Banking and finance: consumer credit law update

Credit Contracts Legislation Amendment Bill

The first draft of the Credit Contracts Legislation Amendment Bill (Bill) was introduced on 9 April 2019.  The Bill amends the Credit Contracts and Consumer Finance Act 2003 (CCCFA) and proposes a staggered commencement, with most of the amendments coming into force from 1 March 2020.

The key changes the Bill introduces reflect our earlier comments.  Click the below buttons to view our earlier updates on the proposed amendments.

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We can now comment in further detail on these key amendments on the basis the Bill is enacted in its current form:

• Interest and fee cap on high-cost loans:

Interest and fees (in aggregate) on “high-cost consumer credit contracts” and all related consumer credit contracts must not exceed an amount equal to 100% of the “first advance”.  High-cost consumer credit contracts have been defined as consumer credit contracts with an annualised interest rate of 50% or more (or any other contracts designated as such by regulations).  The link to the “first advance” means that if a borrower refinances a high-cost loan with the same creditor, any interest and fees charged under subsequent loans cannot exceed 100% of the initial principal amount advanced, including any interest and fees that have already been paid prior to the refinance.  Certain flexible options for making disclosure under the CCCFA will also not be available to high-cost consumer credit contracts.

• Strengthening of Lender Responsible Principles:

Creditors will be required to ensure that any advertising complies with advertising standards to be set in regulations and is not likely to be misleading, deceptive or confusing to borrowers.

In addition, as from 1 September 2020, creditors who advertise in a particular language will be required to make initial disclosure of the key information concerning the credit contract in that advertising language.

• More prescribed assessments under Part 1A of the CCCFA:

There will be requirements to comply with more prescriptive assessments of affordability and suitability to be set out in new regulations.  Further, the existing presumption in section 9C(7) of the CCCFA that creditors can rely on information provided by borrowers and guarantors without objective verification will be removed and creditors are expected to verify information provided by their borrowers and guarantors in a wider range of circumstances.

• Record Keeping and Substantiation under Part 1A of the CCCFA:

In addition to keeping records as to how its fees are calculated (and demonstrating that those fees are reasonable), a creditor will be required to keep records of all inquiries it has made in relation to its compliance with the lender responsibility principles.  The creditor must provide copies of these records to the Commerce Commission upon request and to its dispute resolution scheme provider (where those records relate to a contract that is the subject of a dispute).

• Greater accountability and regulation:

Mobile traders and creditors under consumer credit contracts (other than an entity that is already licensed under another licensing statute (e.g. banks)) (Relevant Person) must be certified under the CCCFA and their directors and senior management will be required to meet a “fit and proper person” test.  This will be a pre-requisite to a Relevant Person’s registration on the Financial Service Providers Register, and the certification must be renewed every three years.  The certification will be mandatory for new creditors and mobile traders as from 1 April 2021.

Further, directors and senior managers of creditors under consumer credit contracts will be required to exercise “due diligence” in ensuring that it has appropriate procedures in place to ensure compliance with the CCCFA, and also that its employees and agents are complying with such procedures.  A director or senior manager can be personally liable for statutory damages where the Court is satisfied that the director or senior manager has breached his or her obligation to exercise due diligence.

• Debt Collection

Before debt collection may start against a natural person, a debt collector will be required to disclose certain key information to be set out in the regulations about the debt to the borrower.

• Court relief for breach of initial and variation disclosure requirements

The Bill also introduces relief for a creditor that has breached its initial or variation disclosure obligations.  Where currently a creditor is unable to recover the costs of borrowing (i.e. fees and interest) for any period during which the creditor has failed to make initial or variation disclosure, a creditor will now be able to apply to the Court for relief.  Any relief is to be on terms and conditions that the Court thinks fit, and the Bill sets out a number of guidelines that the Court must consider in making an order for relief.  If enacted, a creditor will have the right to seek relief from the Court in respect of any interest or fees that it must otherwise forfeit from the date of the breach and the date the breach is discovered and remedied.  On its current drafting, this will only apply in respect of periods commencing after the date that the Bill comes into force.

Credit Contracts and Consumer Finance Amendment Regulations 2019

The Credit Contracts and Consumer Finance Amendment Regulations 2019 (Regulations) came into force on 15 March 2019 amending the Credit Contracts and Consumer Finance Regulations 2004.

The Regulations create an exemption for peer-to-peer (P2P) lending services from certain disclosure requirements under the CCCFA, namely in relation to creditor identification.  The exemption means that certain details of a P2P creditor do not need to be disclosed to a borrower and/or guarantor on entry into the loan contract, or when a creditor assigns its rights to another creditor.  These details include the name, address and registration details of the creditor.

Instead, only a “representative creditor” is required to comply, which in practice will most likely be the P2P platform provider.  While the Regulations remove the burdens of the CCCFA from those relevant creditors the amendments do not reduce the effectiveness of the protections afforded or negatively impact on the interests of consumers under the CCCFA.  The exemption avoids complex disclosure documents being provided to borrowers, onerous obligations on the P2P provider, and also protects the anonymity of P2P creditors.

The above is a summary of some of the key proposed amendments and the Regulation, but not an exhaustive summary.  If you are a creditor or mobile trader that will be affected by the proposed amendments, or would like further information on the Bill or Regulations, please do not hesitate to contact our Banking and Finance team for assistance.

Business Law team

Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace,  Peter Orpin, Ellen Sewell, Matt Tolan, Carlo Wan, Kristina Sutherland, Jacob Nutt, Whitney Moore, Alex Stone, Ben Cooper, Lisa Catto