by lenders when conducting their ‘reasonable inquiries’ (whilst still remaining compliant with SARs and their responsible lending obligations).
• Removal of the prohibition on directors and senior managers protecting themselves from personal liability. We believe that approach is disproportionate and unhelpful, and there are other regulatory levers that can be pulled to ensure individuals are properly focused on compliance.
• Short term, additional regulatory guidance — this may be the most appropriate fix to encourage lenders to unlock credit where appropriate without fear of penalty.

In addressing the above, any changes should acknowledge that a universal prescriptive approach to understanding detailed aspects of a customer’s spending has inherent limitations when applied to a diverse range of customers. To make good credit decisions for both lenders and customers, nuance and agility in the loan approval process are critical to the mix.

Any outcome of the Investigation is unlikely to be a quick fix. As the Government has pointed out, with New Zealand’s current high inflation economy and the pandemic still looming large, there are no doubt other factors at play outside of the CCCFA reforms that may be dampening access to credit.

On our own path

Some Australian commentators have said the current loan approval problems in New Zealand follow similar issues raised in the famous ‘Wagyu and Shiraz’ case, which found that there was no statutory basis for ASIC's prescriptive interpretation of Australian responsible lending obligations. The case effectively halted a responsible lending drive that had caused Australian banks to favour a forensic approach when assessing income and expenses. Subsequently, the Australian government has moved to repeal responsible lending laws, shifting from a ‘lender beware’ model to a ‘borrower responsibility’ model.

This is not New Zealand’s ‘Wagyu and Shiraz’ moment — we don’t see us following Australia’s trajectory anytime soon. The CCCFA reforms have been a two-term project of the current Government. To date, the Government has shown it is fully committed to seeing through its reform of consumer credit laws, and reducing consumer protection is not on the current political agenda. We do not see the Investigation as changing that general direction of travel, but the Australian example provides an interesting counterfactual that could be instructive at some stage in the future, particularly with many New Zealand banks having Australian parent companies.

Conclusion

We welcome the Investigation and the opportunity for stakeholder engagement and dialogue. We encourage the CoFR to take a measured approach in assessing what can be done to ensure the CCCFA changes do not become an undue barrier to credit, while still protecting the most vulnerable consumers.

Provided they are drafted with due care and consideration, fine tuning or adjustments to the CCCFA, Regulations and/or the Code will be welcome by lenders so that their obligations are more practical and proportionate.

It is imperative that at the end of the Investigation a workable balance can exist in the regulatory framework so lenders can ensure good customer outcomes are achieved and that credit remains reasonably accessible for the benefit of all consumers, as well as the wider New Zealand economy. The anecdotal evidence to date illustrates that the latest CCCFA reforms have not struck that balance.

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 Financial Law Insight, please contact Catriona Grover on +64 4 498 0816, David Ireland on +64 4 498 0840, Liz Lim on +64 9 909 6341 or email the team at bankingandfinancialmarkets.nz@dentons.com.